Senate

Revised Explanatory Memorandum

Circulated by the authority of the Treasurer, the Hon Wayne Swan MP

Glossary

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

General outline and financial impact

Amounts misappropriated by an employee or agent

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to allow taxpayers to:

•

claim a deduction in relation to an amount misappropriated by an employee or agent following the disposal of an asset that has been dealt with under the uniform capital allowance provisions;

•

recognise the misappropriation under the capital gains tax provisions; or

•

both claim a deduction and recognise the misappropriation as discussed above (depending on whether the use of the asset was for taxable purposes or not).

Date of effect: These amendments commence on the date this Bill receives Royal Assent and apply to amounts misappropriated in the 2007-08 and later years of income.

Proposal announced: This measure was announced on 8 May 2007 in the 2007-08 Budget.

Financial impact: Unquantifiable, but is expected to be negligible.

Compliance cost impact: Minimal to nil.

Extending the superannuation guarantee late payment offset

Schedule 2 to this Bill amends the Superannuation Guarantee (Administration) Act 1992 to extend the period within which an employer can make a contribution - after the due date - and still be eligible to use the late payment offset to reduce their superannuation guarantee (SG) charge liability. This measure will reduce the incidence of employers having to potentially pay the same amount twice, once when they make a late contribution to the employee's fund and again when they are assessed with an SG charge for making the contribution late.

Date of effect: These amendments apply from the date of Royal Assent.

Proposal announced: This measure was announced in the then Minister for Revenue and Assistant Treasurer's Press Release No. 121 of 2 October 2007.

Financial impact: Minimal.

Compliance cost impact: Low. These amendments affect employers who make a late contribution. There will be a low increase in implementation compliance costs arising from the need for some employers to be aware of these changes. There will be a low ongoing compliance cost impact arising from the need for some employers to make an election before being able to use the late payment offset. It is anticipated that the measure will affect a small proportion of the average 15,000 employers per quarter who incur liability for the SG charge.

Capital gains tax market value substitution rule for interests in certain companies and trusts

Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 so that the market value substitution rule in section 116-30 does not apply when capital gains tax (CGT) event C2 occurs in relation to interests in certain companies and trusts.

Date of effect: These amendments apply to CGT events happening during and after the 2006-07 income year.

Proposal announced: This measure was announced by the then Minister for Revenue and Assistant Treasurer in Press Release No. 128 of 16 October 2007.

Financial impact: Unquantifiable but insignificant.

Compliance cost impact: This measure is expected to have a small impact on implementation compliance costs and result in nil ongoing compliance costs.

Income tax exemption of the Endeavour Executive Award and research fellowships under the Endeavour Awards

Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 to ensure that the Endeavour Executive Award and research fellowships under the Endeavour Awards scholarship program are exempt from income tax.

Date of effect: This measure applies to fellowships and awards received in the 2007-08 income year and later income years.

Proposal announced: This measure was announced in the 2007-08 Mid-Year Economic and Fiscal Outlook (MYEFO) report.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Minimal.

Early completion bonuses for apprentices

Schedule 5 to this Bill amends the Income Tax Assessment Act 1997 to extend an income tax exemption to early completion bonuses paid to apprentices by State and Territory governments.

Date of effect: This measure applies to early completion bonuses received in the 2007-08 and later income years.

Proposal announced: This measure was announced on 23 October 2007 in the Pre-Election Economic and Fiscal Outlook.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Negligible.

Deductible gift recipients

Schedule 6 to this Bill amends the Income Tax Assessment Act 1997 to update the list of deductible gift recipients (DGRs) to include nine new DGRs and extend the time period of four existing DGRs.

Date of effect: There are various dates of effect based upon each of the individual organisation's DGR start date. The nine new DGRs are listed below:

•

AE 2 Commemorative Foundation Ltd - 29 February 2008;

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Ian Thorpe's Fountain for youth Limited - 29 February 2008;

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Wheelchairs for Kids Incorporated - 29 February 2008;

•

Amy Gillett Foundation - 14 September 2007;

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The Spirit of Australia Foundation - 11 September 2007;

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World Youth Day 2008 Trust - 5 September 2007;

•

Memorials Development Committee Ltd - 5 September 2007;

•

The Council for Jewish Community Security - 10 August 2007; and

•

Playgroup Australia Incorporated - 3 August 2006.

In addition this Schedule extends the DGR listing of the:

•

Dunn and Lewis Youth Development Foundation

Limited - 1 January 2008;

•

Finding Sydney Foundation - 28 August 2007;

•

Xanana Vocational Education Trust - 21 July 2007; and

•

Australia for UNHCR - 28 June 2007.

Proposal announced: The deductibility of gifts to the following organisations were announced by the former Minister for Revenue and Assistant Treasurer:

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AE 2 Commemorative Foundation Ltd - Press Release No. 131 of 17 October 2007;

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Ian Thorpe's Fountain for youth Limited - Press Release No. 126 of 16 October 2007;

•

Wheelchairs for Kids Incorporated - Press Release No. 126 of 16 October 2007;

•

Amy Gillett Foundation - Press Release No. 116 of 14 September 2007;

•

The Spirit of Australia Foundation - Press Release No. 113 of 11 September 2007;

•

World Youth Day 2008 Trust - Press Release No. 110 of 11 September 2007;

•

Memorials Development Committee Ltd - Press Release No. 108 of 10 September 2007; and

•

The Council for Jewish Community Security - Press Release No. 098 of 10 August 2007.

The deductibility of gifts to Playgroup Australia Incorporated was announced in the then Minister for Revenue and Assistant Treasurer's Press Release No. C059/04 of 25 June 2004.

In addition the former Minister for Revenue and Assistant Treasurer announced the extension of the following DGR listings:

•

Dunn and Lewis Youth Development Foundation

Limited - Press Release No. 129 of 17 October 2007;

•

Finding Sydney Foundation - Press Release No. 126 of 16 October 2007;

•

Xanana Vocational Education Trust - Press Release No. 112 of 11 September 2007; and

•

Australia for UNHCR - Press Release No. 102 of 17 August 2007.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Nil.

Superannuation lump sum paid to a person with a terminal medical condition

Schedule 7 to this Bill amends the Income Tax Assessment Act 1997 and the Income Tax (Transitional Provisions) Act 1997 so that a superannuation lump sum paid to a person who has a terminal medical condition is tax free.

