Senate

Revised Explanatory Memorandum

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

Tax Laws Amendment (2006 Measures No. 3) Bill 2006; New Business Tax System (Untainting Tax) Bill 2006

Glossary

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

General outline and financial impact

Extension of the beneficiary tax offset to Cyclone Larry and Cyclone Monica income support payments

Schedule 1 to this Bill amends the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 to extend eligibility for the beneficiary tax offset to farmers and small business owners in receipt of Cyclone Larry and Cyclone Monica income support payments.

Date of effect: The beneficiary tax offset applies to Cyclone Larry and Cyclone Monica income support payments for the 2005-06, 2006-07 and 2007-08 years of income.

Proposal announced: The amendments that relate to extending the beneficiary tax offset to Cyclone Larry and Cyclone Monica income support payments have not previously been announced.

Cyclone Larry income support payments were announced by the Prime Minister on 22 March 2006 and Cyclone Monica income support payments were announced by the Prime Minister on 26 May 2006.

Financial impact: This measure has an estimated impact on revenue of nil in 2006-07 and a cost of $0.5 million in 2007-08.

Compliance cost impact: Negligible.

Cyclones Larry and Monica: Assistance for affected businesses

Schedule 2 to this Bill provides tax-free status for certain Australian Government payments to businesses adversely affected by Cyclone Larry, and by flooding due to the combined impacts of Cyclones Larry and Monica.

Date of effect: This measure will apply to all relevant payments made in 2005-06 and 2006-07 income years.

Proposal announced: This measure was announced by the Prime Minister in his press releases of 22 and 26 March 2006, and 26 May 2006.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: The implementation costs related to this measure are expected to be small, and the ongoing compliance costs are expected to be minimal.

Extension of the beneficiary tax offset to interim income support payments

Schedule 3 to this Bill amends the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 to extend eligibility for the beneficiary tax offset to drought affected taxpayers in receipt of interim income support payments.

Date of effect: The beneficiary tax offset applies to interim income support payments for the 2005-06 income year and later income years.

Proposal announced: This measure was announced in the 2006-07 Budget and the Minister for Revenue and Assistant Treasurer 's Press Release No. 016 of 9 May 2006.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Negligible.

Simplified imputation system (share capital tainting rules)

Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 to ensure that a company's share capital account will become tainted if it transfers certain amounts to that account. If a company taints its share capital account, a franking debit arises in the company's franking account. If the company chooses to untaint its share capital account, an additional franking debit may arise and untainting tax may be payable.

Date of effect: The new share capital tainting rules will apply to transfers made to a company's share capital account after the day this Bill is introduced into Parliament. Some consequential amendments apply from 1 July 1998.

Proposal announced: This measure was announced in the then Minister for Revenue and Assistant Treasurer's Press Release No. C104/02 of 27 September 2002.

Financial impact: Negligible.

Compliance cost impact: Nil.

Government grants

Capital gains tax exemption of expense-reimbursing government grants

Schedule 5 to this Bill amends the Income Tax Assessment Act 1997 to exempt the recipients of the Unlawful Termination Assistance Scheme, the Alternative Dispute Resolution Assistance Scheme and similar expense-reimbursing government grants from capital gains tax (CGT).

This Schedule makes a further amendment to ensure capital losses, and not just capital gains, are exempt from CGT.

Date of effect: These amendments will apply to income tax assessments from 1 July 2005.

Proposal announced: This measure has not previously been announced.

Financial impact: Negligible.

Compliance cost impact: Negligible.

Medicare levy surcharge lump sum payment in arrears offset

Schedule 6 to this Bill amends the Income Tax Assessment Act 1997 to provide an offset to certain taxpayers in respect of their Medicare levy surcharge liability where that liability arose, or significantly increased, as a result of the taxpayer receiving an eligible lump sum payment in arrears.

Date of effect: These amendments will apply to assessments for income years commencing on or after 1 July 2005.

Proposal announced: This measure was announced in the then Minister for Revenue and Assistant Treasurer's Press Release No. 029 of 10 May 2005.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Minimal.

Reporting of employer superannuation contributions by superannuation providers

Schedule 7 to this Bill amends the Superannuation Guarantee (Administration) Act 1992 to require superannuation providers to report details of superannuation contributions to the Australian Taxation Office.

Date of effect: This measure applies to the 2005-06 income year and later years.

Proposal announced: This measure was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 001 of 3 February 2006.

Financial impact: Nil.

Compliance cost impact: Negligible.

Exclusion for fringe benefits to address personal security concern

Schedule 8 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 to exclude from reporting, fringe benefits provided to address certain security concerns relating to the personal safety of an employee, or an associate of the employee, arising from the employee's employment.

Date of effect: 1 April 2004.

Proposal announced: This measure was announced in the then Minister for Revenue and Assistant Treasurer's Press Release No. 079 of 8 September 2005.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Minimal.

Pre-1 July 1988 funding credits

Schedule 9 to this Bill amends the Income Tax Assessment Act 1936 to:

•

prevent the inappropriate use of pre-1 July 1988 funding credits (funding credits) by ensuring that superannuation schemes can only use them to reduce their taxation liability in respect of contributions made for the purpose of funding benefits that accrued before 1 July 1988; and

•

allow regulations to be made to provide guidance to the trustee of a superannuation scheme on how to work out the amount of funding credits that can be applied to reduce the taxation liability of the trustee in respect of contributions made and to allow other methods of working out how the trustee of a superannuation scheme can apply funding credits.

Date of effect: These amendments apply to the use of funding credits on or after 9 May 2006 the date this measure was announced in the 2006-07 Budget. In addition, any new or outstanding objections or amendments to past assessments will only be able to amend funding credit use for that year/s up to the amount that can be claimed under the new law.

Proposal announced: This measure was announced in the 2006-07 Budget and the Treasurer's Press Release No. 036 of 9 May 2006.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Minimal.

Allow certain funds to obtain an Australian Business Number

Schedule 10 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 and the A New Tax System (Australian Business Number) Act 1999 to allow certain funds that raise money for other deductible gift recipients, to obtain an Australian Business Number so that those funds can be exempt from income tax and receive input tax credits for goods and services tax (GST) paid and other GST benefits.

Date of effect: 1 July 2005.

Proposal announced: This measure was announced in the 2006-07 Budget.

Financial impact: The financial impact of this measure is unquantifiable but is expected to have an insignificant impact on income tax and GST revenue.

Compliance cost impact: Minimal.

New deductible gift recipient categories

Schedule 11 to this Bill amends the Income Tax Assessment Act 1997 to create five new general categories of deductible gift recipient to cover war memorials, disaster relief, animal welfare, charitable services and educational scholarships.

Date of effect: 1 July 2006.

Proposal announced: These amendments were announced by the Government in the 2005-06 Budget and in the Treasurer's Press Release No. 49 of 10 May 2005.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Minimal.

GST treatment of gift-deductible entities

Schedule 12 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 to ensure that:

•

the goods and services tax (GST) charity concessions apply as originally intended; and

•

charities operating retirement villages, like other charities, are required to be endorsed in order to access the GST charitable retirement village concession.

Date of effect: These amendments will apply for tax periods that begin on or after Royal Assent.

Proposal announced: The amendment dealing with gift-deductible entities was announced in the Treasurer's Press Release No. 049 of 29 August 2002. The amendment dealing with the endorsement of charitable institutions was announced in the Treasurer's Press Release No. 031 of 11 May 2004.

Financial impact: These amendments are expected to result in a small but insignificant gain to GST revenue.

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

Technical clarification of time for certain amended assessments

Schedule 13 to this Bill amends the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005 to clarify that the repeal of the six-year amendment period for general anti-avoidance (Part IVA) amendments only applies to assessments for the 2004-05 income year and later income years, as originally intended by the Government.

Date of effect: This amendment will apply immediately after the commencement of the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005, (19 December 2005).

Proposal announced: This measure was announced in the 2006-07 Budget.

Financial impact: Nil.

Compliance cost impact: Nil.

Increase in wine equalisation tax producer rebate

Schedule 14 to this Bill enhances the Government's assistance to the wine industry by increasing the maximum amount of wine equalisation tax (WET) producer rebate claimable by a wine producer (or group of producers) each financial year.

The WET producer rebate scheme was announced by the Government in the 2004-05 Budget. The scheme commenced on and from 1 October 2004 to provide assistance to each wine producer (or group of producers) of up to $290,000 in WET rebates per annum. This effectively exempts $1 million in domestic wholesale wine sales by a producer each year.

From 2006-07, each wine producer or group of wine producers will be able to claim up to $500,000 in WET rebates each year. This means the effective WET-free threshold for a producer with respect to their domestic wholesale wine sales in each financial year will be around $1.7 million.

The existing framework of eligibility rules and claiming arrangements will not be altered by these amendments.

Date of effect: This measure takes effect on and from 1 July 2006.

Proposal announced: This measure was announced in the 2006-07 Budget and the Treasurer's Press Release No. 035 of 9 May 2006.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: This measure is not expected to impose any additional costs to WET producer rebate claimants as it is an increase in an amount that current claimants may claim, via the existing claiming mechanism.

GST treatment of residential premises

Schedule 15 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that following the decision of the Full Federal Court of Australia in Marana Holdings Pty Ltd v Commissioner of Taxation
[2004] FCAFC 307 supplies of certain types of real property continue to be input taxed. This confirms the Government's policy intent.

Date of effect: 1 July 2000.

Proposal announced: This measure was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 006 of 27 February 2006.

Financial impact: Nil.

Compliance cost impact: Nil.

Chapter 1 Extension of the beneficiary tax offset to Cyclone Larry and Cyclone Monica income support payments

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) to extend eligibility for the beneficiary tax offset to farmers and small business owners in receipt of Cyclone Larry and Cyclone Monica income support payments.

Context of amendments

Cyclone Larry and Cyclone Monica income support payments

1.2 The Cyclone Larry income support payments provide income support to farmers and small business owners whose income has been adversely affected by Cyclone Larry.

1.3 The Prime Minister announced the Cyclone Larry income support payments to farmers and small business owners on 22 March 2006.

1.4 The Cyclone Monica income support payments provide income support to farmers and small business owners who have been adversely affected by the cumulative effects of Cyclone Larry and Cyclone Monica (eg, farmers and small business owners in the Cape York region that were affected by flooding and damage caused by Cyclone Monica shortly after suffering from the residual effects of Cyclone Larry).

1.5 The Prime Minister announced the Cyclone Monica income support payments to farmers and small business owners on 26 May 2006.

1.6 The Cyclone Larry and Cyclone Monica income support payments are equivalent to the maximum rate of Newstart allowance and are administered by Centrelink.

1.7 The Prime Minister announced that the Cyclone Larry payments will be available for 6 months from 22 March 2006 to 21 September 2006 and the Cyclone Monica payments will be available for 6 months from 29 May 2006.

Taxable status

1.8 A payment received by a person as income support, or as a replacement for lost salary or wages or lost income, is taxable. The Cyclone Larry and Cyclone Monica payments are therefore taxable as they are received as ordinary income by the recipient.

1.9 The Newstart allowance is also a form of income support which is received as ordinary income by the recipient. However, the Newstart allowance is a rebatable benefit to which the beneficiary tax offset applies, ensuring that a person who receives the Newstart allowance for the full year and has no other income pays no tax on the Newstart income.

1.10 This amendment will extend the beneficiary tax offset to Cyclone Larry and Cyclone Monica income support payments to ensure consistent taxation treatment with the Newstart allowance.

Summary of new law

1.11 This measure amends:

•

subsection 160AAA(1) of the ITAA 1936 to include Cyclone Larry and Cyclone Monica income support payments in the definition of a 'rebatable benefit' to which the beneficiary tax offset applies; and

•

section 13-1 of the ITAA 1997 to list Cyclone Larry and Cyclone Monica income support payments as a payment that is allowed a tax offset.

Detailed explanation of new law

Include Cyclone Larry and Cyclone Monica income support payments in the definition of 'rebatable benefit' for beneficiary tax offset purposes

1.12 Subsection 160AAA(1) of the ITAA 1936 lists certain pensions, benefits and payments that are considered to be a 'rebatable benefit'.

1.13 Paragraph (a) of subsection 160AAA(1) includes payments made under certain parts of the Social Security Act 1991 as rebatable benefits, including the Newstart allowance.

1.14 The amendment to subsection 160AAA(1) of the ITAA 1936 includes Cyclone Larry and Cyclone Monica income support payments as a 'rebatable benefit' to which the beneficiary tax offset applies. This ensures that taxpayers in receipt of Cyclone Larry and Cyclone Monica income support payments are treated consistently with recipients of the Newstart allowance. [Schedule 1, item 1, subsection 160AAA(1)]

1.15 Paragraph 160AAA(3) of the ITAA 1936 provides that where a taxpayer receives an amount of 'rebatable benefit' greater than the tax-free threshold, the taxpayer may be entitled to a tax offset.

Include Cyclone Larry and Cyclone Monica income support payments in the Division 13 guide of tax offsets

1.16 Section 13-1 of the ITAA 1997 lists payments that are allowed a tax offset and the relevant provision of the ITAA 1936 or the ITAA 1997 that provides that offset. Payments are listed under headings classifying the type of payment.

1.17 The first amendment to section 13-1 of the ITAA 1997 will include Cyclone Larry and Cyclone Monica income support payments in the list of payments that attract a tax offset and will direct readers to the item in the table headed 'social security and other benefit payments'. [Schedule 1, item 2, section 13-1]

1.18 The second amendment to section 13-1 lists the reference to Cyclone Larry and Cyclone Monica income support payments at subsection 160AAA(3) under the item in the table headed 'social security and other benefit payments'. [Schedule 1, item 3, section 13-1]

Application and transitional provisions

1.19 These amendments are to apply to the 2005-06, 2006-07 and 2007-08 years of income.

Chapter 2 Cyclones Larry and Monica: Assistance for affected businesses

Outline of chapter

2.1 Schedule 2 to this Bill provides tax-free status for Australian Government payments to businesses adversely affected by Cyclone Larry. These include the Cyclone Larry Business Assistance Fund payments and payments for fuel excise relief.

2.2 Schedule 2 to this Bill also provides tax-free status for Australian Government payments to businesses adversely affected by flooding due to the combined impacts of Cyclones Larry and Monica.

Context of amendments

General

2.3 Generally, government assistance payments are treated as assessable income, as either 'ordinary income' under section 6-5, or 'subsidies' or 'bounties' under section 15-10 of the Income Tax Assessment Act 1997.

Cyclone Larry Business Assistance Fund

2.4 On 22 March 2006, the Prime Minister announced payments of $10,000 for businesses adversely affected by Cyclone Larry. Those businesses that can demonstrate significant losses can receive up to $25,000. These payments are to be paid out of the Cyclone Larry Business Assistance Fund.

Cyclones Monica and Larry Business Assistance Fund

2.5 On 26 May 2006, The Prime Minister announced payments of $10,000 for businesses adversely affected by flooding due to the combined impacts of Cyclones Larry and Monica. Those businesses that can demonstrate significant losses can receive up to $25,000.

Fuel excise relief

2.6 On 26 March 2006, the Prime Minister announced that any excise paid on diesel or petrol fuel used by businesses for generating their own electricity until normal services are restored are to be reimbursed by the Government.

Detailed explanation of new law

2.7 This measure defines payments made under the Cyclone Larry Business Assistance Fund, Cyclones Monica and Larry Business Assistance Fund, and fuel excise relief programme as non-assessable, non-exempt income. This has the effect of exempting such income from tax while avoiding other interactions with taxation law.

2.8 A range of financial assistance measures have been provided for those adversely affected by Cyclone Larry or adversely affected by flooding due to the combined impacts of Cyclones Larry and Monica. However, this measure only applies to payments made to businesses by the Australian Government, and made directly under the Cyclone Larry Business Assistance Fund, the Cyclones Monica and Larry Business Assistance Fund, or the fuel excise relief programme.

2.9 The fuel excise relief programme has components relating to businesses as well as households. This measure only deals with those relating to businesses. [Schedule 2, item 1, paragraph 1(1)(b)]

Application and transitional provisions

2.10 This measure applies to the 2005-06 and 2006-07 income years. [Schedule 2, item 1, subsection 1(1)]

Chapter 3 Extension of the beneficiary tax offset to interim income support payments

Outline of chapter

3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) to extend eligibility for the beneficiary tax offset to drought affected taxpayers in receipt of interim income support payments.

Context of amendments

Exceptional circumstances relief payments

3.2 Welfare support for drought affected farmers in areas declared to be in exceptional circumstances is mainly provided through exceptional circumstances relief payments and is delivered by Centrelink on behalf of the Department of Agriculture, Fisheries and Forestry.

3.3 Exceptional circumstances relief payments is a taxable payment paid under the authority of the Farm Household Support Act 1992. However, exceptional circumstances relief payments is a 'rebatable benefit' to which the beneficiary tax offset applies.

Interim income support payments

3.4 Interim income support payments are made to farmers in areas where an exceptional circumstances application lodged by a state demonstrates a prima facie case for full exceptional circumstances assistance.

3.5 Interim income support is available for up to six months while the case for full exceptional circumstances assistance is being considered.

3.6 In contrast to exceptional circumstances relief payments, interim income support is a temporary payment paid under the general category of emergency and general assistance payments. Emergency and general assistance payments are not made under any specific legislation, rather they are a payment made on ministerial direction, similar to an ex-gratia payment.

3.7 In contrast to exceptional circumstances relief payments, interim income support payments are not eligible for the beneficiary tax offset.

Summary of new law

3.8 This measure amends:

•

subsection 160AAA(1) of the ITAA 1936 to include interim income support payments in the definition of a 'rebatable benefit' to which the beneficiary tax offset applies; and

•

section 13-1 of the ITAA 1997 to list interim income support payments as a payment that is allowed a tax offset.

Detailed explanation of new law

Include interim income support payments in the definition of 'rebatable benefit' for beneficiary tax offset purposes

3.9 This measure amends subsection 160AAA(1) of the ITAA 1936 to include interim income support payments as a 'rebatable benefit' to which the beneficiary tax offset applies. This will ensure consistent taxation treatment with exceptional circumstances relief payments. [Schedule 3, item 1, subsection 160AAA(1)]

3.10 Subsection 160AAA(3) of the ITAA 1936 provides that where a taxpayer receives an amount of 'rebatable benefit', the taxpayer is entitled to a tax offset.

3.11 Subsection 160AAA(1) of the ITAA 1936 lists certain pensions, benefits and payments that are considered to be a 'rebatable benefit'.

3.12 Paragraph (da) of subsection 160AAA(1) includes exceptional circumstances relief payments under the Farm Household Support Act 1992 as rebatable benefits. Paragraph (db) includes grants of financial assistance also made under the Farm Household Support Act 1992 as a 'rebatable benefit'.

3.13 Interim income support payments are paid under the general category of emergency and general assistance payments which are made by ministerial direction and not under any specific legislation. As interim income support payments are not made under the Farm Household Support Act 1992 or otherwise included as a 'rebatable benefit', they are not rebatable benefits and as such are not currently entitled to the tax offset.

