House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan Mp

Glossary

The following abbreviations are used throughout this explanatory memorandum.

General outline and financial impact

Political contributions and gifts

This Bill amends the Income Tax Assessment Act 1997 and the Income Tax Assessment Act 1936 to remove tax deductibility for contributions and gifts to political parties, independent members and independent candidates. This Bill also amends the A New Tax System (Goods and Services Tax) Act 1999 to ensure that the goods and services tax treatment of these entities is not affected by the income tax amendments.

Date of effect : This measure applies to contributions and gifts made on or after 1 July 2008 as announced in the 2008-09 Budget.

Proposal announced : The Government made an election commitment to remove tax deductibility for political donations in Labor's $3 Billion Savings Plan announced on 2 March 2007.

Financial impact : This measure will have these revenue implications:

Compliance cost impact : Low.

Chapter 1 - Political contributions and gifts

Outline of chapter

1.1 This Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax Assessment Act 1936 (ITAA 1936) to remove tax deductibility for contributions or gifts to political parties, independent members and independent candidates.

1.2 This Bill also ensures that political parties, independent members and independent candidates will not lose access to certain goods and services tax (GST) concessions to which they may be entitled as a consequence of the removal of income tax deductibility for gifts or contributions.

Context of amendments

1.3 Subject to certain conditions, contributions or gifts of money or property to political parties, independent members and independent candidates are tax deductible up to a maximum of $1,500.

Summary of new law

1.4 These amendments remove the ability for taxpayers to claim specific deductions for contributions and gifts to political parties and independent members and candidates.

1.5 These amendments also remove general deductions for business taxpayers for contributions and gifts to political parties, members and candidates. They also preclude such contributions or gifts from forming part of the cost base or reduced cost base of any capital gains tax (CGT) asset. These changes do not affect the principle found in the general tax deduction provision that individuals should be able to claim a deduction where the contribution is related to their employment.

1.6 This measure also amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that the existing GST treatment of political parties, independent members and independent candidates is not altered by the income tax changes.

1.7 This measure applies in relation to contributions and gifts made on or after 1 July 2008.

Comparison of key features of new law and current law

Detailed explanation of new law

Income tax changes

1.8 Various references to political gifts and contributions are removed from Division 30, including repealing the main provisions in Subdivision 30-DA. As a result, gifts and contributions made by taxpayers (including those for membership fees) to political parties, independent members and independent candidates are no longer deductible under these provisions. [Schedule 1, items 4 to 10, Subdivision 30-DA, subsections 30-5(1) and 30-15(2), and item 87 in the table in subsection 30-315(2)]

Example 1.1

Mary wishes to support a registered political party, and consequently makes a $1,000 gift to the party. The gift is not deductible.

Example 1.2

Bob earns his income by being employed as an engineer and is a member of a political party for which he pays $50 a year in membership fees. The membership payment is not incurred in earning his assessable income, and is therefore not deductible.

1.9 Division 26 of the ITAA 1997 sets out amounts that cannot be deducted, or deducted in full, from assessable income. To ensure that a deduction is not available:

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a section is added to Division 26 to deny taxpayers who are not employees or office holders from deducting contributions and gifts to political parties, members and candidates under other parts of the Act, including the general deduction provision in section 8-1 of the ITAA 1997. The general deduction provision allows deductions for losses or outgoings to the extent that they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income. This amendment applies to gifts and contributions to parties, members and candidates at the federal, state and local government level; and

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the CGT provisions are amended so that such expenses also do not form part of the cost base or reduced cost base of any CGT asset. This ensures that no capital loss or reduced capital gain can arise from such contributions or gifts.

[Schedule 1, items 3, 11 and 12, section 26-22, subsections 110-38(6) and 110-55(9F)]

Example 1.3

XYZ Ltd is a proof reading company specialising in political publications. XYZ Ltd is looking to maintain its corporate profile, and to this end makes contributions to political parties. This amendment ensures that XYZ Ltd is unable to claim these contributions under section 8-1 as a loss or outgoing necessarily incurred in carrying on its business or for the purpose of gaining or producing its assessable income.