Date of effect: These amendments apply to payments made on or after 1 July 2007. As the amendments remove tax on the affected payments, the retrospective application of the changes will not disadvantage taxpayers.

Proposal announced: This measure was originally announced in the then Minister for Revenue and Assistant Treasurer's Press Release No. 111 of 11 September 2007.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Negligible.

Capital expenditure for the establishment of trees in carbon sink forests

Schedule 8 to this Bill amends Division 40 of the Income Tax Assessment Act 1997 to provide a deduction for capital expenditure for the establishment of trees in carbon sink forests.

Expenditure incurred on establishing trees in a carbon sink forest will be immediately deductible in the period 2007-08 to 2011-12. After this initial period, establishment expenditure will be deductible under a write-off rate of 7 per cent per annum.

During both the initial period and after, the conditions for the deduction will be analogous with the horticultural plant provisions.

Date of effect: Amendments provided for the income years 2007-08 to 2011-12 (inclusive) apply to the 2007-08 income year and later income years.

Amendments provided for the income year 2012-13 and later years apply to the 2012-13 income year and later income years.

Proposal announced: This measure was announced in the then Treasurer's Press Release No. 39 of 8 May 2007.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Low.

Extension of the beneficiary tax offset to the Equine Workers Hardship Wage Supplement Payment

Schedule 9 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 individuals in receipt of the Equine Workers Hardship Wage Supplement Payment (the Supplement).

Date of effect: The beneficiary tax offset applies to payment of the Supplement made during the 2007-08 income year and later income years.

Proposal announced: This measure was part of a broader Equine Influenza assistance package which was announced in the then Minister for Agriculture, Fisheries and Forestry's Press Release No. DAFF07/136PM of 9 September 2007.

Financial impact: Nil.

Compliance cost impact: Negligible.

Tax-free grants for certain tobacco growers

Schedule 10 to this Bill amends the Income Tax Assessment Act 1997 to provide tax-free grants, under the Tobacco Growers Adjustment Assistance Programme 2006, to tobacco growers who undertake to exit all agricultural enterprises for at least five years.

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

Proposal announced: This measure was announced in the 2007-08 Budget.

Financial impact: This measure will have a cost to revenue of $1.3 million in each of the 2007-08 and 2008-09 income years.

Compliance cost impact: Negligible.

Farm management deposits

Schedule 11 to this Bill amends the farm management deposit scheme in the Income Tax Assessment Act 1936 to align the tax law with the guidelines for declaring either all primary producers in a geographical area, or specified classes of primary producers within a geographical area, to be in exceptional circumstances.

Date of effect: This measure will commence from 1 July 2002. This will ensure that those taxpayers that were previously disadvantaged by this inconsistency get the opportunity to receive the tax benefit.

Proposal announced: This amendment was previously introduced into the House of Representatives on 13 September 2007 as part of the Tax Laws Amendment (2007 Measures No. 6) Bill 2007.

Financial impact: The revenue cost of this measure is expected to be nil. However, there may be a small cost to revenue if taxpayers need to amend their prior tax assessments.

Compliance cost impact: Nil.

Chapter 1 Amounts misappropriated by an employee or agent

Outline of chapter

2.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to:

•

allow a deduction in relation to amounts misappropriated by an employee or agent in respect of a disposal of a depreciating asset under the uniform capital allowances (UCA) regime;

•

recognise the amount misappropriated by an employee or agent if a capital gains tax (CGT) event occurs and the amount would have otherwise been taken into account in working out the amount of a capital gain or capital loss; or

•

allow a taxpayer to both claim a deduction and recognise the misappropriation as discussed above (in situations where the use of the asset was in part for a taxable purpose and in part for other than a taxable purpose).

Context of amendments

2.2 When a depreciating asset is disposed of, the amount of the proceeds received, or taken to be received, by a taxpayer is included as the termination value in a balancing adjustment calculation under the UCA provisions (Division 40 of the ITAA 1997). When a CGT event occurs to a CGT asset, the amount of the proceeds received, or taken to be received, by a taxpayer is taken into account in working out the amount of a capital gain or capital loss under the CGT provisions. In the case where the asset is used for a partial taxable purpose or other than a taxable purpose then both the UCA and CGT provisions will apply.

2.3 However, under section 25-45 of the ITAA 1997, if the amount (or non-cash benefit) is misappropriated by an employee or agent, it can only be deducted against assessable income to the extent that the amount (or non-cash benefit) was included in the assessable income of the taxpayer.

2.4 The current law does not recognise amounts (or non-cash benefits) that are misappropriated by an employee or agent following the disposal of an asset because the amount is not included in the assessable income of the taxpayer. Rather, the amount is used to calculate the balancing adjustment under the UCA provisions, or a capital gain or loss from a CGT event under the CGT provisions, or a mixture of both.

2.5 There is currently no provision in the tax law that recognises the reality that the taxpayer did not receive the economic benefit from the disposal as a result of the misappropriation.

Uniform capital allowances

2.6 In general, section 40-285 of the ITAA 1997 provides a balancing adjustment calculation as the difference between an asset's termination value and its adjustable value before the balancing adjustment event. Under sections 40-300 and 40-305, the termination value includes amounts or non-cash benefits that the taxpayer either receives, or is entitled to receive, according to the relevant subsection 40-300(2) or 40-305(1).

2.7 Section 25-45 does not give a deduction for amounts (or non-cash benefits) misappropriated by an employee or agent that are included in a balancing adjustment calculation as part of the termination value under the UCA provisions.

2.8 If an employee or agent misappropriates an amount (or a non-cash benefit) following the disposal of an asset that has been accounted for by a balancing adjustment calculation, the misappropriated amount is not included in the assessable income. Since section 25-45 only provides for a deduction for the amount included in the assessable income, it cannot provide a deduction under these circumstances.

2.9 Since amounts (or non-cash benefits) that are misappropriated by an employee or agent must be included in working out the tax consequences of a balancing adjustment event, it is appropriate that provision is also made to recognise the loss when the misappropriation has occurred.

Capital gains tax

2.10 A taxpayer is taken to have received any capital proceeds that their employee or agent has received. Therefore, the modification in subsection 116-45(1) of the ITAA 1997 for non-receipt does not apply to reduce the capital proceeds by the amount that is misappropriated by an employee or agent of the taxpayer.