Include interim income support payments in the Division 13 guide of tax offsets

3.14 Section 13-1 of the ITAA 1997 lists payments that are allowed a tax offset and the relevant provision of the ITAA 1936 or ITAA 1997 that provides that offset. Payments are listed under headings classifying the type of payment.

3.15 The first amendment to section 13-1 of the ITAA 1997 will include interim income support payments in the list of payments that attract a tax offset and will direct readers to the item in the table headed 'social security and other benefit payments'. [Schedule 3, item 2, section 13-1]

3.16 The second amendment to section 13-1 lists interim income support payments under the item in the table headed 'primary production' and directs readers to the item in the table headed 'social security and other benefit payments'. [Schedule 3, item 3, section 13-1]

3.17 The third amendment to section 13-1 lists the reference to interim income support payments at subsection 160AAA(3) under the item in the table headed 'social security and other benefit payments'. [Schedule 3, item 4, section 13-1]

Application and transitional provisions

3.18 These amendments are to apply to the 2005-06 year of income and later years of income.

Chapter 4 Simplified imputation system (share capital tainting rules)

Outline of chapter

4.1 Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to ensure that a company's share capital account will become tainted if it transfers certain amounts to that account. If a company taints its share capital account, a franking debit arises in the company's franking account. If the company chooses to untaint its share capital account, an additional franking debit may arise and untainting tax may be payable.

4.2 These rules replace the share capital tainting rules in the Income Tax Assessment Act 1936 (ITAA 1936) with modifications to ensure that they interact with the simplified imputation system and to overcome some technical deficiencies.

Context of amendments

4.3 The simplified imputation system was part of the Government's business tax reform package and applies from 1 July 2002. The share capital tainting rules are an integral part of the imputation system. In Press Release No. C104/02 of 27 September 2002, the then Minister for Revenue and Assistant Treasurer announced that the share capital tainting rules would be inserted into the ITAA 1997 as part of the further implementation of the simplified imputation system.

4.4 Shareholders are taxed preferentially on distributions of share capital. In contrast, shareholders are generally taxed at their marginal tax rate on distributions of profits. The share capital tainting rules are integrity rules designed to prevent a company from disguising a distribution of profits as a tax-preferred capital distribution by transferring profits into its share capital account and subsequently making distributions from that account.

Summary of new law

4.5 A company's share capital account will become tainted if it transfers an amount to its share capital account from any other account, other than:

•

an amount that can be identified as share capital;

•

certain amounts that are transferred under debt/equity swaps;

•

an amount that is transferred by a non-Corporations Act company to remove shares with a par value;

•

certain amounts that are transferred from an option premium reserve;

•

certain amounts that are transferred in connection with the demutualisation of a non-insurance company;

•

certain amounts that are transferred in connection with the demutualisation of an insurance company at the time of the demutualisation; and

•

certain amounts that are transferred in connection with the demutualisation of a life insurance company but after the demutualisation.

4.6 If a company's share capital account becomes tainted, a franking debit arises in the company's franking account at the end of the franking period in which the transfer occurs. A tainted share capital account is treated as a profit account and any subsequent distributions from that account are unfrankable distributions (rather than returns of capital).

4.7 A company can make an irrevocable choice to untaint its share capital account. If the company chooses to untaint its share capital account, an additional franking debit may arise at the end of the franking period in which the choice to untaint is made. Untainting tax may also be payable at that time.

Comparison of key features of new law and current law

Detailed explanation of new law

What is a share capital account?

4.8 A share capital account is:

•

any account that the company keeps of its share capital; or

•

any other account (whether or not it is called a share capital account) that was created after 1 July 1998 where the first amount credited to the account was an amount of share capital.

[Schedule 4, item 20, subsection 975-300(1)]

4.9 If a company has more than one share capital account, those accounts are taken to be a single account for the purposes of the ITAA 1936 and the ITAA 1997. [Schedule 4, item 20, subsection 975-300(2)]

4.10 The concept of share capital is not defined in the ITAA 1997. Under its ordinary meaning, share capital includes amounts received by a company in consideration for the issue of shares.

A company's share capital becomes tainted when an amount is transferred to the account

4.11 A company's share capital account becomes tainted if:

•

the company transfers any amount (other than an excluded amount) to its share capital account from any of its other accounts; and

•

the company was an Australian resident immediately before the time of the transfer.

[Schedule 4, item 1, section 197-5 and subsection 197-50(1)]

When is an amount transferred from one account to another account?

4.12 An amount is transferred from one account to another where that amount is moved from one account to another. This, in turn, requires the balance of the first account to be reduced, while the balance of the second account is increased by the same amount.

4.13 An amount is not transferred from one account to another where the particular accounting entries result in the balances of both accounts increasing in size. Accordingly, an accounting entry of the form 'debit asset, credit share capital account' does not represent a transfer in the relevant sense. Furthermore, a transfer to the share capital account will not arise if an expense account is debited at the same time that the share capital account is credited.

Example 4.1

A company has a retained profits reserve balance of $1,000 at the beginning of the 2006-07 income year. The company issues $100 in shares on 1 September 2006 to an individual as consideration for services rendered. The share issue is accounted for by debiting the expense account by $100 and crediting the share capital account by $100.

The company does not derive any income nor does it incur any other expenses during the income year. At the end of the income year, the balance of the expense account ($100 debit) will be transferred to the profit and loss account. On closure of its profit and loss account a $100 debit will be made to the company's retained profits reserve. The company's retained profits reserve is reduced by the net loss ($100) incurred over the income year, not directly by the expense itself. Therefore, no amount has been transferred from the company's retained profits reserve to its share capital account.

Transfers to a share capital account that do not cause the account to become tainted

Amounts that can be identified as share capital

4.14 A company's share capital account does not become tainted if an amount is transferred to its share capital account that, at all times before the transfer, can be identified in the company's books as share capital. [Schedule 4, item 1, section 197-10]

Amounts transferred under debt/equity swaps

4.15 A company's share capital account does not become tainted if the amount is transferred under a debt for equity swap. A debt for equity swap is an arrangement under which a person discharges, releases or otherwise extinguishes the whole or part of a debt that the company owes to the person in return for shares (other than redeemable preference shares) in the company. [Schedule 4, item 1, subsection 197-15(1)]

4.16 This exclusion will only apply to so much of the transferred amount that does not exceed the lesser of:

•

the market value of the shares issued by the company; and

•

the amount of the debt that is discharged, released or extinguished in return for the shares.

[Schedule 4, item 1, subsection 197-15(2)]

4.17 Amendments are made to the ITAA 1936 to ensure a consistent outcome arises under the old share capital tainting rules with effect from 1 July 1998. [Schedule 4, items 15 and 16, subsection 160ARDM(2B) of the ITAA 1936]

Amounts transferred by non-Corporations Act companies in removing shares with a par value

4.18 A company's share capital account does not become tainted if the company is not incorporated under the Corporations Act 2001 and transfers an amount from its share premium account or its capital redemption reserve to its share capital account where:

•

the transfer is made under, or in accordance with, a law of the Commonwealth, or of a State or Territory, that requires or allows either or both of the company's share premium account and capital redemption reserve to become part of the company's share capital account; and

•

the transfer is made as part of a process that leads to there being no shares in the company that have a par value.

[Schedule 4, item 1, section 197-20]

Amounts transferred from option premium reserves

4.19 A company's share capital account does not become tainted if an amount is transferred from an option premium reserve to its share capital account where:

•

the transfer is made because of the exercise of options to acquire shares in the company; and

•

the amount transferred represents option premiums that were received by the company in consideration for the issue of the options that have been exercised.

[Schedule 4, item 1, section 197-25]

4.20 Amendments are made to the ITAA 1936 to ensure a consistent outcome arises under the old share capital tainting rules with effect from 1 July 1998. [Schedule 4, item 16, subsection 160ARDM(2C) of the ITAA 1936]

Amounts transferred in connection with the demutualisation of non-insurance companies

4.21 A company's share capital account does not become tainted if an amount is transferred to its share capital account where:

•

the company is a non-insurance company that demutualises and Division 326 in Schedule 2H to the ITAA 1936 applies to the demutualisation; and

•

the amount is transferred to the company's share capital account in connection with the demutualisation within the limitation period in relation to the demutualisation - the limitation period is defined in subsection 326-20(3) of Schedule 2H to the ITAA 1936 to mean the period ending two years after the demutualisation resolution day or such later time as the Commissioner of Taxation (Commissioner) allows.

[Schedule 4, item 1, subsection 197-30(1)]

4.22 This exclusion will only apply to so much of the transferred amount that, together with any amounts that were previously transferred in connection with the demutualisation, do not exceed the total capital contributions amount. [Schedule 4, item 1, subsection 197-30(2)]

4.23 Where the company is not formed by the merger of two or more mutual entities, the total capital contributions amount is the sum of all the capital amounts that were contributed by the company's members before demutualisation that were not allowed as an income tax deduction and were not payments for goods or services provided by the company. [Schedule 4, item 1, subsection 197-30(3)]

4.24 Where the company is formed by the merger of two or more mutual entities, the total capital contributions amount is the sum of:

•

all the capital amounts that were contributed before demutualisation by persons that become members at or after the time when the merger took place and were not allowed as an income tax deduction or were not payments for goods or services provided by the company; and

•

the market values, at the time of the merger, of the entities that merged to form the company, as determined by a qualified valuer.

[Schedule 4, item 1, subsection 197-30(4)]

Amounts transferred in connection with the demutualisation of insurance companies

4.25 A company's share capital account does not become tainted if an amount is transferred to its share capital account where:

•

the company is an insurance company that demutualises in accordance with a demutualisation method specified in Division 9AA of Part III of the ITAA 1936; and

•

the amount was transferred in connection with the demutualisation within the listing period in relation to the demutualisation - the listing period is defined in subsection 121AE(6) of the ITAA 1936 to mean the period ending two years after the demutualisation resolution day or such later time as the Commissioner allows.

[Schedule 4, item 1, paragraphs 197-35(1)(a) to (c)]

4.26 This exclusion applies only to amounts transferred to the share capital account of the issuing company. The issuing company is:

•

if demutualisation method 1 (section 121AF) or method 2 (section 121AG) applies to the demutualisation, the demutualising company; or

•

if demutualisation method 3 (section 121AH), method 4 (section 121AI), method 5 (section 121AJ), method 6 (section 121AK) or method 7 (section 121AL) applies to the demutualisation, the company that issues the ordinary shares under the demutualisation.

[Schedule 4, item 1, paragraph 197-35(1)(d)]

4.27 This exclusion will only apply to the extent that the sum of:

•

the transferred amount;

•

all amounts that were previously transferred to the issuing company's share capital account from another account of the company in connection with the demutualisation; and

•

all amounts that were previously transferred to the issuing company's retained profit account in connection with the demutualisation,

do not exceed the listing day company valuation amount. [Schedule 4, item 1, subsection 197-35(2)]

4.28 The 'listing day valuation amount' is defined in note 3 to table 1 in section 121AS of the ITAA 1936. [Schedule 4, item 1, subsection 197-35(3)]

4.29 In most cases the listing day valuation amount will be:

•

if the demutualising company is a life insurance company, the embedded value of the company; or

•

if the demutualising company is a general insurance company, the net tangible asset value of the company.

4.30 Amendments are made to the ITAA 1936 to ensure a consistent outcome arises under the old share capital tainting rules with effect from 1 July 1998. [Schedule 4, items 17 and 18, subsections 160ARDM(4A) and (6) of the ITAA 1936]

Amounts transferred in connection with post-demutualisation transfers relating to life insurance companies

4.31 A company's share capital account does not become tainted if an amount is transferred to its share capital account where:

•

the company is a life insurance company that has demutualised in accordance with a demutualisation method specified in Division 9AA of Part III of the ITAA 1936; and

•

the amount was transferred after the end of the listing period in relation to the demutualisation - the listing period is defined in subsection 121AE(6) of the ITAA 1936 to mean the period ending two years after the demutualisation resolution day or such later time as the Commissioner allows.

[Schedule 4, item 1, paragraphs 197-40(1)(a) to (c)]

4.32 This exclusion applies to amounts transferred to the share capital account of either:

•

the demutualising company; or

•

if demutualisation method 3 (section 121AH), method 4 (section 121AI), method 5 (section 121AJ), method 6 (section 121AK) or method 7 (section 121AL) applied to the demutualisation, the company that issued the ordinary shares under the demutualisation.

[Schedule 4, item 1, paragraph 197-40(1)(d)]

4.33 In the case of the demutualising company, the amount must be transferred to the share capital account from an account of the company consisting of shareholders' capital (within the meaning of the Life Insurance Act 1995) in relation to a statutory fund (within the meaning of that Act) and must have been part of such an account at the time of the demutualisation. [Schedule 4, item 1, paragraph 197-40(1)(e)]

4.34 Paragraph 63(3)(a) of the Life Insurance Act 1995 applies to determine whether an amount is transferred from an account of the company consisting of shareholders' capital in relation to a statutory fund under paragraph 197-40(1)(e). For these purposes, it is not relevant that the transfer under the Corporation Act 2001 is from an account of a different description.

4.35 In the case of the issuing company, the amount must be transferred to the share capital account from a capital reserve created at the time of or in connection with the demutualisation. [Schedule 4, item 1, paragraph 197-40(1)(f)]

4.36 This exclusion will only apply to the extent that the sum of:

•

the transferred amount;

•

all amounts that were previously transferred to the demutualising company's share capital account, or to the issuing company's share capital account, as described in subsection 197-40(1); and

•

all amounts that were previously transferred, in connection with the demutualisation, to the issuing company's share capital account or retained profit account, as described in section 197-35,

do not exceed the listing day company valuation amount. [Schedule 4, item 1, subsection 197-40(2)]

4.37 The 'listing day valuation amount' is defined in note 3 to table 1 in section 121AS of the ITAA 1936. [Schedule 4, item 1, subsection 197-40(3)]

4.38 In most cases the listing day valuation amount will be:

•

if the demutualising company is a life insurance company, the embedded value of the company; or

•

if the demutualising company is a general insurance company, the net tangible asset value of the company.

4.39 Amendments are made to the ITAA 1936 to ensure a consistent outcome arises under the old share capital tainting rules with effect from 1 July 1998. [Schedule 4, items 17 and 18, subsections 160ARDM(4B) and (6) of the ITAA 1936]

Example 4.2

Life Co demutualises on 1 January 2007. The demutualisation is in accordance with demutualisation method 3 (section 121AH) in Division 9AA of Part III of the ITAA 1936. Life Co's listing day valuation amount (or embedded value) at the time of demutualisation is $200 million.

At the time of the demutualisation:

•

$110 million is transferred to Head Co's (the issuing company) share capital account before the end of the 'listing period' in relation to the demutualisation;

•

$30 million is transferred to Head Co's retained profit account before the end of the 'listing period' in relation to the demutualisation;

•

$25 million is transferred to a capital reserve created by Head Co in connection with the demutualisation; and

•

$35 million is retained in the shareholders' capital of the statutory fund of Life Co.

Section 197-35 applies to ensure that Head Co's share capital account does not become tainted by the $110 million transferred to that account before the end of the 'listing period' in relation to the demutualisation. The cap in subsection 197-35(2) is not breached because the sum of the amount transferred ($110 million) and the amount transferred to Head Co's retained profit account in connection with the demutualisation ($30 million) - that is, $140 million in total - does not exceed the listing day valuation amount at the time of demutualisation ($200 million).

In 2009 (ie, after the end of the 'listing period' in relation to the demutualisation), Head Co transfers the $25 million that was held in the capital reserve created in connection with the demutualisation to its share capital account. Section 197-40 applies to ensure that Head Co's share capital account does not become tainted by the amount transferred. The cap in subsection 197-40(2) is not breached because the sum of the amount transferred ($25 million), the amount transferred within the 'listing period' to Head Co's share capital account ($110 million) and the amount transferred to Head Co's retained profit account in connection with the demutualisation ($30 million) - that is, $165 million in total - does not exceed the listing day valuation amount at the time of demutualisation ($200 million).

In 2010, Life Co transfers the $35 million that was part of the shareholders' capital of the statutory fund at the time of the demutualisation to its share capital account. Section 197-40 applies to ensure that Life Co's share capital account does not become tainted by the amount transferred. The cap in subsection 197-40(2) is not breached because the sum of the amount transferred ($35 million), the amount transferred after the end of the 'listing period' to Head Co's share capital account from the capital reserve created in connection with the demutualisation ($25 million), the amount transferred within the 'listing period' to Head Co's share capital account ($110 million) and the amount transferred to Head Co's retained profit account in connection with the demutualisation ($30 million) - that is, $200 million in total - does not exceed the listing day valuation amount at the time of demutualisation ($200 million).

What happens when the share capital account becomes tainted?

4.40 If a company's share capital account is tainted, then:

•

a franking debit arises in the company's franking account;

•

the account is generally taken not to be a share capital account for the purposes of the ITAA 1936 and the ITAA 1997; and

•

any distributions from the account are taxed as unfranked dividends in the hands of the shareholder.

A franking debit arises in the company's franking account

4.41 When an amount is transferred to a company's share capital account that causes the share capital account to become tainted, a franking debit arises in the company's franking account immediately before the end of the franking period in which the transfer occurs. [Schedule 4, item 1, subsection 197-45(1)]

4.42 The amount of the franking debit is calculated by applying the formula:

4.43 The applicable franking percentage is the company's benchmark franking percentage (determined under section 203-30 of the ITAA 1997) for the franking period in which the tainting occurs. If the company has not set a benchmark franking percentage by the end of the franking period, it is taken to be 100 per cent. [Schedule 4, item 1, subsection 197-45(2)]

Example 4.3

A company's share capital account becomes tainted when an amount of $700 is transferred to the account from another account. The company has a benchmark franking percentage for the franking period in which the tainting occurred of 80 per cent. Section 197-45 imposes a franking debit at the end of the franking period of $240,

(ie, $700 × 30/70 × 80%).

The share capital account is taken not to be a share capital account except where specified

4.44 If a company's share capital account is tainted, then the account is generally taken not to be a share capital account for the purposes of the ITAA 1936 and the ITAA 1997.

4.45 However, a tainted share capital account continues to be recognised as a share capital account for the purposes of applying:

•

subsection 118-20(6) of the ITAA 1997, which ensures that a capital gain is not reduced by the amount of a non-portfolio dividend paid by a non-resident company that is debited against the company's share capital account;

•

the share capital tainting rules (Division 197 of the ITAA 1997);

•

the definition of 'paid-up share capital' in subsection 6(1) of the ITAA 1936;

•

subsection 44(1B) of the ITAA 1936, which deems dividends debited against a share capital account to be paid out of profits for certain purposes;

•

section 46H of the ITAA 1936, which specifies a share capital account to be a disqualifying account under the dividend tainting rules; and

•

subsection 159GZZZQ(5) of the ITAA 1936, which specifies that an amount that is debited against a share capital account is not an eligible non-capital amount under the off-market share buy-back rules.