1.10 The existing general tax deduction provision continues to apply to employees and office holders. Contributions to political parties remain deductible provided that they meet the general deduction requirements of section 8-1. In other words, a deduction will be available where the amount contributed is incurred in gaining or producing assessable income (similar to an accountant being eligible for a deduction for annual subscriptions paid to a society of accountants). The new section does not seek to extend the ordinary deduction requirements of section 8-1. [Schedule 1, item 3, section 26-22]

Example 1.4

A member of Parliament pays a compulsory levy to retain their party membership. This would generally be deductible under section 8-1.

Example 1.5

A member of Parliament pays for a ticket to attend a fundraising event hosted by their party where a substantial sit-down dinner is provided. The ticket price generally would not be deductible under section 8-1.

GST changes

1.11 Items 9 and 15 in Schedule 1 to this Bill remove deductions for donations to political parties and independent members and independent candidates. As a result political parties, independent members and independent candidates no longer meet the definition of a 'gift-deductible entity' in section 195-1 of the GST Act. As a consequence political parties, independent members and independent candidates would lose access to certain concessions that may be available to gift-deductible entities in the GST Act. Items 1 and 3 in Schedule 1 to this Bill restore the ability of political parties, independent members and independent candidates to access these GST concessions to the same extent as existed before this Bill.

1.12 Examples of the GST concessions in question include enabling a gift-deductible entity to:

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hold GST-free raffles or bingo games;

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treat certain other fund-raising events as input-taxed;

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prevent donors from requiring adjustments to their input tax credits for making supplies to the entity;

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receive input tax credits for certain reimbursements made to volunteer workers of the gift-deductible entity;

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make GST-free supplies for nominal consideration in certain circumstances;

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account for GST on a cash basis, regardless of turnover; and

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treat branches of the gift-deductible entity, where the gift-deductible entity is a non-profit body, as separate non-profit sub-entities. This enables the branches to be treated as separate entities for GST purposes. As a result one or more sub-entities may fall below the GST registration threshold for non-profit organisations when the complete entity would exceed the registration threshold.

1.13 Items 1 and 4 replace the term 'gift-deductible entity' with the term 'concessional entity' in the GST Act and item 3 defines a concessional entity as an entity to which a taxpayer may make a gift or contribution that is deductible to the taxpayer under Division 30 of the ITAA 1997 or a political party, independent member or independent candidate. Concessional entities become entitled to the same GST concessions under the GST Act as were available to gift-deductible entities. [Schedule 1, items 1, 3 and 4]

1.14 This measure also inserts definitions of 'independent member' and 'independent candidate' into section 195-1 of the GST Act. These definitions are intended to have a similar scope to the definitions of 'independent member' and 'independent candidate' in Subdivision 30-DA of the ITAA 1997 that are repealed. [Schedule 1, items 2, 5 and 6]

Application and transitional provisions

1.15 These amendments apply to contributions and gifts made on or after 1 July 2008. [Schedule 1, item 15]

Consequential amendments

1.16 The reference to 'contributions to political parties' in the non-operative index of provisions about deductions is amended to refer to the new section in Division 26. [Schedule 1, item 2, section 12-5]

1.17 The references to 'independent candidate' and 'independent member' are repealed from the ITAA 1997 Dictionary. [Schedule 1, items 13 and 14, definition of 'independent candidate' and 'independent member' in subsection 995-1(1) of the ITAA 1997]

1.18 The provisions for tax deductions for political donations were expanded by the Electoral and Referendum Amendment (Electoral Integrity and Other Measures) Act 2006. Among other things, these amendments provided for additional deductions for contributions and gifts to independent candidates and independent members. Consequently, minor amendments were made to section 78A of the ITAA 1936 (which denies deductions for certain gifts) to cover individuals who were able to receive tax deductible donations. These minor amendments are reversed. [Schedule 1, item 1, subsections 78A(2) to (4) of the ITAA 1936]

Index

Schedule 1 : Political contributions and gifts