2.11 Where there has been a misappropriation of the capital proceeds by an employee or agent of the taxpayer, in calculating a capital gain or loss, the taxpayer will:

•

have to include all the capital proceeds that they were entitled to receive, regardless of whether or not they actually received all of the proceeds; and

•

disregard any later recovery of the capital proceeds for CGT purposes.

2.12 These amendments ensure that the capital proceeds from a CGT event will be reduced if an amount is misappropriated by an employee or agent of the taxpayer. If an amount is later recovered, the original capital gain or loss will be amended to take this receipt into account.

2.13 These amendments also ensure that the termination value of a depreciating asset will be reduced by the amount misappropriated or increased by the amount of the misappropriation that is recouped if CGT event K7 happens to a depreciating asset. This ensures that the correct amount is taxed.

Summary of new law

2.14 This Schedule amends the ITAA 1997 to recognise amounts (or non-cash benefits) that are misappropriated by an employee or agent following the disposal of an asset that has been accounted for by either a balancing adjustment calculation as part of the termination value under the UCA provisions, or a CGT event under the CGT provisions, or both.

Uniform capital allowances

2.15 This Schedule amends Division 25 by inserting a provision to allow a deduction for amounts (or non-cash benefits) misappropriated by an employee or agent that are included in the termination value of a depreciating asset under sections 40-300 and 40-305. [ Schedule 1, item 3, section 25-47 of the ITAA 1997 ]

2.16 The amount (or non-cash benefit) will be recognised as a deduction at the time that the misappropriation has occurred. The amount that can be deducted will be reduced in the same way (or by the same proportion) as occurs under section 40-290 for depreciating asset balancing adjustment amounts (ie, a reduction for other than taxable purpose use). [ Schedule 1, item 3, subsection 25-47(4 ) of the ITAA 1997 ]

Capital gains tax

2.17 This Schedule also amends Division 116 by inserting a provision which reduces the capital proceeds from a CGT event by the amount misappropriated by an employee or agent. [ Schedule 1, item 18, section 116-60 of the ITAA 1997 ]

2.18 CGT event K7 happens where a balancing adjustment event happens to a depreciating asset that has been used, or installed ready for use, wholly or partly for non-taxable (generally for private) purposes.

2.19 If CGT event K7 happens to a depreciating asset, the termination value of the depreciating asset is reduced by the misappropriated amount or increased by the amount of the misappropriation that is recouped. [ Schedule 1, item 7, subsections 104-240(3 ) and ( 4 ) and item 8, subsections 104-245(3 ) and ( 4 ) of the ITAA 1997 ]

Comparison of key features of new law and current law

Detailed explanation of new law

Uniform capital allowances

2.20 These amendments allow a deduction for amounts (or non-cash benefits) misappropriated by an employee or agent that are included in the termination value of a depreciating asset under sections 40-300 and 40-305.

2.21 The amount that can be deducted is so much of the amount misappropriated that represents an amount applicable to the taxpayer under item 8 in the table in subsection 40-300(2) or item 1, 3, 4 or 6 of the table in paragraph 40-305(1)(b) in relation to the balancing adjustment event. In particular, these amendments refer precisely to all or part of the amount (or non-cash benefit) that is capable of being misappropriated by an employee or agent. [ Schedule 1, item 3, subsection 25-47(2 ) of the ITAA 1997 ]

2.22 For example, item 8 in the table in subsection 40-300(2) provides that for a balancing adjustment event in relation to a depreciating asset that is lost or destroyed, the termination value is the amount or value received or receivable under an insurance policy or otherwise for the loss or destruction. Similar rules are contained in the table in paragraph 40-305(1)(b).

2.23 These amendments also reduce the deduction for amounts (or non-cash benefits) misappropriated by an employee or agent in the same way (or by the same proportion) as occurs under section 40-290 for depreciating asset balancing adjustment amounts (ie, a reduction for other than taxable purpose use). [ Schedule 1, item 3, subsection 25-47(4 ) of the ITAA 1997 ]

Example 2.1

Linda operates a flower delivery business. She purchased a van she used solely in her business. Linda's agent sold the van on her behalf for $10,000 and misappropriated the proceeds. At that time, in the 2008 year, the adjustable value of the van was $6,000. Under the UCA provisions, Linda would include $4,000 in assessable income (ie, the difference between the van's termination value and its adjustable value before the balancing adjustment event). Under these amendments, Linda is now also able to claim a deduction equal to the amount that was misappropriated - $10,000 (see item 3, section 25-47 of the ITAA 1997).

Example 2.2

Henry is an architect and operates a business from home. He owns a computer which is used 60 per cent in the business. Henry authorises an agent to sell the computer on his behalf and collect the proceeds. The agent sells the computer for $1,500 (its termination value). At that time, in the 2008 year, the adjustable value of the computer is $1,000. The balancing adjustment calculation will use an adjustable value of $1,000 and a termination value of $1,500. Since Henry is taken to receive the amount, $300 (60% of $500) will be included in Henry's assessable income.

In the same year, Henry becomes aware that his agent has misappropriated the sale proceeds. Under the new provisions, Henry can claim a deduction of $900 (60% of $1,500) for the 2008 income year (see item 3, subsection 25-47 of the ITAA 1997).

Example 2.3

Alternatively, following the facts of Example 1.2, if Henry's agent sells the computer for $600, the termination value will be $600, and $240 (60% of $400) will be deductible from Henry's assessable income (as the termination value is less than the adjustable value). If the sale proceeds are misappropriated by his agent, $360 (60% of $600) may be deducted from Henry's assessable income in the year the misappropriation happened.

If a tax return has already been lodged for the 2008 income year and the misappropriation was discovered in a later year of income, then the taxpayer can request an amendment by the Australian Taxation Office (see item 3, subsections 25-47(3) to (5) of the ITAA 1997).

2.24 The items in the tables in subsection 40-300(2) or paragraph 40-305(1)(b) that are excluded from the new section in Division 25 in relation to the balancing adjustment, refer to amounts that are not strictly capable of being misappropriated.