[Schedule 4, item 20, subsection 975-300(3)]

Distributions are taken to be unfrankable dividends

4.46 If a company's share capital account is tainted, then any distributions from the account are taxed as dividends in the hands of the shareholder. This is because subsection 975-300(3) applies to ensure that a tainted share capital account is not regarded as a share capital account for the purposes of paragraph (d) of the definition of a 'dividend' in subsection 6(1) of the ITAA 1936. In addition, the dividend is taken to be an unfrankable distribution (see section 202-45 of the ITAA 1997 and section 46M of the ITAA 1936).

How does the share capital account become untainted?

4.47 A company's share capital account remains tainted until the company chooses to untaint the account. [Schedule 4, item 1, subsection 197-50(2)]

4.48 A company can untaint its share capital account by making a choice in the approved form given to the Commissioner. This choice is made at the time the form is given to the Commissioner and cannot be revoked. [Schedule 4, item 1, section 197-55]

What happens when the share capital account is untainted?

4.49 If a company chooses to untaint its share capital account, the company may have:

•

a further franking debit to its franking account; and

•

a liability to pay untainting tax.

An additional franking debit may arise in the company's franking account

4.50 If a company chooses to untaint its share capital account, an additional franking debit will arise in the company's franking account if its applicable franking percentage at the end of the franking period in which the choice to untaint is made is higher than its applicable franking percentage at the end of the franking period in which the share capital account was tainted. [Schedule 4, item 1, section 197-65]

4.51 The applicable franking percentage at the end of the franking period in which the choice to untaint is made is the company's benchmark franking percentage (determined under section 203-30 of the ITAA 1997) for that franking period. If the company has not set a benchmark franking percentage by the end of the franking period, it is taken to be 100 per cent. [Schedule 4, item 1, subsection 197-65(3)]

4.52 The amount of the additional franking debit is equal to the excess of the amount worked out under the formula:

over the amount of the franking debits that arose at the time of tainting under section 197-45 in relation to the transferred amount. [Schedule 4, item 1, subsection 197-65(3)]

Example 4.4

A company's applicable franking percentage at the end of the franking period in which the share capital account was tainted was 100 per cent. Therefore, if the company chooses to untaint its share capital account, no additional franking debit will arise in its franking account.

Example 4.5

A company's applicable franking percentage at both the end of the franking period in which the share capital account was tainted and the end of the franking period in which the choice to untaint is made is 80 per cent. Therefore, if the company chooses to untaint its share capital account, no additional franking debit will arise in its franking account.

Example 4.6

A company's share capital account becomes tainted when an amount of $700 is transferred to the account from another account. The company's benchmark franking percentage at the end of the franking period in which the share capital account was tainted was 80 per cent. Therefore, a franking debit of $240 was made to the company's franking account at that time.

The company chooses to untaint its share capital account. Its applicable franking percentage at the end of the franking period in which the choice to untaint is made is 100 per cent. Therefore, a franking debit of $60, (ie, ($700 × 30/70 × 100%) = $300 - $240) will arise in its franking account at the end of the franking period in which the choice to untaint is made.

The company may be liable to pay untainting tax

4.53 If a company chooses to untaint its share capital account, it may be liable to pay untainting tax. Untainting tax is due and payable 21 days after the end of the franking period in which the choice to untaint is made. [Schedule 4, item 1, subsection 197-60(2) and section 197-70]

4.54 Untainting tax is imposed by section 3 of the New Business Tax System (Untainting Tax) Bill 2006.

4.55 The amount of the liability to untainting tax depends on whether the company is:

•

a company with only lower tax members in relation to the tainting period - that is, a company that is wholly-owned by other companies, complying superannuation entities or foreign residents; or

•

a company with higher tax members in relation to the tainting period - that is, a company that is not a company with only lower tax members in relation to the tainting period.

[Schedule 4, item 1, subsection 197-60(1)]

4.56 If a company that chooses to untaint its share capital account only has lower tax members in relation to the tainting period, it will be liable to untainting tax only if its applicable franking percentage at either the end of the franking period in which the share capital account was tainted or the end of the franking period in which the choice to untaint is made was less than 100 per cent.

4.57 If a company that chooses to untaint its share capital account has higher tax members in relation to the tainting period, it will always be liable to untainting tax.

4.58 The amount of untainting tax that is payable is worked out by applying the formula:

where:

•

the applicable tax amount is the grossed-up tainting amount at the time of the choice to untaint multiplied by the applicable tax rate;

•

the section 197-45 franking debits are the franking debits that arose at the end of the franking period in which the share capital account became tainted; and

•

the section 197-65 franking debits are the further franking debits that arise at the end of the franking period in which the choice to untaint the share capital account was made.

[Schedule 4, item 1, section 197-60]

4.59 The applicable tax rate is:

•

if the company only has lower tax members in relation to the tainting period, the company tax rate (currently, 30 per cent);

•

if the company has higher tax members in relation to the tainting period, the highest marginal tax rate plus Medicare levy and Medicare levy surcharge (from 1 July 2006, 47.5 per cent).

[Schedule 4, item 1, subsection 197-60(3)]

Example 4.7

A company's share capital account becomes tainted when an amount of $700 is transferred to the account from another account. The company's benchmark franking percentage at the end of the franking period in which the share capital account was tainted was 80 per cent. Therefore, a franking debit of $240 was made to the company's franking account at that time.

The company chooses to untaint its share capital account. The company only has lower tax members in relation to the tainting period.

The company's applicable franking percentage at the end of the franking period in which the choice to untaint is made is 90 per cent. Therefore, a franking debit of $30, (ie, ($700 × 30/70 × 90%) = $270 - $240) will arise in its franking account at the end of the franking period in which the choice to untaint is made under section 197-65.

The company will be liable to pay untainting tax of $30, worked out as follows:

•

the applicable tax amount is $300,

(ie, $700 + ($700 × 30/70) = $1,000 × 30%);

•

the section 197-45 franking debits are $240;

•

the section 197-65 franking debits are $30;

•

the amount of untainting tax is $30, (ie, $300 - ($240 + $30)).

Example 4.8

A company's share capital account becomes tainted when an amount of $700 is transferred to the account from another account. The company's benchmark franking percentage at the end of the franking period in which the share capital account was tainted was 80 per cent. Therefore, a franking debit of $240 was made to the company's franking account at that time.

The company chooses to untaint its share capital account. The company has higher tax members in relation to the tainting period.

The company's applicable franking percentage at the end of the franking period in which the choice to untaint is made is 90 per cent. Therefore, a franking debit of $30, (ie, ($700 × 30/70 × 90%) = $270 - $240) will arise in its franking account at the end of the franking period in which the choice to untaint is made under section 197-65.

The company will be liable to pay untainting tax of $205, worked out as follows:

•

the applicable tax amount is $475,

(ie, $700 + ($700 × 30/70) = $1,000 × 47.5%);

•

the section 197-45 franking debits are $240;

•

the section 197-65 franking debits are $30;

•

the amount of untainting tax is $205,

(ie, $475 - ($240 + $30)).

Example 4.9

A company's share capital account becomes tainted when an amount of $700 is transferred to the account from another account. The company's benchmark franking percentage at the end of the franking period in which the share capital account was tainted was 100 per cent. Therefore, a franking debit of $300 was made to the company's franking account at that time.

The company chooses to untaint its share capital account. The company has higher tax members in relation to the tainting period.

As the company's applicable franking percentage at the end of the franking period in which the share capital account was tainted was 100 per cent, no further franking debit will arise under section 197-65.

The company will be liable to pay untainting tax of $175, worked out as follows:

•

the applicable tax amount is $475,

(ie, $700 + ($700 × 30/70) = $1,000 × 47.5%);

•

the section 197-45 franking debits are $300;

•

the section 197-65 franking debits are nil;

•

the amount of untainting tax is $175,

(ie, $475 - ($300 + 0)).

How do the share capital tainting rules apply to consolidated groups?

4.60 If a subsidiary member of a consolidated group or multiple entry consolidated (MEC) group transfers an amount to its share capital account that causes the share capital account to become tainted, only the subsidiary member's share capital account is tainted - that is, the single entity rule does not apply to cause the head company's account to become tainted.

4.61 Franking debits that arise at the time of tainting (section 197-45) or untainting (section 197-65) will arise in the franking account of the head company because the consolidated group or MEC group has a single franking account (see section 709-75). The applicable franking percentage, which applies to determine the amount of the franking debits that arise under sections 197-45 and 197-65, will be the head company's benchmark franking percentage for the relevant franking period. If the head company has not determined a benchmark franking percentage for the relevant franking period, the applicable franking percentage will default to 100 per cent.

4.62 Where a subsidiary chooses to untaint its share capital account, any untainting tax liability is calculated on the basis of its position as a company with either higher tax or lower tax shareholders.

4.63 If a subsidiary member joins a consolidated group or MEC group with a tainted share capital account, no further franking debit will arise under section 197-45. Any liability to untainting tax liability will be determined on the basis of the subsidiary member's position as a company with higher or lower tax shareholders.

4.64 If a subsidiary member leaves a consolidated group or MEC group with a tainted share capital account, its share capital account will remain tainted.

Machinery provisions

4.65 Machinery provisions are included that:

•

impose the general interest charge on unpaid amounts of untainting tax;

•

allow the Commissioner to give a company a notice of its liability to pay untainting tax; and

•

specify the evidentiary effect of such a notice.

[Schedule 4, item 1, sections 197-75, 197-80 and 197-85]

4.66 These machinery provisions are consistent with the machinery provisions that applied under the old share capital tainting rules.

Application and transitional provisions

Application of the amendments

4.67 The new share capital tainting rules in Division 197 apply to transfers made to a company's share capital account after the day this Bill is introduced into Parliament. The changes to the definition of share capital account apply from the date of Royal Assent. [Schedule 4, items 2, 14 and 30, section 197-5 of the Income Tax (Transitional Provisions) Act 1997]

4.68 The old share capital tainting rules effectively ceased to apply from 1 July 2002. Therefore, amounts transferred to a company's share capital account between 1 July 2002 and the day that this Bill is introduced into Parliament will not cause the share capital account to be tainted.

4.69 Consequently, any transfers to a company's share capital account that occurred as an immediate result of the adoption of the Australian Equivalent of the International Financial Reporting Standards will not cause the share capital account to be tainted. Companies were required to adopt those Standards on the first day of the first accounting period beginning on or after 1 January 2005.

4.70 Some amendments are made to the old share capital tainting rules in the ITAA 1936 with effect from 1 July 1998. These amendments are beneficial to taxpayers as they reduce the circumstances in which a company's share capital account becomes tainted. [Schedule 4, item 19]

Transitional provisions

4.71 Schedule 4 to this Bill inserts transitional rules into the Income Tax (Transitional Provisions) Act 1997 to facilitate the untainting of accounts that became tainted under the old share capital tainting rules and had not been untainted before 1 July 2002. [Schedule 4, item 2, section 197-10 of the Income Tax (Transitional Provisions) Act 1997]

4.72 Under the transitional rules, if a company had a tainted share capital account as at 30 June 2002:

•

the share capital account will be taken to be untainted from 1 July 2002 - therefore any distribution from the account between 1 July 2002 and the day after the introduction of this Bill will be treated as a capital distribution;

•

no franking debit or liability to untainting tax will arise at that time;

•

immediately after the day that this Bill is introduced into Parliament, the share capital account will be taken to be tainted to the same extent under Division 197 of the ITAA 1997; and

•

no franking debit will arise under section 197-45 of the ITAA 1997 as a result of the share capital account becoming tainted.

[Schedule 4, item 2, sections 197-15 and 197-20 of the Income Tax (Transitional Provisions) Act 1997]

4.73 The company will be able to choose to untaint its share capital account under section 197-55 of the ITAA 1997.

4.74 If the company chooses to untaint its share capital account, the operation of sections 197-60 and 197-65 of the ITAA 1997 will be modified as follows:

•

the tainting amount is taken to include the amount that was tainted under the old share capital tainting provisions;

•

references to franking debits arising under section 197-45 of the ITAA 1997 are taken to be references to franking debits that arose under the former sections 160ARDQ and 160ARDV of the ITAA 1936;

•

the amount of the franking debits that arose under the former section 160ARDQ or 160ARDV of the ITAA 1936 will be converted into a tax paid basis - this is achieved by multiplying the amount of any Class A franking debits by 39/61 and any Class C franking debits by 30/70; and

•

no untainting tax will be payable if the company has only lower tax members.

[Schedule 4, item 2, section 197-25 of the Income Tax (Transitional Provisions) Act 1997]

Consequential amendments

ITAA 1936

4.75 Consequential amendments to the ITAA 1936:

•

modify the definition of 'share capital account' in subsection 6(1);

•

insert a definition of 'tainted';

•

modify the definition of 'tainting amount'; and

•

repeal the former definition of 'share capital account' in section 6D.

[Schedule 4, items 3, 4, 21 and 22]

ITAA 1997

4.76 Consequential amendments to the ITAA 1997:

•

modify the table of franking debits in section 205-30 so that it includes references to the franking debits arising under sections 197-45 and 197-65;

•

modify the table of tax-related liabilities of the head company of a consolidated group in subsection 721-10(2) to update the reference to untainting tax; and

•

insert definitions of 'share capital account', 'tainted', 'tainting amount'; and 'untainting tax' into subsection 995-1(1); and

•

insert asterisks before various references to the term 'share capital account'.

[Schedule 4, items 5 to 9 and 23 to 29]

Taxation Administration Act 1953

4.77 Consequential amendments to the Taxation Administration Act 1953:

•

modify the tables in section 8AAB that list provisions that make persons liable to the general interest charge to include section 197-60 of the ITAA 1997; and

•

modify the table of tax-related liabilities in section 250-10 to update the reference to untainting tax.

[Schedule 4, items 10 to 13]

Chapter 5 Government grants

Outline of chapter

Capital gains tax exemption of expense-reimbursing government grants

5.1 Schedule 5 amends the Income Tax Assessment Act 1997 (ITAA 1997) to exempt from capital gains tax (CGT), the recipients of the Unlawful Termination Assistance Scheme, the Alternative Dispute Resolution Assistance Scheme and similar expense-reimbursing government grants from CGT.

5.2 This Schedule makes a further amendment to ensure capital losses, and not just capital gains, are exempt from CGT.

Context of amendments

Unlawful Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme grants

5.3 The Australian Government has established two financial assistance schemes to support the WorkChoices reforms. These are the Unlawful Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme grants.

5.4 The grants provide eligible parties with a capped amount of financial assistance. Any amount in excess of the cap will be borne by the recipients of the financial assistance. The financial assistance is delivered via a voucher.

5.5 Under the Unfair Termination Assistance Scheme, legal practitioners or their firms will supply services to eligible participants. The Commonwealth will pay for those services up to the capped amount.

5.6 Under the Alternative Dispute Resolution Assistance Scheme, alternative dispute resolution providers or their firms will supply services to eligible participants. The Commonwealth will pay for those services up to the capped amount.

CGT status of grants payable under the Unfair Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme

5.7 Under section 104-25 of the ITAA 1997, CGT event C2 (cancellation, surrender and similar endings) happens if an intangible CGT asset such as a right to a grant is satisfied (among other cases). This could technically give rise to CGT consequences on receipt or use of the vouchers under the two grant Schemes.

CGT status of similar grants

5.8 There is the potential for recipients of other similar expense-reimbursing government grants also to have CGT consequences.

Summary of new law

5.9 This Schedule amends subsection 118-37(2) of the ITAA 1997 specifically to exempt the Unlawful Termination Assistance Scheme and Alternative Dispute Resolution Assistance Scheme grants. It also adds a generic provision to exempt expense-reimbursing government grants under government schemes established under an enactment or an instrument of a legislative character.

5.10 This Schedule also amends the existing legislation so that not only capital gains are exempt for specifically listed programmes, but also capital losses.

5.11 This ensures that recipients of the Unlawful Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme grants, the specifically listed government programmes and more generally expense-reimbursing government grants, do not have CGT consequences as a result of receiving the grant.

Comparison of key features of new law and current law

Detailed explanation of new law

Unlawful Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme grants

5.12 The Australian Government has established two financial assistance schemes to support the WorkChoices reforms. These are the Unlawful Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme grants, which are administered by the Minister for Employment and Workplace Relations.

5.13 The grants provide eligible parties with a capped amount of financial assistance. Any amount in excess of the cap will be borne by the recipients of the financial assistance. The financial assistance is delivered via a voucher.

5.14 Under the Unfair Termination Assistance Scheme, legal practitioners or their firms will supply services to eligible participants. The Commonwealth will pay for those services up to the capped amount.

5.15 Under the Alternative Dispute Resolution Assistance Scheme, alternative dispute resolution providers or their firms will supply services to eligible participants. The Commonwealth will pay for those services up to the capped amount.

CGT status of grants payable under the Unfair Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme

5.16 Under section 104-25 of the ITAA 1997, CGT event C2 (cancellation, surrender and similar endings) happens if an intangible CGT asset such as a right to a grant is satisfied (among other cases). This could technically give rise to CGT consequences on receipt or use of the vouchers under the two grant schemes.

5.17 There is already a CGT exemption provision that applies to specific expense-reimbursing government grants. At present, this provision (subsection 118-37(2)) disregards a capital gain for the following grants:

•

the General Practice Rural Incentives Program or the Rural and Remote General Practice Program;

•

the Sydney Aircraft Noise Insulation Project; and

•

the M4/M5 Cashback Scheme (a scheme by the New South Wales Government to reimburse tolls paid on two motorways in Sydney).

5.18 In addition, section 118-14 of the ITAA 1997 provided a CGT exemption to disregard a capital gain or capital loss made in the 1999-2000 or the 2000-01 income years in relation to the use of goods and services tax (GST) Direct Assistance Certificates issued by the GST Start-Up Assistance Office in the Treasury of the Australian Government and associated with the introduction of the GST. These certificates were conceptually similar to the vouchers under the two schemes for which a CGT exemption to disregard a capital gain or capital loss is now being provided.

5.19 This amendment lists the Unlawful Termination Assistance Scheme and Alternative Dispute Resolution Assistance Scheme grants to ensure that recipients of the grants do not have a CGT consequence. [Schedule 5, item 1, paragraph 118-37(2)(e)]

CGT status of similar grants

5.20 There is the potential for recipients of other similar expense-reimbursing government grants to have CGT consequences.

5.21 These amendments also provide a generic CGT exemption to disregard a capital gain or capital loss as a result of receiving a payment or property as reimbursement or payment of expenses, or receiving or using a voucher or certificate, under a scheme established by an Australian government agency (as defined), a local governing body (as defined) or a foreign government agency (as defined). The scheme needs to be established under an enactment or an instrument of a legislative character.

5.22 This means that the scheme can be established by the Australian Government or its authorities, by the state and territory governments or their authorities, or by governments of (or part of) foreign countries or their authorities.

5.23 The requirement that the scheme be established under an enactment or an instrument of a legislative character would be satisfied where the scheme is established that way either expressly or by necessary implication. An enactment would include an Appropriation Act (or equivalent) having regard to associated documentation such as budget papers. An instrument of a legislative character would include regulations (and similar instruments) and local government by-laws.

5.24 The CGT exemption extends only to those cases where the receipt of the payment or property, or the receipt or use of the certificate or voucher, in itself directly gives rise to the capital gain or capital loss. It would not extend, for example, to cases where the payment, property, voucher or certificate is compensation (a form of capital proceeds) for the loss, destruction or transfer of an underlying asset. [Schedule 5, item 1, paragraph 118-37(2)(a)]

5.25 Consistent with the approach taken with the GST Direct Assistance Certificates and more generally with CGT exemptions such as the main residence exemption, the amendments ensure that the subsection 118-37(2) exemptions apply to disregard a capital loss as well as a capital gain. [Schedule 5, item 1, subsection 118-37(2)]

Application and transitional provisions

5.26 The amendments apply to assessments for the 2005-06 income year and later income years.

Chapter 6 Medicare levy surcharge lump sum payment in arrears offset

Outline of chapter

6.1 Schedule 6 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide an offset to certain taxpayers in respect of their Medicare levy surcharge (in the legislation the Medicare levy surcharge is sometimes referred to as MLS) liability where that liability arose, or significantly increased, as a result of the taxpayer receiving an eligible lump sum payment in arrears.

Context of amendments

6.2 In the 2005-06 Budget the Government announced that it would provide concessional Medicare levy surcharge treatment for certain taxpayers who receive lump sum payments in arrears, with effect from the 2005-06 income year.

6.3 The Medicare levy surcharge is payable if a taxpayer and all their dependants do not have private patient hospital cover, (other than because they are 'prescribed persons' as defined in section 251U of the Income Tax Assessment Act 1936 (ITAA 1936)), and their income for Medicare levy surcharge purposes exceeds the threshold of $50,000 for singles and $100,000 for families (plus additional amounts for more than one child). The Medicare levy surcharge is 1 per cent of taxable income, and is payable in addition to the 1.5 per cent Medicare levy.

6.4 For married taxpayers, both spouses pay the Medicare levy surcharge on their separate taxable incomes if their family income exceeds the family threshold and they are liable for the Medicare levy surcharge. If only one member of a couple has private patient hospital cover but the family income exceeds the family threshold, then both spouses may be liable for the Medicare levy surcharge.

6.5 Taxpayers (and their spouses, where applicable) are currently liable for the Medicare levy surcharge in cases where their income exceeds the Medicare levy surcharge threshold due to the receipt of a lump sum payment in arrears by either one, or both, members of a couple.

6.6 Concessional treatment of the increased tax liability arising from the receipt of an eligible lump sum payment in arrears is currently available through the lump sum in arrears tax offset (Subdivision AB of Division 17 of the ITAA 1936), but no concessional treatment has been available until now to offset a Medicare levy surcharge liability created by a lump sum payment in arrears.

6.7 This measure will provide a similar concession to the lump sum in arrears tax offset for the Medicare levy surcharge liability in the event of an eligible lump sum payment in arrears.

Summary of new law

6.8 The ITAA 1997 will be amended to provide a tax offset to certain taxpayers who, in the year in which they have received a significant, eligible lump sum payment in arrears, have become liable for the Medicare levy surcharge, (or an increased Medicare levy surcharge liability), due to the receipt of the lump sum payment in arrears. The amount of the offset will be the amount of the increased Medicare levy surcharge liability created by the receipt of the eligible lump sum.

6.9 In cases where receipt of the lump sum payment in arrears alone results in the taxpayer's spouse having a Medicare levy surcharge liability, then the spouse will also be eligible for the offset.

Comparison of key features of new law and current law

Detailed explanation of new law

6.10 This amendment will insert Subdivision 61-L into the ITAA 1997 to provide a tax offset to taxpayers who have incurred a Medicare levy surcharge liability or an increased Medicare levy surcharge liability in the current year due to the receipt of an eligible lump sum payment in arrears. [Schedule 6, item 4]

Medicare levy surcharge liability

6.11 The Medicare levy surcharge is payable if a taxpayer and all their dependants do not have private patient hospital cover, (other than because they are 'prescribed persons' as defined in section 251U of the ITAA 1936), and their income for Medicare levy surcharge purposes exceeds the threshold of $50,000 for singles and $100,000 for families (plus additional amounts for more than one child). The Medicare Levy Act 1986 and the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 set out the types of income included for the purpose of determining liability for the Medicare levy surcharge.

6.12 Broadly, income for the purpose of determining whether a Medicare levy surcharge liability exists includes a taxpayer's taxable income (including any exempt foreign employment income), a taxpayer's reportable fringe benefits amounts, and the net amount on which family trust distribution tax has been paid, less post-June 1983 elements of an eligible termination payment where the maximum tax rate is nil. If the taxpayer has a spouse, it will also include the spouse's taxable income, the spouse's reportable fringe benefits amounts, and the spouse's net amount on which family trust distribution tax has been paid, less post-June 1983 elements of an eligible termination payment where the maximum tax rate is nil.

Lump sum payments in arrears

6.13 Section 61-590 will define 'MLS lump sum' for the purpose of the Medicare levy surcharge. An 'MLS lump sum' is a lump sum payment of 'eligible income' which includes eligible income for the purpose of the lump sum in arrears tax offset contained in subsection 159ZR(1) of the ITAA 1936, and a lump sum payment in arrears of 'exempt foreign employment income', to be defined in subsection 995-1(1) of the ITAA 1997.

6.14 In general terms, an MLS sum means a lump sum payment of eligible income that is included in the assessable income of the year of income and accrued, in whole or in part, in an earlier year or years of income. However, wage and salary income (which is part of eligible income) and exempt foreign employment income are eligible MLS lump sums, when they relate to a period of employment that ended more than 12 months before the date on which they were paid. [Schedule 6, item 4, section 61-590]

Eligibility for the Medicare levy surcharge lump sum payment in arrears offset

6.15 Broadly consistent with the treatment of eligible lump sums for the purpose of the lump sum in arrears tax offset, a lump sum payment in arrears will only be eligible for the Medicare levy surcharge lump sum payment in arrears offset if the amount of the lump sum is equal to or greater than ten per cent of taxable income for Medicare levy surcharge purposes (excluding the spouse's income when there is a spouse) in the current year, less the total lump sum payment in arrears. So, a taxpayer will be eligible for this offset in the current year if:

6.16 For simplicity, this test is described in paragraph 61-580(1)(d) in terms of the value of the lump sum being greater than or equal to 1/11th of the total income for Medicare levy surcharge purposes (excluding the spouse's income when there is a spouse) in the current year. The effect is the same as described in paragraph 6.15. [Schedule 6, item 4, paragraph 61-580(1)(d)]

6.17 The use of a threshold test ensures that only significant lump sums are eligible for the offset.

6.18 The offset will be available in situations where a Medicare levy surcharge liability has arisen entirely due to the receipt of an eligible lump sum payment in arrears, as well as cases when an existing Medicare levy surcharge liability has been increased by the payment of an eligible lump sum.

Example 6.1

In 2005-06, Ellis, a single woman, earned income in the form of salary of $42,000, and reportable fringe benefits of $5,000. She also received a lump sum payment of $10,000 that related to back pay from 2002-03. She does not have private patient hospital cover in 2005-06.

If Ellis had not received the lump sum payment her Medicare levy surcharge income would have been $47,000, that is, wages and salaries of $42,000 plus reportable fringe benefits of $5,000. As she would have been below the $50,000 single Medicare levy surcharge threshold, she would not have paid any Medicare levy surcharge.

But the receipt of the lump sum increases her Medicare levy surcharge income to $57,000, which is over the Medicare levy surcharge threshold for singles. Without the Medicare levy surcharge offset, Ellis would be liable to a Medicare levy surcharge of $570.

However, Ellis will be eligible for the new Medicare levy surcharge offset as her lump sum payment is eligible income (as it meets the definition of 'MLS lump sum' in section 61-590) and the size of her lump sum satisfies the 10 per cent test. That is:

Amount of the offset

6.19 If a lump sum payment in arrears meets the criteria set out in sections 61-590 and 61-580, then the value of the offset will equal the amount of Medicare levy surcharge liability attributable to that lump sum, regardless of the taxpayer's income in previous years.

6.20 The offset will be available in situations where the Medicare levy surcharge liability arose entirely due to the receipt of the lump sum payment in arrears, as well as in situations where an existing Medicare levy surcharge liability was increased by the payment of an eligible lump sum. The amount of the offset will equal the amount of the Medicare levy surcharge attributable to the lump sum payment in arrears. The amount of offset available to a taxpayer can be represented as:

6.21 The amount of the offset cannot exceed the Medicare levy surcharge liability. [Schedule 6, item 4, subsection 61-585(1)]

Example 6.2

In Example 6.1, Ellis was eligible for the Medicare levy surcharge lump sum payment in arrears offset because her eligible lump sum met the 10 per cent test.

Using the formula in paragraph 6.20, the amount of her offset entitlement is calculated as:

The amount of Ellis's offset entitlement is $570, which is her full Medicare levy surcharge liability, because in the absence of the lump sum payment in arrears she would not have been liable for the Medicare levy surcharge in the current tax year.

Offset for spouses

6.22 Under existing Medicare levy surcharge legislation, a family's Medicare levy surcharge liability is determined by adding together both spouses' incomes to ascertain whether the family Medicare levy surcharge threshold has been reached (section 8D of the Medicare Levy Act 1986, Division 4 of Part 3 of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999. Therefore, the receipt of a lump sum payment in arrears by one spouse may affect the Medicare levy surcharge liability of both themselves and their spouse. However, once the Medicare levy surcharge family threshold has been reached, the amount of Medicare levy surcharge payable by each spouse is calculated on the basis of their own taxable income.

6.23 As noted in paragraph 6.20, this legislation may provide the recipient of an eligible lump sum with an offset when their Medicare levy surcharge liability has been increased by the receipt of the lump sum. If receipt of the lump sum payment in arrears results in the creation of a Medicare levy surcharge liability for the taxpayer's spouse, then the spouse will receive an offset equal to the amount of that Medicare levy surcharge liability. The spouse of a recipient of a lump sum payment in arrears cannot be entitled to the offset unless the recipient of the lump sum is also entitled to the offset. [Schedule 6, item 4, subsections 61-585(2) and 61-580(2)]

Example 6.3

June and Bruce are a couple with three dependent children. They do not have private patient hospital cover. In 2005-06, June earns $40,000 and Bruce earns $50,000 in wages. However, in 2005-06 Bruce also receives a $20,000 lump sum worker's compensation payment owed from 2003-04.

If Bruce had not received the lump sum payment in arrears, neither June nor Bruce would have been liable to pay the Medicare levy surcharge in 2005-06 as their family income was below $103,000 (the Medicare levy surcharge threshold for a family with three children).

However, Bruce's lump sum brings their total family income to $110,000, meaning that both Bruce and June are liable for the Medicare levy surcharge.

Without the Medicare levy surcharge lump sum payment in arrears offset, Bruce would be liable for a Medicare levy surcharge of $700 (1 per cent of $70,000) while June's Medicare levy surcharge liability would have been $400 (1 per cent of $40,000).

Bruce's lump sum payment in arrears payment is eligible income (as it meets the definition of 'MLS lump sums' in section 61-590) and meets the 10 per cent test:

Hence Bruce will be eligible for the Medicare levy surcharge lump sum payment in arrears offset. June will also be eligible for the offset as her Medicare levy surcharge liability arose solely due to Bruce's lump sum payment in arrears. Bruce and June will each be eligible for an offset representing the full amount of their individual Medicare levy surcharge liability: Bruce's offset will be $700 and June's offset will be $400.

6.24 In cases where a lump sum payment in arrears is received by one member of a couple and both members of the couple are already liable for the Medicare levy surcharge (because their non-lump sum payment in arrears income exceeds the family threshold), the offset will only be available to the person who received the lump sum payment in arrears. The Medicare levy surcharge liability of the taxpayer's spouse will be unchanged by the lump sum payment in arrears and therefore they will not be eligible for the offset.

Example 6.4

Rob and Lyn are a couple with one child. They do not have private patient hospital cover.

In 2005-06, Rob earned $60,000 as a salesman and Lyn earned $80,000 as an accountant. On the basis of this income they would be liable for the Medicare levy surcharge because their family income exceeds the family threshold of $100,000. Rob's Medicare levy surcharge liability would be $600 and Lyn's liability would be $800.

However, in 2005-06 Lyn also received an eligible lump sum payment in arrears of $30,000 due to work done in 2001-02 and 2002-03. Hence Lyn's total taxable income is $110,000. In the absence of the Medicare levy surcharge offset, this lump sum would increase her Medicare levy surcharge liability from $800 to $1,100.

Lyn's lump sum payment in arrears is eligible income (as it meets the definition of 'MLS lump sums' in section 61-590) and meets the 10 per cent test:

The amount of Lyn's offset would be equal to the amount of the Medicare levy surcharge due to receipt of the lump sum, that is, $300. Her remaining Medicare levy surcharge liability would be $800.

Rob would not be eligible for the Medicare levy surcharge offset as his Medicare levy surcharge liability was not affected by Lyn receiving the lump sum payment in arrears. His Medicare levy surcharge liability would remain at $600.

Application and transitional provisions

6.25 These amendments made by Schedule 6 to this Bill apply to assessments for income years commencing on or after 1 July 2005 as announced in the 2005-06 Budget. This offset is claimable on assessment when the Medicare levy surcharge liability is calculated. [Schedule 6, item 8, section 61-575 of the Income Tax (Transitional Provisions) Act 1997]

Consequential amendments

6.26 Notes identifying the offset are added to:

•

the end of subsection 10(1) of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999;

•

the end of subsection 251S(1) of the ITAA 1936; and

•

the end of section 5 of the Medicare Levy Act 1986.

[Schedule 6, items 1, 2 and 9]

6.27 The Taxation Administration Act 1953 is amended to add reference to the offset in section 45-340 in Schedule 1 and section 45-375 in Schedule 1. [Schedule 6, items 10 and 11]

6.28 Three definitions are added to the Dictionary. [Schedule 6, items 5 to 7, subsection 995-1(1), definitions of 'exempt foreign employment income' , ' Medicare levy surcharge', and 'MLS lump sums']

Chapter 7 Reporting of employer superannuation contributions by superannuation providers

Outline of chapter

7.1 Schedule 7 to this Bill amends the Superannuation Guarantee (Administration) Act 1992 to require superannuation providers to report details of superannuation contributions to the Australian Taxation Office (ATO).

7.2 This Schedule also amends the Superannuation Guarantee (Administration) Act 1992 to allow the Commissioner of Taxation (Commissioner) to impose administrative penalties on superannuation providers for failure to provide details of the contributions.

Context of amendments

7.3 The Superannuation Contributions Tax (Assessment and Collection) Act 1997 required superannuation providers to report, on an annual basis, information necessary for the Commissioner to determine superannuation surcharge liabilities. The specific information required is set out in the regulations to this Act.

7.4 This information is used by the ATO to monitor compliance with the superannuation guarantee arrangements.

7.5 Following the abolition of the surcharge, superannuation providers will not be required to report information relating to the 2005-06 and later income years. This information will therefore no longer be reported to the ATO.

Summary of new law

7.6 Schedule 7 allows the Commissioner to require superannuation providers to report prescribed information that is reasonably necessary to assist in the administration of the superannuation guarantee arrangements.

7.7 The information that superannuation providers will be required to report to the ATO are details of employer and total contributions. Where amounts are transferred between superannuation funds or retirement savings accounts (RSAs) the transferring superannuation provider must provide the receiving superannuation provider with equivalent information. Superannuation providers must report this information on a statement that is in the approved form.

Comparison of key features of new law and current law

Detailed explanation of new law

7.8 The legislation requires a superannuation fund or RSA provider to provide the Commissioner with a statement which sets out:

•

the total of all employer contributions made on behalf of an employee to the superannuation fund or RSA in a year; and

•

the total of all contributions made to the fund or RSA for the benefit of that employee in the year.

[Schedule 7, item 3, section 78]

7.9 Contributions include payments of superannuation guarantee shortfall components and payments from the Superannuation Holding Accounts Special Account into the superannuation fund or RSA.

7.10 'Superannuation provider' has the same meaning as that given in the Superannuation (Government Co-contributions for Low Income Earners) Act 2003. This Act defines 'superannuation provider' to include:

•

the trustee of a complying superannuation fund;

•

the provider of an RSA; or

•

the trustee of a constitutionally protected fund.

7.11 The statement to be given by the superannuation provider to the Commissioner must be in the approved form. The definition of 'approved form' in the Superannuation Guarantee (Administration) Act 1992 is linked to the definition in section 388-50 in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). This ensures that, unless specifically excluded, the other provisions of the TAA 1953 relating to approved form apply to this statement. This includes the power to allow the Commissioner to extend the due date of lodgement of an approved form. [Schedule 7, item 3, paragraph 78(1)(c)]

7.12 A superannuation provider is only required to give the Commissioner a statement in the approved form in respect of employees who had a contribution made for their benefit in the year. This ensures a provider is not required to provide a statement in respect of a member who has not had contributions made for their benefit during the relevant year. [Schedule 7, item 3, paragraph 78(1)(b)]

7.13 When amounts are transferred between superannuation providers, the superannuation provider transferring these amounts must provide the superannuation provider to which these funds are transferred with a statement in the approved form, that sets out details of employer and total contributions transferred. This statement is required to be provided within 30 days after the day on which the amount is transferred. [Schedule 7, item 3, section 78A]

7.14 Regulations to the Superannuation Guarantee (Administration) Act 1992 will specify the type of information required and the date by which it is required.

7.15 To encourage compliance with these requirements, administrative penalties of 5 penalty points will be imposed upon superannuation providers that do not provide statements in the approved form within the time prescribed. The penalty will be imposed on a per member basis rather than a statement basis. That is, a superannuation provider will be liable to an administrative penalty of 5 penalty points for each relevant member in respect of whom the provider has not provided the Commissioner with a statement in the approved form and within the time prescribed.

7.16 Penalty provisions within the TAA 1953 have been amended to allow for the Commissioner to impose the administrative penalties in the Superannuation Guarantee (Administration) Act 1992 and also ensure that the Commissioner has the power to remit the new penalty where the Commissioner decides that the particular circumstances of the case warrant such a remission. [Schedule 7, items 4 and 5, paragraphs 298-5(b) and (c)]

Application and transitional provisions

7.17 These amendments will apply to income years from 1 July 2005. The amendments allow for regulations to take effect from this date. [Schedule 7, item 6]

Chapter 8 Exclusion for fringe benefits to address personal security concern

Outline of chapter

8.1 Schedule 8 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to exclude from reporting, fringe benefits provided to address certain security concerns relating to the personal safety of an employee, or an associate of the employee, arising from the employee's employment.