2.25 If a misappropriation is discovered in a later year of income, the taxpayer may request the Commissioner of Taxation to amend their earlier return. An assessment can be amended within four years, starting immediately after the taxpayer discovers the misappropriation. [ Schedule 1, item 3, subsection 25-47(5 ) of the ITAA 1997 ]

2.26 Any subsequent recoupment of the misappropriated amount for a depreciated asset will be required to be included in the taxpayer's assessable income in the income year when it is recouped. [ Schedule 1, item 2, subsection 20-30(1 ) of the ITAA 1997 ]

Example 2.4

Abbie was able to deduct $500 from her assessable income due to misappropriation of funds by her agent. If she is able to subsequently recoup the amount at a later date, this must be included in Abbie's assessable income for the income year in which it was recouped.

Capital gains tax

Misappropriation rule: modification rule

2.27 Division 116 specifies the capital proceeds to be taken into account in working out whether a capital gain or loss has been made.

2.28 Capital proceeds from a CGT event are ordinarily:

•

money a taxpayer receives, or is entitled to receive, for the event happening;

•

the market value of any property a taxpayer receives, or is entitled to receive, for the event happening; or

•

a combination of these.

2.29 Section 116-60 will modify Division 116 to ensure that the capital proceeds from a CGT event are reduced by the amount misappropriated by an employee or agent (whether by theft, embezzlement, larceny or otherwise). [ Schedule 1, item 18, subsections 116-60(1 ) and ( 2 ) of the ITAA 1997 ]

2.30 This rule exists because the general rules treat the taxpayer as having received an amount to which they are entitled to receive even though they did not actually receive the amount. [ Schedule 1, item 18, subsection 116-60(1 ) of the ITAA 1997 ]

Example 2.5

Parvin sold a rental property in the 2007 income year for $500,000. She would include $500,000 as the capital proceeds for the purposes of working out the capital gain in her 2007 tax return.

However, if the purchaser paid $500,000 to Parvin's solicitor and the solicitor misappropriates the amount, under the current law she must still include the full $500,000 as capital proceeds even though those proceeds were not passed on to her by the solicitor.

Under these amendments, the $500,000 would not be included as capital proceeds for the purposes of working out the capital gain.

2.31 However, if the taxpayer later receives an amount as recoupment of all or part of the misappropriated amount, the capital proceeds will be increased by the amount received. [ Schedule 1, item 18, subsection 116-60(3 ) of the ITAA 1997 ]

2.32 Parts 3-1 and 3-3 of the ITAA 1997 will apply to the debt owed to the taxpayer (misappropriated amount) as if it were not a CGT asset. [ Schedule 1, item 18, subsection 116-60(4 ) of the ITAA 1997 ]

Termination value of the depreciating asset and CGT event K7: general case

2.33 A capital gain or loss may arise from a depreciating asset if CGT event K7 happens to the asset. That event can only happen if a balancing adjustment event has happened to the depreciating asset that has been used either wholly or partly for non-taxable (generally for private) purposes.

2.34 To ensure complementary treatment between the UCA rules and the CGT rules, a capital gain or loss under CGT event K7 is calculated on the basis of the depreciating asset's cost and termination value, instead of on the usual CGT basis of cost base and capital proceeds. The gain or loss arises at the same time as any balancing adjustment amount.

2.35 If the use was wholly for taxable purposes, CGT event K7 does not apply, but there will be a balancing adjustment under the UCA system.

2.36 If the use was not wholly for taxable purposes, there will be a capital gain or loss under CGT event K7 based on the difference between the depreciating asset's termination value and its cost. In such a case, there will be no balancing adjustment.

2.37 If there is mixed use (eg, partly taxable and partly non-taxable), there may be both a balancing adjustment and a capital gain or loss. That capital gain or loss will be based on the difference between the termination value and the cost, apportioned to reflect the taxable component of the decline in value.

2.38 Section 104-240 is used to work out the capital gain or loss for CGT event K7 in general cases. A taxpayer makes a capital gain from CGT event K7 if the termination value of the depreciating asset exceeds its cost. The capital gain is worked out from the formula in subsection 104-240(1).

2.39 Conversely a taxpayer makes a capital loss from CGT event K7 if the cost of the depreciating asset exceeds its termination value. The capital loss is worked out from the formula in subsection 104-240(2).

2.40 The amendments to section 104-240 ensure that if CGT event K7 happens to a depreciating asset, the termination value of the asset will be reduced by the amount misappropriated by the employee or agent and conversely, the termination value of the depreciating asset is increased by any amount received as recoupment of the amount misappropriated.

Example 2.6

Following from the facts in Examples 1.2 and 1.3, given that Henry bought the computer for $1,200 in the 2007 income year and sold the computer at a termination value of $1,500 in the 2008 income year, he makes a capital gain of $120 in relation to his 40 per cent private use under CGT event K7 (($1,500 - $1,200) × 40%).

If his agent subsequently misappropriates the sale proceeds, the termination value would be reduced to zero and a capital loss of $480 now arises under CGT event K7 (($0 - $1,200) × 40%) in the 2008 income year.

Should Henry recoup 100 per cent of the misappropriated amount in a later income year, under these amendments the termination value of the computer is increased by the recovered misappropriated amount of $600 ($1,500 × 40%) applicable to his private use.

In the later year of income Henry's tax assessment for the 2008 income year (of a $480 capital loss) will need to be amended to give effect to a $120 capital gain (see item 7, subsections 104-240(3) and (4) of the ITAA 1997).

Termination value of the depreciating asset and CGT event K7: pooled assets

2.41 When a balancing adjustment event happens in relation to a depreciating asset in a low-value pool, the taxable use portion of the depreciating asset's termination value is taken into account in working out the pool's closing balance for the income year.

2.42 Section 104-245 deals with the calculation of a capital gain or loss from a balancing adjustment event occurring for a depreciating asset that was allocated to a low-value pool under Subdivision 40-E.

2.43 A taxpayer makes a capital gain from CGT event K7 if the termination value of the pooled asset exceeds its cost. The capital gain is worked out from the formula in subsection 104-245(1).

2.44 Conversely, a taxpayer makes a capital loss from CGT event K7 if the cost of the depreciating asset exceeds its termination value. The capital loss is worked out from the formula in subsection 104-245(2).

2.45 The amendments to section 104-245 ensure that if CGT event K7 happens to a pooled depreciating asset, the termination value of the depreciating asset will be reduced by the amount misappropriated by the employee or agent and conversely, the termination value of the depreciating asset is increased by any amount received as recoupment of the amount misappropriated. [ Schedule 1, item 8, subsections 104-245(3 ) and ( 4 ) of the ITAA 1997 ]

Amendment of assessments

2.46 If the taxpayer discovers the misappropriation or receives an amount as recoupment after lodging their income tax return for the income year the taxpayer may request the Commissioner of Taxation to amend their earlier return. An assessment can be amended within four years, starting immediately after the taxpayer discovers the misappropriation or receives the amount as recoupment. [ Schedule 1, items 7, 8 and 18, subsections 104-240(5 ), 104-245(5 ) and 116-60(5 ) of the ITAA 1997 ]

Application and transitional provisions

2.47 These amendments commence when this Bill receives Royal Assent.

2.48 These amendments apply to amounts misappropriated in the 2007-08 and later income years. [ Schedule 1, item 19 ]

Consequential amendments

2.49 There are tables, notes, subsections and references that are inserted, or changed because of the application of the new misappropriation provisions. [ Schedule 1, items 1, 2, 4 to 6 and 9 to 17 of the ITAA 1997 ]

Chapter 2 Extending the superannuation guarantee late payment offset

Outline of chapter

4.1 Schedule 2 to this Bill amends the Superannuation Guarantee (Administration) Act 1992 (SGAA) to extend the late payment offset that allows employers to use a late contribution to offset part of their superannuation guarantee (SG) charge liability.

Context of amendments

4.2 The SGAA prescribes a minimum level of superannuation support that all employers are required to provide for their eligible employees, either by making contributions to a complying superannuation fund or paying the SG charge. The prescribed minimum level of support is 9 per cent of the employee's ordinary time earnings. In order to avoid the SG charge, employers have been required to make contributions on behalf of their employees at least quarterly since 1 July 2003.

4.3 Superannuation contributions reduce an employer's SG charge liability if they are made by the due date (which is 28 days after the end of the quarter). An employer who fails to pay the required amount of contributions by the due date is liable to pay the SG charge to the Australian Taxation Office (ATO). The SG charge includes the contribution shortfall amount, a nominal interest component and an administration charge.

4.4 From 1 January 2006, an employer who makes a late contribution to an employee's superannuation fund within one month after the due date can use that late payment to offset against part of their SG charge for the employee for the quarter. However, if an employer makes a contribution more than one month after the due date they are unable to use the offset. This effectively means the employer must pay the same amount twice for a quarter for the same employee; once when they made the late contribution to the fund and again when they are required to pay the SG charge to the ATO.

Example 4.1

Debbie was required to make a $1,000 contribution for the March 2006 quarter commencing on 1 January 2006 on behalf of her employee, Catherine. Debbie has failed to make the contribution by the due date of 28 April 2006 but makes a late contribution of $1,000 into Catherine's superannuation fund on 5 June 2006. Debbie is assessed on 1 July 2006 with an SG charge liability for the March 2006 quarter in respect of Catherine. The SG charge includes the shortfall amount equal to the contribution which has in fact now been paid. Before these changes, the late payment offset could not be used by Debbie since her contribution was not made by 28 May 2006.

4.5 Amending the SGAA to extend the late payment offset for employers who make a contribution after the due date, will reduce the incidence of employers being forced to pay the same amount twice for a quarter for the same employee.

Summary of new law

4.6 Schedule 2 to this Bill amends the SGAA to extend the period within which an employer can make a superannuation contribution after the due date and still be eligible to use the late payment offset.

4.7 The amended late payment offset is available to employers who:

•

have made a contribution for an employee after the due date for the quarter;

•

have an outstanding SG charge for the employee for that quarter; and

•

elect, in the approved form, to use the offset.

4.8 These amendments ensure that employers who fail to make sufficient contributions by the due date, but subsequently made a contribution directly to the employee's fund, do not have to pay the same amount twice (once to the fund and once to the ATO). This is achieved as the amended late payment offset allows employers to use a late contribution to offset part of their SG charge for the employee.

Comparison of key features of new law and current law

Detailed explanation of new law

Eligibility to use the offset

4.9 The amended late payment offset is available to an employer who:

•

has made a contribution after the due date for the quarter for an employee [ Schedule 2, item 1, paragraph 23A(1 )( a )];

•

has an unpaid SG charge for that quarter for the employee; and

•

elects, in the approved form, that the contribution be offset against that SG charge.

4.10 The contribution can only be offset against an SG charge which relates to the same quarter and to the same employee.

4.11 Transitional provisions will allow an employer to use the offset if they have an SG charge for a year (rather than a quarter) which becomes payable after the commencement of this Schedule. [ Schedule 2, item 8 ]

4.12 Transitional provisions will also enable an employer to use the offset if they have an SG charge liability for a year (rather than a quarter) which becomes payable after the commencement of this Schedule. [ Schedule 2, item 9 ]

Election for the offset

4.13 An election to use a contribution as an offset must be in the approved form. The election can be made either in the first SG statement for the quarter or, if the employer has already been assessed for the quarter, within four years from when the SG charge for that quarter became payable. [ Schedule 2, item 2, subsection 23A(2 )]

4.14 Subsection 23A(2) enables an election to be communicated to the ATO and for the contribution to be used as an offset. Subsection 36(3) and section 46 of the SGAA set out when an SG charge becomes payable.

4.15 An employer cannot elect to use the offset before a contribution is made, and an election can only be made if the contribution is made after the due date. [ Schedule 2, item 1, paragraph 23A(1 )( a )]

4.16 If the election is made after the SG charge for the quarter has been assessed, the assessment must be amended before the employer's liability can be reduced. [ Schedule 2, item 3, subsection 23(4A )]

4.17 Section 37 of the SGAA empowers the Commissioner of Taxation (Commissioner) to amend an assessment, including an amendment to reduce an employer's SG charge liability as a result of applying the offset under section 23A of the SGAA.

4.18 An election to use a contribution as an offset cannot be revoked. [ Schedule 2, item 2, subsection 23A(2 )]

Applying the offset

4.19 When an election in the approved form is lodged with the Commissioner in accordance with section 23A of the SGAA, the late contribution is applied to offset against the SG charge for the relevant quarter for the relevant employee.

4.20 The contribution is first used to offset against the nominal interest component of the SG charge for the quarter for the employee, before any remainder of the contribution is used to offset against the employer's SG shortfall for that quarter for that employee. This is in accordance with subsection 23A(4) of the SGAA.