Context of amendments

8.2 The provision of a benefit by an employer to an employee (such as residential burglar alarms and drive-by security patrols) to protect against general or specific security risks, when not engaged in business activities, are generally fringe benefits subject to fringe benefits tax (FBT).

8.3 The taxable value of a fringe benefit may be reduced by the application of the 'otherwise deductible' rule. However this rule will generally not apply to personal security protection of a person and their family at their home as it is regarded as a private expense and therefore is not deductible to the employee.

8.4 Consequently, under Part XIB of the FBTAA 1986, the employee may have a reportable fringe benefit amount arising from the fringe benefit provided.

8.5 An employee's reportable fringe benefits total for a year of income is the sum of each of the employee's reportable fringe benefit amount for the year of income, where this sum is more than $1,000^[1]. This enables the employee's reportable fringe benefit amount to be taken into account in income tests in order to determine entitlement to income-tested government benefits (eg, family tax benefit), liability to tax surcharges (eg, the Medicare levy surcharge) and income-tested obligations (eg, child support payments).

8.6 On 8 September 2005, the then Minister for Revenue and Assistant Treasurer announced that the Government would amend the law so that employers who provided personal security services to employees who had received threats due to their line of work would not have to report these fringe benefits on the employee's payment summaries (the reporting exclusion).

8.7 The Government is providing this reporting exclusion because some employees require certain security services outside of employment as a result of a credible threat of attack to them or their associates by reason of their employment.

Summary of new law

8.8 Schedule 8 amends section 5E of the FBTAA 1986 so that a fringe benefit provided to address a security concern:

•

relating to the personal safety of the employee, or an associate of the employee; and

•

arising in respect of the employee's employment,

is an excluded fringe benefit, subject to certain conditions.

8.9 For the reporting exclusion to apply, the provision of a fringe benefit to address a security concern must be consistent with a threat assessment made by a person recognised to be competent to make threat assessments by a relevant industry body, government body or the Commissioner of Taxation (Commissioner).

Comparison of key features of new law and current law

Detailed explanation of new law

A security concern relating to personal safety

8.10 For the purposes of this provision, a security concern only exists if the facts and circumstances establish a basis for concern in relation to the personal safety of an employee, or an associate of the employee. [Schedule 8, item 1, subparagraph 5E(3)(l)(i)]

8.11 Examples of concerns for the personal safety of an employee, or associate, might arise from (but are not restricted to) a threat of death, kidnapping, assault or serious bodily harm.

8.12 Concerns that do not relate to the personal safety of the employee, but rather relate more to the property of the employee, will not satisfy the requirements for claiming a reporting exclusion.

A security concern that arises in respect of employment

8.13 Under the FBTAA 1986, 'in respect of', in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment. [Schedule 8, item 1, subparagraph 5E(3)(l)(ii)]

8.14 'Employment', in relation to a person, means the holding of any office or appointment, the performance of any functions or duties, the engaging in of any work, or the doing of any acts or things that results, will result or has resulted in the person being treated as an employee.

8.15 'Employee' means a current employee, a future employee or a former employee. 'Current employee' means a person who receives, or is entitled to receive, salary or wages. A 'future employee' means a person who will become a current employee. A 'former employee' means a person who has been a current employee.

8.16 For the purposes of the reporting exclusion, a security concern relating to the personal safety of the employee must arise in respect of the employee's employment.

Example 8.1

Catherine, an employee of a business, has received threats from an identified source because of work duties done by her on behalf of the business.

On the basis of these threats, Catherine's employer has sought advice from a security expert. The security expert, having given consideration to the facts and circumstances surrounding these threats, advises following a security assessment that there is a significant risk to Catherine's safety.

These threats to Catherine would form the basis for a security concern under paragraph 5E(3)(l).

8.17 This is irrespective of whether the security concern arises in respect of the employment of a former, current or a future employee.

Example 8.2

Continuing on from Example 8.1, Catherine subsequently ceases working for the business and is now a former employee for the purposes of FBT.

Given her operational knowledge of the business the security expert concluded that a security concern still exists in relation to Catherine's safety.

This security concern arises in respect of Catherine's employment for the purposes of subsection 5E(3).

8.18 Certain public officials and certain proprietors and employees of businesses may have security concerns which arise due to the nature of their responsibilities and the contacts that they make in the course of their duties or which arise because of their operational duties. Consequently a security concern may arise, for the purposes of the reporting exclusion, in the absence of demonstrated threats from identified individuals or parties.

8.19 A security concern exists where there is a risk to the employee's personal safety specifically connected to the nature of the work carried on by the employee, regardless of whether there were direct threats from identified individuals or parties.

Example 8.3

Anupam is a senior public official responsible for law enforcement. There is some history of personal security risks associated with that position. While he has not been subject to a direct threat to his life, his safety may be at risk due to his responsibility for the management of operational matters within his jurisdiction.

Subject to the threat assessment, this could form the basis for a security concern under section 5E by virtue of the nature of Anupam's employment.

A fringe benefit provided to address a security concern

8.20 The proposed exclusion would only apply to fringe benefits that directly address the security concern. [Schedule 8, item 2, paragraph 5E(3)(l)]

8.21 Security measures that address a security concern would emerge from the threat assessment process and would form part of the recommendations of the threat assessment (see below).

8.22 Fringe benefits that are not consistent with a threat assessment carried out by the recognised security consultant would not be eligible for this reporting exclusion.

8.23 Depending on the nature of the threat assessment, types of security measures that address security concerns might include (but are not restricted to) an employer-provided residential burglar alarm, drive-by security patrols, personal bodyguards, personal protective equipment and protective modifications to a motor vehicle.

8.24 Fringe benefits that do not address a security concern are not excluded from reporting.

Example 8.4

Continuing from Example 8.3, given that the security risks relating to Anupam, form the basis for a security concern under section 5E, his employer engages a security expert from within the agency to make a threat assessment. Protective measures to Anupam and his family at his home are based on the recommendations of the recognised security expert.

The employer-provided protective measures that are subsequently provided include home security systems and drive-by patrols. The amounts arising from these fringe benefits would be excluded from reporting.

8.25 Where the security concern relating to an employee or associate has ended, any fringe benefits provided to them would not be excluded fringe benefits. The security concern may end where the basis for the security concern no longer exists.

Example 8.5

The security concern relating to Catherine, from Example 8.2, has subsequently ended as the identified source of the security risk has since been arrested and incarcerated. The security expert, in reviewing the threat assessment, is of the view that a security concern no longer exists. The employer continues to provide fringe benefits to protect Catherine at her home after the security concern has ended. The amounts arising from these fringe benefits would no longer be excluded fringe benefits.

Threat assessment

8.26 It is commonplace for employers to undertake threat assessments to address security risks before providing protective measures.

8.27 A fringe benefit would only be an excluded fringe benefit where its provision is consistent with a threat assessment and that threat assessment is made by a person who is recognised as being competent to make threat assessments by the relevant industry body, government body or the Commissioner. [Schedule 8, item 2, subsection 5E(6)]

8.28 For the purpose of the reporting exclusion, the threat assessment must be made in relation to the relevant employee or associate. The threat assessment would identify and analyse the facts and circumstances relating to the security concern and provide advice on measures to treat the security concern.

8.29 It is expected that the threat assessment would be based on (or consistent with) the relevant Australian/New Zealand Standard or equivalent industry standard practices.

8.30 This requirement ensures that the types of benefits provided to the employee would not be unrelated to the identified security concern or disproportionate to the security concern faced by the employee.

8.31 The threat assessment is not required to take an approved form.

8.32 It is recognised that there will be situations where, for various reasons, employers will need to provide fringe benefits to employees to address a security concern prior to the completion of the threat assessment.

8.33 An employer who provides fringe benefits to address a security concern prior to the completion of the threat assessment will not be precluded from excluding those fringe benefit amounts from reporting once the threat assessment has been made. The fringe benefits must still be consistent with the threat assessment.

8.34 Where fringe benefits are provided to address a security concern in the absence of a threat assessment, the employer will need to report the fringe benefit amounts on the recipient employee's payment summary. However, should these fringe benefits subsequently meet the conditions to be an excluded fringe benefit, the employer may correct an amount, on a payment summary, based on the procedures set out by the Commissioner.

Example 8.6

Benjamin is an employee of a business which provided him with fringe benefits to address a perceived security risk to his personal safety in the 2004-05 income year. The reportable amounts arising from those fringe benefits were reported on his payment summary at the time.

The employer subsequently became aware of the paragraph 5E(3)(l) reporting exclusion. The employer would be required to seek a threat assessment in relation to Benjamin concerning the fringe benefits provided so that the amounts on the payment summary can be corrected.

A person recognised as being competent to make threat assessments

8.35 A fringe benefit would only be an excluded fringe benefit where its provision is consistent with a threat assessment, in relation to the employee or associate. This threat assessment must be made by a person who is recognised to be competent to make threat assessments by the relevant industry body, government body or the Commissioner.

8.36 There are varying licensing and oversight conditions for the security industry in different jurisdictions. As such, the conditions concerning the competency of the person making the threat assessment are designed to operate in light of the different circumstances in each jurisdiction.

8.37 Relevant industry bodies would only include organisations or associations that are capable of, as a part of their business operations, accrediting or recognising the competency of persons to carry out threat assessments. In some jurisdictions, these would often be government approved organisations or associations.

8.38 Under the FBTAA 1986, 'government body' means the Commonwealth, a State, a Territory or an authority of the Commonwealth, a State or a Territory.

8.39 Relevant government bodies would include only government bodies that could carry out threat assessments as a part of their business operations or which recognise or accredit the competency of persons to carry out threat assessments as a part of their business operations.

8.40 In the absence of a relevant industry body or a relevant government body, the Commissioner has the discretion to recognise a person as being capable of carrying out threat assessments.

8.41 In exercising this discretion, the Commissioner will take into account the qualifications and experience of the person seeking to make the threat assessment and whether the person's qualifications and experience would be equivalent to a person recognised by the relevant industry or government body as being competent to make the threat assessment.

8.42 It is expected that a person, in demonstrating their competence to make a threat assessment, would have completed tertiary or vocational qualifications in security risk management. The experience and qualifications of a competent person may have been acquired internationally.

Application and transitional provisions

8.43 The amendments in relation to this reporting exclusion apply retrospectively from 1 April 2004. [Schedule 8, item 3]

8.44 The retrospective application of the amendments can affect the entitlement to income-tested government benefits, liability to tax surcharges and income-tested obligations in past years.

8.45 Applying the amendments retrospectively from 1 April 2004 addresses the concerns of individuals affected by the application of the current law by excluding from reporting fringe benefits provided to address certain security concerns.

Chapter 9 Pre-1 July 1988 funding credits

Outline of chapter

9.1 Schedule 9 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to:

•

prevent the inappropriate use of pre-1 July 1988 funding credits (funding credits) by ensuring that superannuation schemes can only use them to reduce their taxation liability in respect of contributions made for the purpose of funding benefits that accrued before 1 July 1988; and

•

allow regulations to be made to provide guidance to the trustee of a superannuation scheme on how to work out the amount of funding credits that can be applied to reduce the taxation liability of the trustee in respect of contributions made and to allow other methods of working out how the trustee of a superannuation scheme can apply funding credits.

Context of amendments

9.2 Since 1 July 1988 most contributions (eg, employer and other deductible contributions) to superannuation schemes have been subject to a 15 per cent tax. Funding credits were granted to unfunded superannuation schemes so that contributions made after 1 July 1988 to fund benefits that accrued prior to 1 July 1988 are not taxed. This ensures equity with funded superannuation schemes which only pay tax on contributions from 1 July 1988.

Example 9.1

In a funded superannuation scheme contributions are made each year for members. In an unfunded scheme contributions are not made each year but could be made as a one-off contribution immediately before a benefit payment is to be made. This is illustrated below for a member who commenced work in 1968 and retires in 2008.

Funded scheme - contributions are made each year since 1968 to fund the benefit, hence only those contributions made since 1988 have been taxed.

Unfunded scheme - a one-off contribution is made in 2008 to fund the benefit, the contribution covers the whole period 1968 to 2008 but because it was made in 2008 the entire contribution will be subject to 15 per cent tax (in the absence of funding credits). Funding credits can be used so that the part of the contribution made to fund pre-1988 benefits will not be taxed. This ensures equity with funded schemes.

9.3 However, the current law does not ensure that superannuation schemes can only use funding credits to reduce their taxation liability in respect of contributions made for the purpose of funding benefits that accrued before 1 July 1988.

9.4 To address this unintended outcome, these amendments will ensure that the policy objective - that is, funding credits can only be used to reduce tax on contributions made in respect of pre-1 July 1988 benefits - will be achieved.

Summary of new law

9.5 These amendments provide that funding credits can only apply to reduce tax on contributions that are used to fund liabilities that accrued prior to 1 July 1988.

9.6 These amendments apply to the use of funding credits on or after 9 May 2006 the date this measure was announced in the 2006-07 Budget.

9.7 In addition, any new or outstanding objections or requests for amendment to past assessments will only be able to amend funding credit use for that year/s up to the amount that can be claimed under the new law.

Comparison of key features of the new law and current law

Detailed explanation of the new law

9.8 Since 1 July 1988 most contributions (eg, employer and other deductible contributions) to superannuation schemes have been subject to a 15 per cent tax. Funding credits were granted to unfunded superannuation schemes so that contributions made after 1 July 1988 to fund benefits that accrued prior to 1 July 1988 are not taxed. This ensures equity with funded superannuation schemes which only pay tax on contributions from 1 July 1988.

9.9 However, the current law does not adequately restrict funding credit use to that covered by the original policy intent. In particular, funding credits can be used to reduce tax on contributions paid in respect of benefits that accrued after 1 July 1988, rather than just allowing use of funding credits for contributions paid in respect of pre-1 July 1988 benefits.

9.10 The current law does include provisions designed to restrict the inappropriate use of funding credits but, in practice, these provisions have not been effective in limiting their use as intended.

9.11 The key fault in the previous law was that it assumed that unfunded schemes would only be funded (ie, have contributions made) when a benefit was due to be paid out.

9.12 Subsection 275B(2) of the ITAA 1936, in effect, limits the amount of funding credits that can be used in a year to the total amount of taxable contributions for the year less taxed post-1983 benefits paid out during that year. (Post-1983 benefits were used rather than post-1988 benefits as schemes already had to calculate the post-1983 benefit component and it avoided introducing another benefit component for schemes to administer.) The intention was that the residual amount would broadly represent those contributions that funded pre-1 July 1988 benefits.

9.13 However, if large one-off contributions are made in a year (eg, if the employer has moved to fully fund the scheme) with few benefit payments made in that year, then funding credits can be used to reduce tax on a significant amount of those contributions. This would be over and above the amount of those contributions that may have been intended to fund pre-1 July 1988 benefits.

9.14 As a result a scheme is able to effectively avoid tax on some contributions made in respect of post-1 July 1988 benefits - contributions that should be subject to tax.

9.15 To address the unintended outcome of funding credits being used to reduce tax on contributions paid in respect of benefits that accrued after 1 July 1988, the amendments replace the existing formula-based rule with a principle-based rule, that funding credits can only be used to reduce tax on contributions made in respect of pre-1 July 1988 benefits.

[Schedule 9, item 1]

9.16 These amendments also allow regulations to be made to provide guidance to the trustee of a superannuation scheme on how to work out the amount of funding credits that can be applied to reduce the taxation liability of the trustee in respect of contributions made, and to allow other methods of working out how the trustee of a superannuation scheme can apply funding credits. It is anticipated that the regulations will set out rules for actuaries to follow in determining the amount of funding credits that can be used. [Schedule 9, item 2]

Application and transitional provisions

9.17 These amendments will apply to the use of funding credits on or after 9 May 2006 the date this measure was announced in the 2006-07 Budget. [Schedule 9, item 5]

9.18 In addition, any new or outstanding objections or requests for amendment to past assessments will only be able to amend funding credit use for that year/s up to the amount that can be claimed under the new law. [Schedule 9, item 5]

9.19 This is designed to ensure that the new law cannot be avoided by superannuation schemes adjusting previous years' returns in order to use as many funding credits as possible under the current law.

Consequential amendments

9.20 These amendments repeal the following provisions as they are no longer required:

•

subsection 275B(3) which defines 'pension component';

•

subsection 275B(6) which defines '1988-89' and future years for the purposes of subsection 275B(2);

•

subsection 275B(7) which contains definitions used in subsection 275B(2) and section 275C; and

•

section 275C which defines 'accrual period for a superannuation pension' for the purposes of subsection 275B(7).

[Schedule 9, items 3 and 4]

Chapter 10 Allow certain funds to obtain an Australian Business Number

Outline of chapter

10.1 Schedule 10 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and the A New Tax System (Australian Business Number) Act 1999 (ABN Act) to allow certain funds that raise money for other deductible gift recipients (DGRs), to obtain an Australian Business Number (ABN) so that those funds can be exempt from income tax and receive input tax credits for goods and services tax (GST) paid and other GST benefits.

Context of amendments

10.2 Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a tax deduction to taxpayers who make a gift or contribution to a fund, authority or institution which is a DGR, subject to some conditions.

10.3 Public ancillary funds and prescribed private funds are DGRs under Subdivision 30-A of the ITAA 1997. Section 50-20 of the ITAA 1997 provides an income tax exemption to non-charitable public ancillary funds and prescribed private funds which donate to DGRs that are income tax exempt, whether or not the DGR is a charity.

10.4 A public ancillary fund is a fund established and maintained solely for the purpose of providing money, property or benefits to other DGRs or for the establishment of DGRs.

10.5 A prescribed private fund is a trust fund established by businesses, families and individuals for philanthropic purposes to receive tax deductible donations to be used for similar purposes as a public ancillary fund. Prescribed private funds differ from public ancillary funds in that while they must meet all the criteria required of public ancillary funds, they may but are not required to seek contributions from the public. They must also be prescribed in the Income Tax Assessment Regulations 1997.

10.6 As an integrity measure, for an entity to be a DGR and exempt from income tax it must be endorsed by the Commissioner of Taxation (Commissioner). Endorsement requires the entity to have an ABN.

10.7 To be eligible to receive an ABN an entity must carry on an 'enterprise' within the meaning of the GST and ABN Acts. The definition of 'enterprise' does not cover most public ancillary funds and prescribed private funds that are not charities. As a result, they are not entitled to have an ABN.

Summary of new law

10.8 Schedule 10 amends the definition of 'enterprise' in both the GST Act and the ABN Act so that non-charitable public ancillary funds and prescribed private funds can obtain an ABN and will, where applicable, be entitled to be endorsed as income tax exempt. This amendment will also ensure that the DGR status of non-charitable public ancillary funds and prescribed private funds is maintained and these entities can receive input tax credits for GST included in their acquisitions and importations.

10.9 As these entities will become DGRs for income tax purposes, they will also become gift-deductible entities for GST purposes and be able to access the GST concessions available to these entities.

Comparison of key features of new law and current law

Detailed explanation of new law

10.10 Prescribed private funds and public ancillary funds are funds established for the purposes of providing money, property or benefits to other DGRs. The ITAA 1997 allows public ancillary funds and prescribed private funds to be endorsed as income tax exempt if they are charitable funds. This requires that these funds distribute money, property and benefits only to DGRs that are endorsed by the Commissioner as charities.

10.11 However, not all DGRs are endorsed as charities, and some DGRs, such as public ambulance services and research authorities, are income tax exempt but not charities. It is a well-established principle of the existing common law that a government body is not a charitable institution simply because it is performing a government responsibility.

10.12 Public ancillary funds and prescribed private funds that are not charitable because they distribute to non-charitable DGRs do not meet the definition of 'enterprise' and are therefore not entitled to have an ABN. This amendment allows the trustees of public ancillary funds and prescribed private funds to obtain an ABN regardless of their charitable status, by expanding the definition of an 'enterprise' in the GST and ABN Acts. The amendment to the GST Act will enable non-charitable public ancillary funds and prescribed private funds to register for GST purposes and therefore claim input tax credits. [Schedule 10, items 1 and 3, paragraph 38(1)(h) of the ABN Act and paragraph 9-20(1)(h) of the GST Act]

10.13 This amendment to the GST Act, in conjunction with the amendment to the ABN Act, will enable non-charitable public ancillary funds and prescribed private funds to qualify as DGRs and fully access the GST concessions which are available to all gift-deductible entities, regardless of whether or not they are charities. These concessions include: GST-free status for certain supplies for nominal consideration; GST-free status for certain sales of donated second hand goods; GST-free status for raffles and bingo; and the availability of input tax credits for reimbursements made to volunteers. Furthermore, input tax credit adjustments will not be required where an item acquired is gifted. Distributions from a trust that is a member of a GST group to a public ancillary fund or prescribed private fund will not cause the trust to lose its status as a member of the GST group.

10.14 Since these funds were effectively input taxed under the current GST law, some of these benefits and others were already available to non-charitable public ancillary funds and prescribed private funds. However, these amendments will allow these funds to be able to enjoy the benefit of all GST concessions for DGRs on a similar basis to charitable funds.

Application and transitional provisions

10.15 These amendments apply from 1 July 2005 to align with the commencement of section 50-20 of the ITAA 1997. [Schedule 10, item 5]

10.16 Taxpayers and DGRs will not be worse-off as a result of these amendments and will benefit from being able to take advantage of the concessions in section 50-20 of the ITAA 1997.

Consequential amendments

10.17 Both the ABN and the GST Act will also be amended to ensure that the changes to the definition of 'enterprise' will not be excluded by the provisions in both Acts, which outline the exclusions to the definition of 'enterprise'. [Schedule 10, items 2 and 4, paragraph 38(2)(c) of the ABN Act and paragraph 9-20(2)(c) of the GST Act]

Chapter 11 New deductible gift recipient categories

Outline of chapter

11.1 Schedule 11 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to create five new general categories of deductible gift recipient (DGR).

Context of amendments

11.2 Subsection 30-15(2) of the ITAA 1997 allows a tax deduction to taxpayers who make a gift or contribution to a fund, authority or institution covered by the tables in Subdivision 30-B, subject to some conditions.

11.3 There are more than 30 existing general DGR categories. Organisations which meet the criteria under these categories can request endorsement from the Commissioner of Taxation (Commissioner) as a DGR. Gifts of $2 or more in cash or property to DGRs may be tax deductible.

11.4 In the 2005-06 Budget, the Government announced that it would establish five new DGR categories to cover war memorials, disaster relief, animal welfare, charitable services and educational scholarships.

Summary of new law

11.5 These amendments streamline current DGR specific listing arrangements and provide a more consistent framework for assessing applications for DGR status.

11.6 This measure allows taxpayers to claim an income tax deduction for certain gifts of money or property to the following types of organisations that are endorsed as DGRs:

•

public funds established and maintained for the reconstruction or critical repair of a damaged war memorial;

•

public funds established and maintained by a public benevolent institution solely to provide money to assist in providing relief to people (including assistance to re-establish a community) in distress as a result of declared natural or man-made disasters in a developed country, and public funds established and maintained for charitable purposes solely to provide money for relief of people and re-establishing a community in distress as a result of declared disasters which occur in Australia;

•

charitable institutions with a principal activity of providing short-term direct care to animals that are lost, mistreated, without owners and/or are rehabilitating those animals if they are orphaned, sick or injured;

•

charitable institutions that would be a public benevolent institution except that they also undertake activities that would fall under the existing DGR categories of a health promotion charity and/or a harm prevention charity; and

•

public funds that are established for charitable purposes solely to provide money for scholarships, bursaries or prizes to promote education where entry is open to persons at a national, state, territory or regional level.

Comparison of key features of new law and current law

Detailed explanation of new law

11.7 These amendments establish five new DGR categories to cover war memorials, disaster relief, animal welfare, charitable services and educational scholarships.

War memorials

11.8 A public fund is eligible to be endorsed by the Commissioner as a DGR if it is set up solely to provide funds for the reconstruction or critical repair of a war memorial. [Schedule 11, item 6, item 5.1.3 in the table in subsection 30-50(1)]

11.9 The term 'war memorial' follows the ordinary dictionary meaning. The structure must be clearly identifiable as a memorial. It must also be a memorial:

•

situated in Australia (including its external territories and territorial seas);

•

that either commemorates events in a conflict in which Australia was involved or commemorates people (most of whom are Australian) who participated on Australia's behalf in a conflict;

•

that is a focus for public commemorations; and

•

that is solely or mainly used for public commemorations.

[Schedule 11, item 6, item 5.1.3 in the table in subsection 30-50(1)]

11.10 This general DGR category would not include funds established for:

•

repairing public amenities such as community memorial halls, swimming pools, club buildings, hospitals and sports grounds, even if they are named as a memorial or contain a plaque;

•

repairing memorials to individuals;

•

repairing memorials operated for a commercial purpose;

•

maintaining memorials; and

•

maintaining or repairing memorial surrounds.

11.11 Examples of memorials eligible for DGR status would include structures such as statues, honour rolls, decorative gates, monuments, obelisks, ornamental bridges and fountains, that are a focus for public commemorations. Trees may be considered war memorials where it can be demonstrated that they are the memorial and not the memorial surrounds.

Example 11.1

The Goulding Memorial consists of a decorative gate at the entrance to a community garden. The decorative gate is inscribed with a dedication to the Australian soldiers who fought in the Vietnam War and is the focus of community commemorations. The decorative gate meets the criteria of a war memorial but the community garden does not. Accordingly, any public fund established to replace the trees, pathways or gardens would not be eligible for endorsement under the war memorials category as it would not be limited to critical repair of the memorial structure (the gate).

Example 11.2

Each ANZAC Day, Martinville residents gather for commemorations at their local World War I memorial which consists of a row of elm trees - one tree and one plaque for each fallen soldier from Martinville. The community accepts that the row of trees is a single memorial to the town's World War I victims, not a collection of separate memorials to individuals. The trees of the Martinville Memorial were severely damaged and many of the trees were uprooted during a storm. A public fund is established to collect funds for the repair and replacement of the damaged and destroyed trees. This public fund is eligible for endorsement under this general category as the trees qualify as a single memorial and the work required qualifies as critical repair or reconstruction.

11.12 Reconstruction of a war memorial would involve repairing significant and unforseen damage to a memorial resulting from an event such as fire, vandalism, flooding or earthquake. Critical repair arises where a failure to repair the damage (however caused) could endanger public safety and significantly compromise the structural integrity of the memorial.

Example 11.3

A part of the supporting structure of the Smithville Community Memorial statue for World War II veterans sustained severe damage due to a lightning strike, resulting in a risk to public safety from the damaged memorial. The memorial is used for Smithville Community commemorations. A public fund is set up to collect funds to repair the damage. This public fund is eligible for endorsement as a DGR because it is collecting funds to be used to repair critical damage of an eligible memorial.

11.13 Reconstruction also extends to replacing a memorial which is badly damaged and cannot be repaired. DGR funds can only be used to build a similar memorial and cannot be used to expand or significantly alter the memorial.

11.14 Reconstruction and critical repair do not cover maintenance, expansion or improvement of an existing memorial, repairs that are routine in nature, or repairs that are desirable but not essential.

Example 11.4

A group of Happyville residents has set up a public fund to add a bell tower to the town's memorial commemorating Australian World War I victims. This public fund is not entitled to DGR status under the general category because the fund is established for expanding a war memorial, not for its critical repair or reconstruction.

11.15 DGR support extends to gifts made to eligible public funds for a maximum period of two years. This time limit applies to ensure that the DGR funds are collected for reconstruction and critical repair and not for maintenance of memorials.

11.16 Once the two years has ended, the public fund cannot continue to collect tax deductible donations, however it may continue to operate to complete reconstruction or critical repairs to the memorial for which DGR support was initially conferred.

11.17 A public fund can only provide funds for the reconstruction or critical repair of one war memorial.

Disaster relief

11.18 Public funds established solely to assist in providing relief to people (including assistance to re-establish a community) in distress as a result of declared natural or man-made disasters may be eligible for endorsement by the Commissioner. The criteria for endorsing those funds providing relief in Australia differ from those providing relief in a developed country. [Schedule 11, item 4, item 4.1.5 in the table in subsection 30-45(1 ); item 5, section 30-46 ; item 8, item 9.1.2 in the table in subsection 30-80(1 ); and item 11, section 30-86]

11.19 DGR status through the disaster relief category is only extended to developed countries, where a developed country is one that has not been declared by the Minister for Foreign Affairs as a developing country. Disasters which occur in countries classified by the Minister for Foreign Affairs as developing countries may be eligible for DGR support under the international affairs DGR general category (section 30-80 of the ITAA 1997). [Schedule 11, item 8, item 9.1.2 in the table in subsection 30-80(1)]

11.20 An eligible disaster under this category must meet both of the following conditions:

•

it developed rapidly; and

•

it resulted in the death, serious injury or other physical suffering of a large number of people, or in widespread damage to property or the natural environment.

[Schedule 11, items 5 and 11, sections 30-46 and 30-85]

11.21 A disaster might be considered to have 'developed rapidly' if it developed over a number of weeks, but not if it developed over a number of years.

Example 11.5

Cyclone Bob developed off the coast of Queensland, remaining over the ocean for 14 days before crossing the coast and causing significant damage to Smallville. For the purposes of this category, Cyclone Bob is considered to have developed rapidly.

Example 11.6

A bushfire started in thick forest in a remote area of New South Wales. The fire burned for 21 days, growing in intensity before it reached the city of Albie, causing substantial damage. For the purposes of this category, the fire is considered to have developed rapidly.

Example 11.7

Mickleborg had not received rain for two years. Mickleborg's local council started introducing water restrictions to preserve the town's water supply. One year later, Mickleborg had still not received rain and the town was declared to be in drought. For the purposes of this category, the drought did not develop rapidly.

11.22 Examples of disasters which are likely to be eligible under this category include: fire, earthquake, flood, storm (including hailstorm), cyclone (including typhoon and hurricane), storm surge, tornado, landslide, tsunami, meteorite strike, volcanic eruption, plague, terrorist act, large scale transport accident or chemical accident, epidemic or war-like action. Crop and animal diseases may qualify if these developed rapidly and resulted in significant damage to property or the natural environment which affected a large area or injury to a large number of people.

Example 11.8

Mr Smith's pumpkin crop is destroyed by a disease. A public fund is set up to relieve the hardship of Mr Smith due to the loss of income. This public fund is not eligible for endorsement under the disaster relief category because the crop disease did not affect a sufficiently large area to attract a declaration of a disaster or a state of emergency from the relevant minister.

Example 11.9

Mr Brown's pumpkin crop was one of many crops in the region destroyed by disease. The relevant state or territory minister declares the effect of this crop disease as a disaster. A public fund which is set up to relieve distress in the region as a result of the crop disease would be eligible for endorsement under this category.

11.23 Funds for relief from global warming, drought, land salinity, and soil erosion would not be eligible for this category as they do not develop rapidly.

11.24 In providing relief after a declared disaster, public funds can be used to assist in the delivery of short to medium-term relief and recovery efforts to alleviate hardship and suffering in communities severely affected by eligible disasters. Public funds may also use donations to prevent a community from facing further danger from the disaster.

Example 11.10

Much of Porpoise Spit was destroyed or badly damaged in a recent cyclone. A public fund is set up to provide relief to the residents of Porpoise Spit as a result of the cyclone. The public fund also provides funds to prevent an imminent landslide which may occur as a result of the loss of a significant number of trees which were destroyed during the cyclone. The public fund is eligible for endorsement as a DGR.

Disasters that occur within Australia

11.25 A public fund is eligible to be endorsed by the Commissioner as a DGR where it is established and maintained for charitable purposes solely to provide funds for the relief (including assistance to re-establish a community) of people in Australia who have suffered a disaster which is declared and meets the relevant criteria. [Schedule 11, item 4, item 4.1.5 in the table in subsection 30-45(1 ); and item 5, section 30-46]

11.26 For the purposes of this category, an event must be declared by or with the approval of the relevant state or territory minister as a disaster or state of emergency, in addition to meeting the other conditions outlined in paragraph 11.20. [Schedule 11, item 5, section 30-46]

Example 11.11

Nick's house, which is situated in Australia, was flooded due to a burst water pipe. A public fund is established to provide funds to help repair Nick's house and replace his damaged furniture. This public fund is not eligible for endorsement as a DGR under this category for a number of reasons. First, the event was not declared by the relevant state or territory minister as a disaster or state of emergency. Secondly, it did not cause widespread damage across the community and finally, this public fund is not established for public charitable purposes as it is established for the benefit of an individual, not a community.

11.27 Gifts made to a public fund under this category are deductible for two years from the date of the disaster or emergency specified in the state or territory minister's declaration (or a declaration made with the approval of the state or territory minister), or otherwise on the date of the declaration. Once the two years have ceased, the public fund cannot continue to collect tax deductible donations, but it may continue to operate in undertaking purposes for which DGR status was conferred under the category. [Schedule 11, item 5, section 30-46]

Example 11.12

Numerous community buildings in Mt Wannamanna, Australia, were damaged in a recent storm and the process of rebuilding was slow due to a lack of funds. A public fund was set up six months after the date of the disaster, as declared by the state minister, to provide funds to assist with the reconstruction. This public fund can receive DGR status because the disaster was declared by the minister, and had caused widespread damage; however DGR status can only be received for a maximum period of one and a half years (ie, ending two years after the disaster occurred).

Disasters that occur in a developed country

11.28 A public fund is eligible to be endorsed by the Commissioner as a DGR where it is established and maintained by a public benevolent institution solely to provide funds for the relief (including assistance to re-establish a community) of people in a developed country that has suffered a disaster recognised by the Treasurer. [Schedule 11, item 8, item 9.1.2 in the table in subsection 30-80(1 ); and item 11, section 30-86]

11.29 The Treasurer's recognition of a disaster must be announced publicly and must specify the day (or the first day) the disaster is taken to have occurred or commenced. [Schedule 11, item 11, section 30-86]

Example 11.13

Ycart, a town situated in a developed country, sustained severe damage as a result of a tsunami leading the Treasurer to recognise it as a disaster for tax deductibility purposes. An existing Australian public benevolent institution, the Giving Society, set up a public fund to collect funds to assist with the relief of people in the Ycart community. The public fund is eligible for endorsement as a DGR under the disaster relief category.

11.30 The public benevolent institution should ensure that the funds provided by the public fund are used solely for the purpose intended. This could be met where the delivery of relief and recovery assistance in the developed country is undertaken by an agent appointed by the public benevolent institution, based in the disaster-affected country, working on the public benevolent institution's behalf.

11.31 DGR support under this category will be restricted to a maximum period of two years after the date of the disaster specified in the Treasurer's declaration. Once the two years have ceased, the public fund cannot continue to collect tax deductible donations, however it may continue to operate in undertaking the principal purpose to which DGR status was conferred under the category. [Schedule 11, item 11, section 30-86]

Animal welfare

11.32 A charitable institution is eligible to be endorsed by the Commissioner as a DGR where its principal activity is one or both of:

•

providing short-term direct care to animals (but not only native wildlife) that have been lost, mistreated or are without owners; and/or

•

rehabilitating orphaned, sick or injured animals (but not only native wildlife) that have been lost, mistreated or are without owners.

[Schedule 11, item 4, item 4.1.6 in the table in subsection 30-45(1)]

Example 11.14

Furry Friends is a charitable institution whose principal activity is to provide short-term care for lost and injured cats, dogs and horses. Furry Friends' intent is to find new homes for all of the animals it shelters. While some animals take longer than others to find new homes, the majority are eventually given new homes. However, Furry Friends has difficulty in finding homes for some of its horses and these are cared for by Furry Friends for the rest of their lives. As Furry Friends' main activity is to provide short-term direct care to injured and lost animals, it is eligible for endorsement under this category. The long-term care that Furry Friends provides to a small portion of its animals does not affect its eligibility for endorsement.

Example 11.15

Animal Care is a charitable institution which rehabilitates injured wildlife that have been brought in by the public and also operates a shelter for lost and unowned pets. Animal Care releases the majority of the wildlife back into their natural environment. Animal Care also aims to find new homes for all the pets it cares for. However, due to the large volume of pets coming to Animal Care, many are put down because they cannot be given new homes. Animal Care is eligible for endorsement under this category because it rehabilitates injured animals and provides short-term care to animals without owners.

11.33 The animal welfare DGR category will not extend to the endorsement of organisations which are established solely to protect native animals. Public funds which are established solely to protect native animals may be eligible for DGR endorsement under the existing general category of environmental organisations (section 30-55 of the ITAA 1997). [Schedule 11, item 4, item 4.1.6 in the table in subsection 30-45(1)]

Example 11.16

Zulu Animals operates a fleet of vehicles which rescue native animals that have been injured by natural disasters or cars. Zulu Animals does not rescue or rehabilitate any non-native animals. Zulu Animals rehabilitates the native animals until they return to full health. As Zulu Animals only cares for native animals, it is not eligible for endorsement under this category. It should instead apply for endorsement under the environmental organisations DGR category.

11.34 Charitable institutions which are endorsed under this category may undertake other minor activities which further their charitable purpose, such as providing veterinary services and promoting the prevention of cruelty to animals. However, the principal activity of the organisation must be to provide one or both of short-term direct care to animals that have been lost, mistreated or are without owners or the rehabilitation of those animals that are sick or injured.

Example 11.17

Ardnas Inc is a charitable animal rescue institution which rehabilitates native and non-native animals that have been hit by cars or injured by natural disasters. Ardnas Inc also operates a shelter for unwanted animals and provides an animal hospital service to members of the public. This animal hospital service only accounts for a small portion of Ardnas Inc's activities. As the principal activity of Ardnas Inc is rehabilitating injured animals, it is eligible for endorsement under this general category.