Interest and penalties

4.21 Significant incentives remain to ensure employers make their SG payments on time. The interest and administration components of the SG charge are still required to be paid by the employer and penalties can be imposed by the ATO for late payments. As well, due to sections 26-95 and 290-95 of the Income Tax Assessment Act 1997, the SG charge and the late payment offset are not tax deductible to the employer.

4.22 An employer who fails to pay the SG charge when it becomes payable is liable to pay the general interest charge. Subsection 8AAC(3) of the Tax Administration Act 1953 and section 49 of the SGAA set out how the general interest charge is calculated for the purposes of the SG charge.

4.23 When an election is made for the first time under section 23A of the SGAA, the general interest charge accrues on the original SG shortfall amount from the day the relevant SG charge became payable to when an election in the approved form is lodged with the Commissioner. [ Schedule 2, items 4 to 7 ]

4.24 From the day the election in the approved form is lodged with the Commissioner, the general interest charge will accrue on any remainder of the original SG shortfall amount (after the offset has been applied). [ Schedule 2, item 7, subsection 49(3A )]

4.25 If more than one election is made under section 23A of the SGAA with respect to the same SG charge, the general interest charge accrues on the remainder of the original SG shortfall amount after the offset has been applied, and accrues from the time the approved form is lodged with the Commissioner to when the next election is lodged. [ Schedule 2, item 7, subsection 49(3A )]

4.26 The general interest charge continues to accrue until the time when both the SG charge and the general interest charge are fully paid, in accordance with subsection 49(3) of the SGAA.

Example 4.2

Following on from Example 2.1, once the law is enacted Debbie decides to use the $1,000 late contribution she made into Catherine's fund on 5 June 2006, to offset her SG charge for the March 2006 quarter with respect to Catherine. The SG charge includes a shortfall amount of $1,000 and a nominal interest component of $100. Debbie lodges a late payment offset form with the ATO on 7 August 2008.

The $1,000 contribution is used to offset Debbie's SG charge for the March 2006 quarter with respect to Catherine. The contribution is first used to pay the nominal interest component before any remainder is used to pay the SG shortfall amount. The general interest charge accrues on the original SG shortfall amount ($1,000) from 1 July 2008 (when the SG charge became payable) to 7 August 2008 (when the election is lodged). After the election, Debbie's remaining SG shortfall amount is $100.

Assume that in September 2008 Debbie makes a $50 contribution into Catherine's fund and on 18 October 2008 she lodges a late payment offset form to elect to use that contribution as an offset to her SG charge for the March 2006 quarter. The general interest charge accrues on the remaining SG shortfall amount ($100) from 7 August 2008 (when the first election was lodged) to 18 October 2008 (when the second election is lodged). After the election, Debbie's remaining SG shortfall amount is $50.

Assume that on 3 December 2008 Debbie decides to fully pay her SG charge and general interest charge for the March 2006 quarter with respect to Catherine. The general interest charge accrues on the remaining SG shortfall amount ($50) from 18 October 2008 (when the second election was made) to 3 December 2008 (when the SG charge and general interest charge are both fully paid).

Application and transitional provisions

Application provision

4.27 These amendments apply from the date of Royal Assent.

Transitional provisions

4.28 These amendments contain transitional provisions that apply to:

•

employers who have an SG charge for a year that becomes payable after the commencement of this Schedule [ Schedule 2, item 9 ]; and/or

•

employers who have an unpaid SG charge at the commencement of this Schedule [ Schedule 2, item 8 ].

Transitional provisions for employers with a superannuation guarantee charge for a year that becomes payable after the commencement date

4.29 Since 1 July 2003, employers have been required to make SG contributions every quarter, and those who fail to do so incur the SG charge for the quarter. Prior to this, employers were required to make SG contributions every year, and those who failed to do so incurred liability for the SG charge for the year.

4.30 Under the transitional provisions, the offset is available to an employer who has an SG charge for a year that becomes payable after the commencement of this Schedule. [ Schedule 2, item 9 ]

4.31 Under the transitional provisions, for the purposes of applying the offset and calculating liability for the SG charge (including any additional SG charge), the SGAA applies to the employer so that references to 'quarter' are replaced with 'year'. [ Schedule 2, item 9 ]

Transitional provisions for employers with an unpaid superannuation guarantee charge at the commencement date - election to use the offset

4.32 Employers who are eligible to use the offset must make the election either in the first SG statement or within four years from when the SG charge for the quarter became payable. [ Schedule 2, item 2, subsection 23A(2 )]

4.33 Under the transitional provisions, where an employer has been assessed with the SG charge prior to the date of commencement of this Schedule and the charge remains unpaid at that date, then an election to use the offset for the remaining SG charge must be made within four years from the date of commencement. [ Schedule 2, subitem 8(2 )]

4.34 These transitional provisions apply to employers who have an unpaid SG charge for a quarter and to employers who have an unpaid SG charge for a year, at the commencement of this Schedule. [ Schedule 2, subitem 8(4 )]

4.35 After the commencement of this Schedule, if the employer incurs a new SG shortfall, then the employer is required to make the election either in the first SG statement for the new shortfall or within four years from when the new SG charge becomes payable. This is in accordance with subsection 23A(2) of the SGAA.

Transitional provisions for employers with an unpaid superannuation guarantee charge at the commencement date - amending assessments

4.36 Section 37 of the SGAA empowers the Commissioner to amend an assessment. Subsection 37(5) of the SGAA allows the Commissioner to amend an assessment if an employer applies to have their assessment amended within four years from when the SG charge under that assessment became payable.

4.37 Under the transitional provisions, an employer who elects to use the offset under section 23A of the SGAA must apply to have the relevant assessment amended within four years from the commencement of this Schedule, before the Commissioner may amend that assessment. [ Schedule 2, item 8, paragraph ( 3 )( b )]

4.38 According to subsection 37(3) of the SGAA, an amendment to reduce the liability of an employer under an assessment is not effective unless the amendment is made within four years from the day the assessment was made.