Example 11.18

Alix's Animals is a charitable institution which has a principal activity of providing short-term direct care, through its pet shelter, to pets that no longer have owners. To help fund the pet shelter, Alix's Animals also operates a boarding kennel and an opportunity shop which sells second hand animal accessories. Both of these activities are minor activities and therefore do not affect Alix's Animals' eligibility for endorsement under this category.

11.35 Institutions which have a principal purpose of advocating a political party or cause, attempting to change the law or government policy, or promoting a particular point of view are not charitable, and are therefore not eligible for endorsement under the animal welfare general category. However, if an entity's activities are otherwise charitable, the presence of political, lobbying or promotional activity that is only incidental to the dominant charitable purpose, will not prevent the institution from being a charity.

Example 11.19

Abba Animals is an institution which has the principal activity of providing information and lobbying the government on animal rights and educating the public on how to care for their pets. Abba Animals would not be eligible for endorsement under this category even if it was a charitable institution as it is not providing animals with short-term direct care or rehabilitation.

11.36 Groups which are not charitable include those which are opposed to vivisection or the use of animals for research, anti-livestock production groups, anti-whaling groups, anti-logging groups and anti-circus groups.

Charitable services

11.37 A charitable institution is eligible to be endorsed by the Commissioner as a DGR where it would have been a public benevolent institution except that in addition to its public benevolent institution activities it undertakes one or both of the following:

•

it also promotes the prevention or the control of disease in human beings (but not as a principal activity); and/or

•

it also promotes the prevention or the control of behaviour that is harmful or abusive to human beings (but not as a principal activity).

[Schedule 11, item 4, item 4.1.7 in the table in subsection 30-45(1)]

11.38 A public benevolent institution is a not-for-profit institution organised for the direct relief of poverty, sickness, suffering, distress, misfortune, disability or helplessness. The characteristics of a public benevolent institution are:

•

it is set up for needs that require benevolent relief;

•

it relieves those needs by directly providing services to people suffering them; and

•

its dominant purpose must be to provide benevolent relief.

Example 11.20

Gift Givers is a charitable institution whose objectives are relieving poverty and improving health outcomes of people suffering from arthritis. It carries out its objectives by providing hostel accommodation for the homeless (which accounts for 45 per cent of its activities), and by providing health information about arthritis to health professionals, carers and the public. The provision of health information accounts for 45 per cent of its activities. It also prepares and publishes research papers about poverty, but these activities are minor in extent and importance.

Gift Givers would qualify as a public benevolent institution but for its work on health information about arthritis. As the provision of health information is not its principal activity, Gift Givers is eligible for endorsement under this category.

11.39 The charitable services category does not provide DGR status to organisations that are established solely to promote the prevention or the control of disease in human beings; or solely to promote the prevention or the control of behaviour that is harmful or abusive to human beings. Where an institution falls into the former category, it may be eligible for endorsement under section 30-20 of the ITAA 1997 (as a health promotion charity). Where an institution falls into the latter category, it may be eligible for endorsement under section 30-45 of the ITAA 1997 (as a harm prevention charity). [Schedule 11, item 4, item 4.1.7 in the table in subsection 30-45(1)]

Example 11.21

Helping Hands is an organisation which has a principal activity of promoting the prevention or control of harmful or abusive behaviour among humans. Helping Hands is not eligible for endorsement under this category. Helping Hands should instead apply for endorsement under the category of harm prevention charity.

11.40 A charitable institution which is endorsed under the charitable services category will also be eligible for a capped fringe benefits tax (FBT) rebate. The rebate is equal to 48 per cent of the gross FBT payable, subject to the capping threshold. The maximum grossed-up value of benefits that can be provided to any one person employed by the institution (without losing the concession) is $30,000.

Educational scholarships

11.41 A public fund established for charitable purposes is eligible for endorsement as a DGR by the Commissioner if its sole purpose is to provide money for scholarships, bursaries or prizes that promote education. [Schedule 11, item 1, item 2.1.13 in the table in subsection 30-25(1);and item 2, section 30-37]

11.42 Scholarships and bursaries are ongoing or one-off benefit payments, which are open to students at a national, state, territory or regional level, and which usually comprise payment for school fees, textbooks and other related educational expenses such as to cover uniforms, travel or boarding costs. Scholarships and bursaries may be awarded to fund education at a particular school or higher education institution. Scholarships and bursaries are usually awarded on the basis of merit or for reasons of equity. For the purposes of this category, reasons of equity would cover students who are experiencing socio-economic disadvantage or hardship.

Example 11.22

Sandra is a student at Eastern Girls' College. Sandra's parents are experiencing financial hardship and can no longer pay her school fees, and she will have to move to another school. A public charitable fund is set up to collect funds to provide a bursary to Sandra to assist with the payment of her school fees to Eastern Girls' College. The public fund is not eligible for endorsement under this category because the bursary is open to just one student. The bursary would need to be open to all students in necessitous circumstances from at least a region to qualify.

Example 11.23

A charitable fund is set up to provide scholarships to students from a remote area to attend higher education training. The scholarship is open to students in the rural areas of Western Australia, Northern Territory and South Australia. Eligibility is assessed against a set of criteria to determine the greatest level of need, including economic circumstances, distance from the nearest school and the student's academic ability. The public fund is eligible for endorsement under this category as it is open to a region of 200,000 people or more and its award is based on assessment against an objective set of criteria.

11.43 A prize is an award of money or property, which is open to students at a national, state, territory or regional level, and is usually conferred for reasons of merit such as academic achievement, but may also include reasons of equity.

11.44 Taxpayers may claim a tax deduction when they donate to a public fund which has a sole charitable purpose of providing money for eligible scholarships, bursaries or prizes which are:

•

awarded to Australian citizens or permanent residents on a merit basis or for reasons of equity;

•

open to individuals or groups of individuals throughout the nation, a state, a territory or a region (where a region is at least 200,000 people); and

•

for the purpose of promoting education in pre-school, primary school, secondary school or tertiary courses in Australia; and/or

•

allows recipients to further courses of study they began at educational institutions in Australia at educational institutions overseas.

[Schedule 11, item 2, section 30-35]

11.45 The scholarship, bursary or prize must be open only to students who are Australian citizens or permanent residents of Australia. For the purposes of this category, the definition of these terms will be those used in the Australian Citizenship Act 1948 or subsequent Acts. [Schedule 11, item 2, section 30-37]

11.46 Under this category, the definitions of pre-school, primary school, secondary or tertiary courses have the same meaning as in the A New Tax System (Goods and Services Tax) Act 1999. [Schedule 11, item 2, section 30-35 and items 19 to 22, subsection 995-1(1)]

Example 11.24

Julieanne sets up a public fund to provide money for a scholarship to attend a class conducted by her to teach interested individuals how to crochet. The public fund advertises the crochet scholarship throughout the Australian Capital Territory. Although the public fund is set up to fund a scholarship for educational purposes and the scholarship is open to students across a territory, the public fund is not eligible for endorsement under this category as Julieanne's course does not meet the definitions of a pre-school, primary school, secondary or tertiary course.

11.47 The scholarship, bursary or prize must be for the promotion of education, but does not cover community service awards. The promotion of education includes music, sport and agriculture, provided that the course is a pre-school, primary school, secondary or tertiary course.

Example 11.25

A public fund is set up for charitable purposes to provide funds for a scholarship to attend Wenton High School. The scholarship is open to students throughout the region to pursue their high school studies. The scholarship will be awarded to the student who has the most promising talent at playing football and also has good academic results. This public fund will be eligible for endorsement under this category because it promotes education, it is awarded on a merits basis and is provided for attendance at a secondary school course.

Example 11.26

A public fund is set up for charitable purposes to provide funds for a scholarship to attend the Acme Music Academy, which is not a registered training organisation (and therefore does not qualify as a tertiary course). The scholarship is open to promising music students across the nation and will be awarded to the best musician. As the Acme Music Academy is not a registered training organisation, the public fund does not fund scholarships to attend a tertiary course. Therefore, the public fund is not eligible for endorsement under this category because the Acme Music Academy does not provide courses which qualify as a pre-school, primary, secondary or tertiary course.

Example 11.27

West High School provides a prize each year for a student who has demonstrated a high level of community service to the school. A charitable public fund is established to expand the scope of the prize to open it to all students in the region who have demonstrated community service to the state. The public fund is not eligible for endorsement under this category, because it is not for the promotion of education in a pre-school, primary, secondary or tertiary course.

11.48 Scholarships, bursaries and prizes cannot be awarded in substitute for paying reduced school fees. Donations to public funds established for charitable purposes to provide funds for scholarships, bursaries and prizes must be made voluntarily and cannot result in reduced payment of school fees for the donor's relative or associate.

Example 11.28

Tetra College set up a public fund to collect funds for scholarships for its students. Enrolment in Tetra College is conditional on the child's parents making a payment to the public fund in return for reduced school fees. In turn each student is nominally given a 'scholarship' to the value of the payment. The public fund is not eligible for endorsement under this category because the payment to the fund was compulsory, only students of Tetra College were eligible to receive the scholarship and the scholarship was not awarded on a merit basis.

11.49 Entry to the scholarship, bursary or prize must be open to students at a national, state, territory or regional level. However, the public fund may impose a reasonable criterion or eligibility conditions to ensure that the scholarship, bursary or prize is appropriately targeted on the basis of academic merit or for reasons of equity.

Example 11.29

A public fund is established for charitable purposes to fund a scholarship. The scholarship is open to all students from Victoria with a Masters degree in botany (from any institution) to complete a Doctoral degree in botany at North University (which is situated in Australia). As the scholarship is open to the state, restricting access to the students who have studied botany does not preclude eligibility for DGR status under this category.

Example 11.30

A public fund is established to fund a scholarship. The scholarship is open to children whose parents are members of a nationwide club. While the scholarship is open to the nation, restricting access to the children of parents at a particular club goes beyond restricting eligibility to ensure the scholarship is awarded on the basis of merit or equity. Therefore, restricting eligibility in this way prevents eligibility for DGR status under this category, even if it was a charitable fund.

11.50 The scholarship, bursary or prize must be open to students across the region, state, territory or nation. It is not sufficient to simply collect donations across the region while only students at a particular school are eligible to enter.

Example 11.31

Mt Atom Secondary School conducts an annual speech and award night. Each year, the top student in each subject is awarded a prize and the dux of the school is awarded a scholarship to attend the Australian university of their choice. The prizes and the scholarship are only open to students at the school. A public, charitable fund is established to collect donations from the community. This fund is not eligible for endorsement under this category as the prizes and the scholarship are only open to all students at the school. Endorsement as a DGR under this category can only be given where the prizes and scholarship are open to students from at least the region. It is not sufficient to only collect donations from the region.

11.51 Scholarships, bursaries and prizes that allow students to complete a component of a course commenced in Australia at an overseas institution are eligible under this category.

Example 11.32

A public charitable fund is established to provide a prize to allow the top student studying their final year of Japanese history in an Australian university to complete their final year at a Japanese university. The Japanese component of the course will be credited towards the Australian course. The prize is open to all second-year Japanese history students in Australia (who are Australian citizens or permanent residents) and will be awarded to the student with the highest marks. The public fund is eligible for DGR endorsement under this category.

Application and transitional provisions

11.52 These amendments apply after 30 June 2006. [Schedule 11, item 23]

11.53 To differentiate between the new disaster relief category and the existing international affairs category in section 30-80, references to 'relief fund' are substituted by 'a developing country relief fund'

[Schedule 11, items 7 to 9] . Any declaration which is in force under section 30-85 immediately before the commencement of item 6 of Schedule 11 is taken to be a declaration that the public fund is a developing country relief fund [Schedule 11, item 24] .

Consequential amendments

11.54 Consequential amendments specify that the existing relief fund in section 30-80 of the ITAA 1997 relates to developing countries. [Schedule 11, items 7 to 9 and subsections 30-80(1), 30-85(2) and (4)]

11.55 A consequential amendment will be made to update the reference to the Australian Citizenship Act 1948 when the new citizenship law receives Royal Assent. [Schedule 11, item 3, paragraph 30-37(a)]

11.56 The index to Division 30 of the ITAA 1997 is updated to include the five new DGR categories. [Schedule 11, items 12 to 18, subsection 30-315(2)]

11.57 The Dictionary definitions in the ITAA 1997 are updated to include definitions of pre-school course, primary course, secondary course and tertiary course. [Schedule 11, items 19 to 22, subsection 995-1(1)]

Chapter 12 GST treatment of gift-deductible entities

Outline of chapter

12.1 Schedule 12 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that:

•

the goods and services tax (GST) charity concessions apply as originally intended; and

•

charities operating retirement villages, like other charities, are required to be endorsed in order to access the GST charitable retirement village concession.

Context of amendments

12.2 There are a number of provisions in the GST Act which allow various GST concessions only to an entity that is either a charitable institution, a trustee of a charitable fund, a gift-deductible entity or a government school. For example, section 38-250 of the GST Act provides that supplies by such entities may be treated as GST-free where they are made for nominal consideration.

12.3 Division 129 of the GST Act is another concession that applies to gift-deductible entities. Division 129 provides that where there is a difference between the actual use and the planned use of a thing acquired by an entity for a creditable purpose, that entity is required to make an adjustment. Where the entity acquires something for its enterprise and then donates the item to a gift-deductible entity, no adjustment is required under section 129-45. However, in certain situations, this may not be an appropriate outcome.

12.4 For GST purposes, an entity is a gift-deductible entity if gifts or contributions made to it can be deductible under Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997).

12.5 It has been suggested that the definition of 'gift-deductible entity' in the GST Act arguably makes it possible for an entity that operates a fund, authority or institution for which gifts or contributions made to it are tax deductible (but is not itself such a fund, authority or institution), to apply the GST charity concessions to its entire operations. This is despite some of its activities being in no way related to the fund, authority or institution that the entity operates.

12.6 As part of its response to the Report of the Inquiry into the Definition of Charities and Related Organisations, the Government decided that charities, public benevolent institutions and health promotion charities would need to be endorsed by the Commissioner of Taxation (Commissioner) in order to access the relevant tax concessions. This requirement was intended to apply to all charities. Although the GST Act was amended to reflect this, the requirement for charities operating retirement villages to be endorsed was inadvertently omitted.

Summary of new law

12.7 Schedule 12 to this Bill amends the GST Act to clarify that:

•

the GST concessions available to an entity only because it operates a fund, authority or institution that has gift-deductible status does not apply to the activities of the entire entity;

•

an entity that supplies a thing as a gift to an entity that operates a fund, authority or institution that has gift-deductible status may have an adjustment under Division 129 of the GST Act if the gift is made other than for the principal purpose of the endorsed fund, authority or institution; and

•

charitable retirement villages must be endorsed by the Commissioner in order to access the GST charitable retirement village concession under section 38-260 of the GST Act.

Comparison of key features of new law and current law

Detailed explanation of new law

Amendments relating to gift-deductible entities

12.8 There are a range of provisions in the GST Act that provide specific GST treatment for gift-deductible entities. These include provisions concerning:

•

cash accounting under Subdivision 29-B;

•

eligibility for GST-free supplies under Subdivision 38-G;

•

the choice to elect to input tax fundraising events under Subdivision 40-F;

•

the ability to create non-profit sub-entities under Division 63;

•

the ability to treat certain reimbursements as creditable acquisitions under Division 111; and

•

no denial of input tax credits for gifts made to gift-deductible entities under section 129-45.

12.9 The amendments in this Bill relating to gift-deductible entities do not apply to gift-deductible entities that are also charitable institutions, trustees of charitable funds or government schools. In addition, the amendments do not apply to entities that are endorsed as gift-deductible recipients in their own right. These entities continue to qualify for concessional GST treatment.

Accounting on a cash basis

12.10 An entity may account for GST on a cash basis if it meets certain eligibility criteria. For instance, an entity may account for GST on a cash basis if its annual turnover does not exceed $1 million. However, certain entities can account for GST on a cash basis regardless of the general eligibility criteria. These entities are currently prescribed under subsection 29-40(2) of the GST Act and include charities, trustees of charitable funds, gift-deductible entities and government schools.

12.11 Given the limited range of entities that can apply this rule it is appropriate that it be situated in that part of the GST Act which deals with special rules. Accordingly, this Bill amends the GST Act to insert a new Division into the GST Act. The amendment essentially transfers the special rules contained within Subdivision 29-B into the new Division. This Bill also includes signposts to the special rules in the GST Act. [Schedule 12, items 1, 3 to 5 and 14, subsections 29-40(2) and (2A), subsections 29-50(5) and (6), sections 29-69, 37-1 and 157-1]

12.12 The current definition of 'gift-deductible entity' in the GST Act includes an entity that operates a fund, authority or institution that is endorsed under paragraph 30-120(b) of the ITAA 1997 to receive tax deductible gifts or contributions. Such an entity is therefore entitled to account for GST on a cash basis. However, eligibility for cash accounting for this type of entity is available irrespective of the fact that its major activities may bear no relationship to the activities of its endorsed fund, authority or institution. Accordingly, this Bill amends the GST law to ensure that such an entity is not entitled to account for GST on a cash basis simply because it operates an endorsed fund, authority or institution. [Schedule 12, item 14, subsections 157-5(3) and 157-10(3)]

12.13 However, the amendment does not prevent these entities from accounting for GST on a cash basis if they meet the existing general eligibility criteria.

12.14 These amendments ensure that an entity's election to account for GST on a cash basis prior to the amendments coming into effect is made as if the choice was made under the new Division. This ensures that existing elections can continue to have effect if they meet the requirements of the new Division. [Schedule 12, item 2]

GST-free and input taxed supplies by gift-deductible entities

12.15 Sections 38-250, 38-255, 38-270 and 40-160 of the GST Act provide that certain supplies made by a gift-deductible entity can be treated as GST-free or input taxed. Section 111-18 provides that a gift-deductible entity may be entitled to input tax credits for certain reimbursements made to its volunteers.

12.16 By virtue of the current GST definition of 'gift-deductible entity', an entity that operates a fund, authority or institution that is endorsed under paragraph 30-120(b) of the ITAA 1997 to receive tax deductible gifts or contributions, may argue that it is entitled to access each of the above concessions for its entire operations. This is despite some of its activities being in no way related to the activities of the endorsed fund, authority or institution. This outcome is inconsistent with the original policy of restricting access to these concessions to charitable and charitable-like activities.

12.17 Accordingly, this Bill amends the GST law to ensure that a gift-deductible entity can only apply these concessions for a supply or reimbursement if the supply or reimbursement relates to the principal purpose of the endorsed fund, authority or institution that the entity operates and not to some other purpose. This Bill amends the GST Dictionary to include the term 'gift-deductible purpose' to refer to the concept of the principal purpose of an endorsed fund, authority or institution. [Schedule 12, items 6, 7, 9, 10, 12 and 15, subsections 38-250(4), 38-255(3), 38-270(3), 40-160(3) and 111-18(3) and section 195-1]

Example 12.1

Sara Pty. Ltd. operates an enterprise buying and selling books. As part of its enterprise, Sara Pty. Ltd. operates a public art gallery. Sara Pty. Ltd. is endorsed solely under paragraph 30-120(b) of the ITAA 1997 as a deductible gift recipient (DGR) for the operation of the public art gallery. The public art gallery is entitled to receive tax deductible gifts and contributions. Sara Pty. Ltd. is thus a gift-deductible entity for GST purposes.

If Sara Pty. Ltd. sells tickets to enable people to visit the art gallery, then the sale of the tickets may be GST-free under section 38-250 of the GST Act. The sale of the tickets relates only to the principal purpose of the public art gallery. However, section 38-250 cannot apply to the sale of the books as these sales relate to a purpose other than the principal purpose of the public art gallery; that is, they relate to the purpose of the book selling enterprise.

Example 12.2

Ely Pty. Ltd. operates both a swimming pool and a public museum. Ely Pty. Ltd. is endorsed solely under paragraph 30-120(b) of the ITAA 1997 as a DGR for the operation of the public museum. Ely Pty. Ltd. is a gift-deductible entity for GST purposes.

Ely Pty. Ltd. sells a single ticket for entry to both the swimming pool and public museum. Assuming that this amounts to a mixed supply for entry to the swimming pool and the public museum, the GST law can apply differently to the two aspects of the transaction.

The supply of a right of entry to the swimming pool is not GST-free under the relevant provisions because the supply relates to a purpose other than the principal purpose of the public museum. On the other hand, the supply of a right of entry to the museum can be GST-free because that supply relates only to the principal purpose of the museum.

Ely Pty. Ltd. needs to apportion the consideration for the ticket between the two components on a reasonable basis when determining its GST liability.

Example 12.3

Ian Inc. is an environmental organisation listed on the Register of Environmental Organisations stemming from Subdivision 30-E of the ITAA 1997. Ian Inc. is not a charitable institution but through its public fund, Ian Fund, is endorsed to receive tax deductible gifts.

Ian Inc. decides to hold a fundraising event to raise funds to support its principal purpose of preserving the local national park. As the supplies involved in this event relate only to the principal purpose of the endorsed fund, Ian Inc. is entitled to access the relevant concessions in the GST Act for this event.

Non-profit sub-entities

12.18 Division 63 of the GST Act allows charitable institutions, trustees of charitable funds, gift-deductible entities, government schools, and certain non-profit entities exempt from income tax (such as non-profit sporting bodies) to create non-profit sub-entities. Such entities are treated as separate entities for GST purposes. This concession was intended to only apply to entities that are set up on a non-profit basis.

12.19 A gift-deductible entity may not necessarily operate on a non-profit basis other than for the purposes of the fund, authority or institution it operates. Therefore, this Bill amends the GST law to ensure that only a gift-deductible entity that is a non-profit body is able to choose to apply the non-profit sub-entity concession. [Schedule 12, item 11, paragraph 63-5(2)(a)]

Change in use of an acquisition

12.20 Division 129 provides that where there is a difference between the actual use and the planned use of a thing acquired by an entity for a creditable purpose, that entity is required to make an adjustment. However, where the entity donates the item to a gift-deductible entity, no adjustment is required under section 129-45.

12.21 As noted earlier, a gift-deductible entity includes an entity that only operates an endorsed fund, authority or institution. Therefore, an entity can supply a gift to this type of entity, with no adjustment under Division 129, even though the gift is not made for the purpose of the endorsed fund, authority or institution.

12.22 The amendment ensures that the concession only applies where the gift is made by an entity for the principal purpose of an endorsed fund, authority or institution that a gift-deductible entity operates. [Schedule 12, item 13, subsection 129-45(3)]

Endorsement of charities operating retirement villages

12.23 A charitable institution or a trustee of a charitable fund that operates a retirement village can make certain supplies of accommodation, related services and food GST-free under section 38-260 of the GST Act. Unlike other provisions in the GST Act which require charities to be endorsed by the Commissioner in order to access the GST concessions, the requirement for charitable retirement village operators to be endorsed was omitted. Therefore, this Bill amends the GST law to ensure that such entities are required to be endorsed, ensuring consistency with other provisions applying to charitable institutions and trustees of charitable funds. [Schedule 12, item 8, paragraph 38-260(a)]

Application and transitional provisions

12.24 These amendments apply to net amounts for tax periods that commence on or after the day this Bill receives Royal Assent. [Schedule 12, item 16]

Chapter 13 Technical clarification of time for certain amended assessments

Outline of chapter

13.1 Schedule 13 to this Bill amends the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005 to clarify that the repeal of the six-year amendment period for general anti-avoidance (Part IVA) amendments only applies to assessments for the 2004-05 income year and later income years, as originally intended by the Government.

Context of amendments

13.2 In the Treasurer's Press Release No. 106 of 16 December 2004, the Government announced that a four-year amendment period for tax avoidance schemes would apply to assessments for the 2004-05 income year and later income years. However, while the amending Act reduced the period for review and amendment of assessments involving determinations under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936), from six to four years, a particular application date was not specified. Without clarification, the four-year period of review in the new subsection 170(1) of the ITAA 1936 could be thought to apply from the date of Royal Assent to the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005.

13.3 The Government is acting to clarify this matter in line with the announced policy intent.

Summary of new law

13.4 The new four-year amendment period for the Commissioner of Taxation (Commissioner) to give effect to Part IVA will apply only to assessments for the 2004-05 income year and subsequent income years, in line with the original Government announcement.

Detailed explanation of new law

13.5 Item 68 of the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005, which specified that certain consequential amendments would apply to assessments for the 2004-05 income year and later income years, is extended to apply to items 64 and 65 of the same Act. Items 64 and 65 of that Act repealed the six-year amendment period for income tax assessments where the Commissioner relies on Part IVA to amend an assessment. [Schedule 13, item 1]

13.6 The technical clarification ensures the ability of the Commissioner to make amended assessments as if it had been in force on the day the original amendment to items 64 and 65 of the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005 was made. [Schedule 13, item 2]

Chapter 14 Increase in wine equalisation tax producer rebate

Outline of chapter

14.1 Schedule 14 to this Bill explains the amendments to the A New Tax System (Wine Equalisation Tax) Act 1999 that will increase the maximum amount of wine equalisation tax (WET) producer rebate a wine producer (or group of producers) is able to claim in each financial year. These amendments commence from 1 July 2006.

Context of amendments

14.2 In the 2004-05 Budget the Government announced the introduction of the WET producer rebate scheme. The scheme commenced on and from 1 October 2004 to provide assistance to each wine producer (or group of producers) of up to $290,000 in WET rebates per annum.

14.3 The Government announced in the 2006-07 Budget that it will provide enhanced assistance to the wine industry from 1 July 2006 through the WET producer rebate scheme.

Summary of new law

14.4 From 2006-07, each wine producer or group of wine producers will be able to claim up to $500,000 in WET rebates each year.

Comparison of key features of new law and current law

Detailed explanation of new law

14.5 Division 19 of the A New Tax System (Wine Equalisation Tax) Act 1999 governs entitlement to a WET producer rebate.

14.6 Section 19-15 of the A New Tax System (Wine Equalisation Tax) Act 1999 provides for calculation of the amount of WET producer rebate that a wine producer or group of producers may claim in a financial year. Under this provision, the maximum amount claimable in a financial year will be $500,000, reflecting the increased annual threshold. [Schedule 14, items 1 and 2 ]

14.7 Section 19-25 of the A New Tax System (Wine Equalisation Tax) Act 1999 imposes a liability on each producer that is a member of a group of producers, for the repayment of claims in excess of the amount to which the group was entitled. This section extends and clarifies the liability rules to an 'associated producer' (as defined in the legislation) of another producer in a group of producers, where the group claims more than the maximum rebateable amount in a financial year. The specified maximum rebateable amount will be the new amount of $500,000. [Schedule 14, item 3]

14.8 The increase to $500,000 in the maximum amount of producer rebates a producer (or group of producers) can claim in each financial year will not affect the current eligibility or claiming rules for WET rebate claimants, and the administration of a WET producer rebate as a wine tax credit will continue.

Chapter 15 GST treatment of residential premises

Outline of chapter

15.1 Schedule 15 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that following the decision of the Full Federal Court of Australia in Marana Holdings Pty Ltd v Commissioner of Taxation
[2004] FCAFC 307 (the Marana decision) supplies of certain types of real property are input taxed. This confirms the Government's policy intent.

Context of amendments

15.2 In the Marana decision, the Full Federal Court:

•

decided that the sale of a unit, which was previously a room in a motel, was the sale of 'new residential premises' and therefore subject to the goods and services tax (GST); and

•

considered that the terms 'reside' and 'residence' connoted a permanent, or at least long-term, commitment to dwelling in a particular place.

15.3 The Court's judgment has resulted in potential difficulties in distinguishing between supplies of premises that are residential premises and therefore input taxed, and supplies that are taxable. In particular, the Court's judgment is likely to lead taxpayers to seek to treat certain supplies of real property as taxable rather than input taxed, with effect from 1 July 2000 when the GST system was introduced. These supplies include:

•

short-term letting of strata titled units such as serviced apartments by owners to guests;

•

leasing of strata titled units to hotel operators or similar operators; and

•

leasing of display homes and provision of certain short-term employee accommodation.

15.4 The interpretation of the GST Act arising from the Court's judgment represents a significant departure from the intended GST treatment of affected premises. As such it would create uncertainty as well as an advantage for some taxpayers and a disadvantage for others. Further, the new view could add to complexity and the compliance burden for taxpayers. In particular:

•

uncertainty would be created in respect of the GST treatment of other forms of accommodation (eg, holiday homes);

•

investors who have purchased affected premises since the introduction of the GST and who were previously denied input tax credits would be advantaged by the interpretation adopted in the Marana decision. If these investors are registered for GST, they would be entitled to claim input tax credits for the earlier acquisition costs. However, they would need to remit GST on supplies of premises (including on a subsequent sale of the premises) unless past transactions have been protected by reliance on an Australian Taxation Office (ATO) ruling;

•

GST registered owners of units who purchased premises before the introduction of the GST would be disadvantaged by the interpretation adopted in the Marana decision. They would not be able to claim input tax credits for acquisition costs incurred before 1 July 2000 but would need to remit GST on supplies of premises (including on a subsequent sale of the premises) unless past transactions have been protected by reliance on an ATO ruling;

•

complexity and compliance costs would increase. The GST treatment of given premises would need to be determined on the basis of a range of factors rather than mainly on the premises' physical characteristics. There would be flow-on consequences for income tax as the capital allowances and capital gains tax rules depend on the GST treatment of transactions; and

•

small scale investors who, since the introduction of the GST, have purchased (or will purchase) units and may be encouraged to enter the GST system to claim input tax credits, may be disadvantaged. These investors may be required to deal with a consequent significant compliance burden as the tax treatment could change from time to time depending on the particular arrangements.

15.5 These amendments confirm the policy intent of the GST law. The continuation of input taxed treatment of supplies of affected premises represents a sound balance between taxing (and crediting) business inputs and ensuring that owners of residential premises do not have to concern themselves with the GST treatment of such premises.

Summary of new law

15.6 These amendments:

•

ensure that supplies of certain types of real property are input taxed to confirm the policy intent that the words 'residential' and 'residence' are not limited to extended or permanent occupation;

•

confirm that residential premises which have only previously been sold as commercial residential premises or as a part of commercial residential premises are still regarded as new residential premises; and

•

confirm that a supply of accommodation provided to individuals in commercial residential premises by an entity that owns or controls the premises remains subject to GST.

Comparison of key features of new law and current law

Detailed explanation of new law

Short-term occupation

15.7 These amendments change the definition of 'residential premises' to confirm that the period of occupation or intended occupation of land or a building is not relevant in determining whether premises are considered to be residential premises. These amendments change the definition to ensure that the occupation or intended occupation of the premises for residential accommodation means that it is residential premises and therefore generally subject to input taxed treatment upon sale or rental. A similar change is made to the definition of a 'floating home'. [Schedule 15, item 8, section 195-1 - definition of 'floating home', and item 9, section 195-1 - definition of 'residential premises']

15.8 Without these changes, the Marana decision would otherwise suggest that the term residential premises refers only to premises occupied or intended to be occupied for long-term occupation.

15.9 These amendments qualify residential accommodation to ensure that it does not solely refer to long-term accommodation but may include short-term accommodation (ie, it may apply regardless of the term, or intended term, of occupation). [Schedule 15, items 2 to 6, paragraphs 40-35(2)(a), 40-65(2)(b), 40-70(1)(a) and 40-70(2)(b), subsection 40-65(1)]

15.10 However, supplies of accommodation provided to individuals in commercial residential premises by an entity that owns or controls the premises remain subject to GST in accordance with the existing rules. This means that supplies by an entity that, for example, owns a hotel and supplies accommodation in the hotel to guests, are not input taxed (unless the existing option to input tax long-term commercial accommodation is exercised). An entity that owns or controls commercial residential premises may provide accommodation to an individual such as an employee of a company even though the supply of accommodation is made by the entity to the employer company.

15.11 The reference to an entity that 'controls' commercial residential premises include an entity that leases the premises from the owner or owners and supplies the accommodation to guests in its own right. It does not refer to control of the entity itself by way of shareholdings, directorships or the like. Nor does it refer to an agent that lets out premises on behalf of the owner of the premises. For example, a supply made by the owner of an individual strata titled unit in a hotel complex, who lets the unit to a guest through an agent, remains input taxed. [Schedule 15, item 1, paragraph 40-35(1)(a)]

Example 15.1: Serviced apartment for short-term stays

Marek leases a strata titled unit in a serviced apartment complex to Phil who lets apartments in the complex to guests in his own right. Permitted use of the apartment is restricted to short stays. The lease of the unit is input taxed because it is a lease of residential premises. The prohibition on long-term occupation of the apartment does not prevent the unit being characterised as residential premises. Under these amendments, residential premises are not limited to those occupied or intended to be occupied permanently or for an extended period.

Example 15.2: Employee accommodation

Coalmer Enterprises Ltd provides accommodation for its employees in residential barracks. The employees' occupation of the barracks is not subject to conditions relating to their terms of employment, such as limitations on personal possessions or a requirement to vacate at the end of a period of duty or a set quota of work. Nevertheless, the barracks are occupied on a short-term basis. These amendments ensure that the supply of the accommodation to the employees remains input taxed.

Interaction between commercial residential premises and residential premises

15.12 These amendments do not change the definition of 'commercial residential premises'. The GST treatment of accommodation in hotels, motels, inns, hostels and similar premises which exhibit similar characteristics (which may include: being run with a commercial intention, having multiple occupancy, holding out to the public, being used for the main purpose of accommodation, having central management, being offered by management in its own right, providing services, and where individuals have the status of guests) is not altered.

15.13 Broadly, these amendments ensure that a sale of residential premises (other than new residential premises) comprising a strata titled unit in commercial residential premises, such as a hotel or motel, will be input taxed.

15.14 For example, a sale of one or several units in a hotel complex will not constitute a supply of commercial residential premises. This is because the sale of a single unit or several units in, for example, a hotel or motel is not a supply of a hotel or motel.

15.15 On the other hand, a sale or lease of, for example, the whole of a hotel complex will be a supply of commercial residential premises, whether or not the hotel complex is strata titled. Whether a sale or lease of anything less than the whole of a hotel complex (eg, not all of the rooms within the complex or not all of the hotel infrastructure such as lobby, kitchen or pool areas) would constitute a supply of commercial residential premises, will depend on the facts of each case.

15.16 However, a supply comprising only the accommodation units in a hotel complex, without other parts of the hotel, such as the reception, is not a supply of commercial residential premises. It is a supply of residential premises.

Example 15.3

Owner Pty Ltd developed a new serviced apartment complex which consists of 50 apartments, a reception area and conference facilities. Owner Pty Ltd has retained the complex for the purposes of leasing the entire complex to Proprietor Pty Ltd who will operate an accommodation business, which essentially is run as a hotel.

The apartments are offered to the public, by Proprietor Pty Ltd in its own right, for short-term stays. The apartments are used predominately for accommodation and include self contained kitchen and laundry facilities. Proprietor Pty Ltd provides room cleaning and other services to the guests.

In this example the supply of the complex by Owner Pty Ltd to Proprietor Pty Ltd under the lease is similar to the supply of a hotel and is a supply of commercial residential premises.

The supply by Proprietor Pty Ltd when it supplies the apartments to the guests will also be taxable as a supply of accommodation in commercial residential premises to an individual by an entity that controls the commercial residential premises. The fact that the apartments may or may not be strata titled will not alter the conclusion in this example.

Application and transitional provisions

15.17 These amendments apply to net amounts for tax periods that commence on or after 1 July 2000. [Schedule 15, item 10]

15.18 These amendments apply from the first tax period in which the GST applies because the GST law has been administered on the basis that residential premises and accommodation include premises/accommodation for both short and long-term occupation. This view was set out in the goods and services tax Ruling 2000/20 titled Goods and Services Tax: commercial residential premises which was released on 21 June 2000 by the Commissioner of Taxation.

Consequential amendments

15.19 These amendments make a consequential change to the definition of 'new residential premises'. These amendments ensure that premises are not precluded from being new residential premises merely because they have previously been sold as commercial residential premises. [Schedule 15, item 7, paragraph 40-75(1)(a)]

15.20 This ensures that any value added upon conversion of commercial residential premises to residential premises is subject to GST.

Example 15.4

Camille Enterprises purchases a motel in August 1996 and operates it for 10 years as a motel. In August 2006, Camille Enterprises ceases operation of the motel, strata titles the motel and sells one of the strata titled units as residential premises to Sebastien.

Although the motel was sold as commercial residential premises in August 1996, the sale of the strata titled unit to Sebastien in August 2006 is a sale of new residential premises. This reflects the position that a prior sale as commercial residential premises does not preclude a later sale of residential premises from being a sale of new residential premises. The previous supplies of accommodation in the motel, being supplies of accommodation in commercial residential premises provided to an individual by an entity that owns the commercial residential premises, were not input taxed supplies; thus, subsection 40-75(2) has no operation.

The later sale to Sebastien is subject to GST.

Index

Schedule 1: Cyclone Larry income support payments

Schedule 2: Cyclones Larry and Monica business payments

Schedule 3: Interim income support payments

Schedule 4: Simplified imputation system (share capital tainting rules)

Schedule 5: Government grants

Schedule 6: Tax offset for Medicare levy surcharge (lump sum payments in arrears)

Schedule 7: Reporting superannuation contributions

Schedule 8: Exclusion for fringe benefits to address personal security concern

Schedule 9: Pre-1 July 88 funding credits

Schedule 10: Allowing certain funds to obtain an ABN

Schedule 11: Deductible gift categories

Schedule 12: GST treatment of gift-deductible entities

Schedule 13: Technical correction

Schedule 14: Wine equalisation tax

Schedule 15: GST treatment of residential premises