4.39 Under the transitional provisions, an amendment to reduce the employer's SG charge liability (as a result of an offset under section 23A of the SGAA) is not effective unless the amendment is made within four years from the commencement of this Schedule. [ Schedule 2, item 8, paragraph ( 3 )( a )]

4.40 These transitional provisions apply to employers who have an unpaid SG charge for a quarter and to employers who have an unpaid SG charge for a year, at the commencement of this Schedule. [ Schedule 2, subitem 8(4 )]

4.41 After the commencement of this Schedule, if an employer incurs a new SG shortfall (whether in respect to the same or to a different employee) and they elect to use the offset for the shortfall, then the employer is required to apply to amend the relevant assessment within four years from the day the new SG charge becomes payable. Further, the employer's liability is not reduced unless the amendment is made within four years from the day the assessment was made. This is in accordance with subsections 37(3) and (5) of the SGAA.

Consequential amendments

4.42 These amendments contain consequential amendments to sections 37 and 49 of the SGAA and, for the purposes of the transitional provisions, to other parts of the SGAA which relate to an SG charge for a quarter. These amendments do not contain consequential amendments to other Acts.

Chapter 3 Capital gains tax market value substitution rule for interests in certain companies and trusts

Outline of chapter

6.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to ensure that the market value substitution rule does not apply where capital gains tax (CGT) event C2 occurs in relation to a share in a widely held company or a unit in a widely held unit trust. The terms widely held company and widely held unit trust are based on the principles in the CGT scrip for scrip roll-over provisions.

Context of amendments

6.2 Division 116 of the ITAA 1997 deals with general rules for capital proceeds from a CGT event. One of the modifications to the general rules is the market value substitution rule in section 116-30. This rule applies where a CGT event occurs and:

•

there are no capital proceeds; or

•

there are capital proceeds but either those proceeds cannot be valued or the proceeds are more or less than the market value and:

-

the parties were not dealing with each other at arm's length in connection with the event; or

-

the CGT event is CGT event C2 (about cancellation, surrender and similar endings).

6.3 The market value substitution rule is designed to prevent taxpayers from reducing capital gains or increasing capital losses by manipulating the capital proceeds associated with a CGT event. This would generally occur where parties are not dealing with each other at arm's length.

6.4 In relation to other CGT events, provided that the parties are dealing with each other at arm's length, the market value substitution rule in section 116-30 will not apply, even if the capital proceeds are more or less than the market value.

6.5 There is currently no equivalent 'arm's length dealing test' in relation to CGT event C2. In other words, the market value substitution rule will automatically apply in relation to a C2 event where the capital proceeds are more or less than the market value, regardless of whether the parties are dealing with each other at arm's length. This can result in a taxpayer being subject to CGT on an unrealised gain or being denied some or all of a capital loss even though all parties are dealing with each other at arm's length and there is no tax manipulation present.

6.6 These amendments will ensure that the market value substitution rule does not apply where CGT event C2 occurs in relation to a share in a widely held company or a unit in a widely held unit trust, as it is assumed that in these cases the parties are dealing with each other at arm's length.

6.7 These amendments will facilitate arrangements where widely held companies or unit trusts, as part of their ongoing capital management strategy, cancel shares or units and agree with their shareholders or unit holders on a cancellation price in advance of the cancellation taking place. Setting a cancellation price in advance provides certainty for management and shareholders or unit holders on the cost or return from the capital reduction.

Summary of new law

6.8 This Schedule amends the ITAA 1997 by inserting subsection 116-30(2B) and section 116-35. These provisions will ensure that the market value substitution rule in subsection 116-30(2) does not apply where CGT event C2 occurs in relation to interests in companies and unit trusts that have at least 300 members or unit holders and that do not have concentrated ownership.

Comparison of key features of new law and current law

Detailed explanation of new law

6.9 The market value substitution rule in subsection 116-30(2) will no longer apply where CGT event C2 occurs in relation to a share in a company that has at least 300 members or a unit in a unit trust that has at least 300 unit holders, provided that neither the company nor the trust:

•

has concentrated ownership; or

•

satisfies subsection 116-35(5) about the possible variation of rights.

[ Schedule 3, items 1 and 2, subsections 116-30(2B ) and 116-35(1 ) to ( 5 )]

6.10 It is assumed that a company or unit trust that has at least 300 members or unit holders and that does not have concentrated ownership will be dealing at arm's length with its members.

Concentrated ownership

6.11 A company will have concentrated ownership if an individual owns, or up to 20 individuals own between them, directly or indirectly (through one or more interposed entities) and for their own benefit, shares in the company carrying:

•

fixed entitlements to at least 75 per cent of the company's income or at least 75 per cent of the company's capital; or

•

at least 75 per cent of the voting power in the company.

6.12 A unit trust will have concentrated ownership if an individual owns, or up to 20 individuals own between them, directly or indirectly (through one or more interposed entities) and for their own benefit, units in the trust:

•

carrying fixed entitlements to at least 75 per cent of the trust's income or at least 75 per cent of the trust's capital; or

•

carrying at least 75 per cent of the voting power of the trust, if unit holders of the trust have a right to vote in respect of the activities of the trust.

[ Schedule 3, item 2, subsections 116-35(3 ) and ( 4 )]

Possible variation of rights

6.13 Where the constituent documents of a company or unit trust allow the rights attaching to the interests in that entity to be varied or abrogated in such a way as to create a concentration of ownership, the company or trust will be deemed to have a concentration of ownership. This is the case even if the rights are not actually varied or abrogated. [ Schedule 3, item 2, subsection 116-35(5 )]

6.14 Where this rule (as described in paragraph 3.13) applies the market value substitution rule will operate as normal.

Example 6.1

Sue owns 100 shares in Company A, a company listed on the Australian Securities Exchange (ie, it has more than 300 members). Company A decides to cancel some of its shares as part of its ongoing capital management strategy. The shareholders agree to a cancellation price of $2 per share on 1 July 2008 (the average closing price of Company A's shares on the securities exchange for the previous quarter). The shares are cancelled on 30 October 2008, at which time the share price had increased to $2.50. Sue receives $200 for her shares on the same day (100 × $2).

The time of CGT event C2 is either when Sue enters into the contract that results in the asset ending or, if there is no contract, when the asset ends. In this case, as there is no contract, the timing of CGT event C2 is when the share is cancelled (30 October 2008).

Prior to these amendments, the market value substitution rule in section 116-30 would have resulted in Sue having to substitute the market value of the shares ($2.50) for the actual proceeds received ($2) when calculating her capital gain on the cancellation of her shares. This is because the CGT event is a C2 event and the capital proceeds were less than the market value of the asset at the time of the event. This resulted in Sue being subject to CGT on an unrealised gain, despite the fact that she was dealing with the company at arm's length.

Assume that Company A does not have concentrated ownership and its constituent documents do not allow for the rights of the shares to be varied or abrogated to allow concentrated ownership.

As a result of these amendments, Sue will calculate her capital gain or loss based on her actual proceeds, not the market value of the shares. This aligns with the general principle of CGT that taxpayers should only be subject to CGT on realised gains or allowed to deduct realised losses.

Single individual

6.15 For the purposes of determining whether a company or trust has a concentrated ownership under subsections 116-35(3) and (4), the following are taken to be single individuals:

•

an individual;

•

the individual's associates; or

•

nominees of either the individuals or of the individual's associates.

[ Schedule 3, item 2, subsection 116-35(6 )]

Application and transitional provisions

6.16 These amendments will commence on Royal Assent.

6.17 These amendments will apply to CGT events that happen in the 2006-07 income year and later income years. [ Schedule 3, item 3 ]

Chapter 4 Income tax exemption of the Endeavour Executive Award and research fellowships under the Endeavour Awards

Outline of chapter

8.1 Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to exempt from income tax research fellowships under the Endeavour Awards. This Schedule also amends the ITAA 1997 to exempt from income tax the Endeavour Executive Award.

Context of amendments

8.2 The Endeavour Awards scholarship program (the program) is an internationally competitive, merit-based scholarship program administered by the Department of Education, Employment and Workplace Relations. This program brings leading researchers, executives and students to Australia to undertake study, research and professional development in a broad range of disciplines and enables Australians to do the same abroad.

8.3 The Endeavour Executive Award and research fellowships under the program are awarded to postgraduate students, postdoctoral fellows, and high achievers in business, industry, education or government in Australia and participating countries. The duration of the research fellowships and the Executive Award is generally between one and six months.

8.4 Some scholarships offered under the program to recipients undertaking full-time study are currently exempt from income tax. The Endeavour Executive Award and some research fellowships under the program do not require recipients to be in full-time education and as such are not exempt from tax. These amendments ensure consistent tax treatment of all fellowships and awards offered under the program regardless of whether the awards are made for full or part-time educational pursuits.

Summary of new law

8.5 These amendments provide that, from 1 July 2007, no income tax will be paid by recipients on an Endeavour Executive Award or a research fellowship under the program. These amendments ensure consistent tax treatment of all fellowships and awards offered under the program regardless of whether the awards are made for full or part-time educational pursuits.

Comparison of key features of new law and current law

Detailed explanation of new law

8.6 The Endeavour Awards program is an internationally competitive, merit-based scholarship program administered by the Department of Education, Employment and Workplace Relations.

8.7 Some scholarships offered under the program to undertake full-time study are currently exempt from income tax under item 2.1A in the table in section 51-10 of the ITAA 1997 and are therefore not covered by this exemption.

8.8 Under the current law, the tax treatment of the Endeavour Executive Award and some research fellowships under the Endeavour Awards scholarship program is inconsistent with other awards offered under this program, which are exempt from income tax for full-time students. Some parts of an Endeavour Executive Award and research fellowships under the Endeavour Awards are currently treated as assessable income where the recipient is not a full-time student.

8.9 This measure exempts the Endeavour Executive Award and all research fellowships under the Endeavour Awards from income tax. [ Schedule 4, item 4, section 51-10 ]

8.10 Research fellowships currently include the:

•

Endeavour Research Fellowship;

•

Endeavour Research Fellowship for Indigenous Australians; and

•

Endeavour Australia Cheung Kong Research Fellowship.

The exemption also applies to any future research fellowships that are introduced under the Endeavour Awards scholarship program.

8.11 These amendments allow consistent income tax treatment for all recipients of an Endeavour Executive Award and research fellowships under the Endeavour Awards whether or not the recipients are full-time students.

Application and transitional provisions

8.12 These amendments apply to fellowships and awards received in 2007-08 and later income years. [ Schedule 4, item 5 ]

Consequential amendments

8.13 Consequential amendments are made to the non-operative index that lists which income is exempt when derived by certain taxpayers. [ Schedule 4, items 1 to 3, section 11-15 ]

Chapter 5 Early completion bonuses for apprentices

Outline of chapter

10.1 Schedule 5 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to exempt from income tax the first $1,000 of an early completion bonus paid to an apprentice by a State or Territory government.

Context of amendments

10.2 Early completion bonuses are payments made to apprentices who complete their apprenticeship more quickly than normal. Currently, only the Queensland Government pays an early completion bonus to apprentices.

10.3 The Queensland Government offers an early completion bonus of $1,000 to apprentices in skill-shortage occupations listed on an Eligible Skill Shortage Occupation List. The bonus is designed to increase the supply of skilled tradespersons.

10.4 To be eligible for the bonus under the Queensland scheme, full-time apprentices must complete their apprenticeship at least six months prior to their original nominal completion date and part-time apprentices must complete their apprenticeship at least 12 months prior to their original nominal completion date.

10.5 It is a general principle of income tax law that remuneration or rewards for personal services, whether received in the capacity of employee or otherwise, are ordinary income. This would usually include payments in the nature of an early completion bonus.

Summary of new law

10.6 This measure provides an income tax exemption for the first $1,000 of an early completion bonus received by an apprentice, in an occupation of a kind to be specified in Australian Government regulations if the apprenticeship is finished within a time frame specified in the regulations for apprenticeships of that kind.

Comparison of key features of new law and current law

Detailed explanation of new law

10.7 These amendments introduce an income tax exemption for the first $1,000 of an early completion bonus paid by a State or Territory government to an apprentice in a listed occupation.

10.8 The first $1,000 of a bonus paid for early completion of certain apprenticeships will be exempt from income tax. [ Schedule 5, item 2, section 51-10 ]

10.9 The bonus must be provided under a scheme provided by a State or Territory, and the scheme must be specified in an Australian Government regulation for the purpose of this subsection. [ Schedule 5, item 3, subsection 51-42(1 )]

10.10 The apprenticeship must also be for an occupation of a kind specified in the regulations. This ensures that the bonus is only exempt if paid to apprentices in occupations with skill shortages. [ Schedule 5, item 3, paragraph 51-42(2 )( a )]

10.11 The apprenticeship must be completed within a time frame specified in the regulations for apprenticeships of that kind. This ensures that the bonus is only exempt if the apprenticeship is completed in a period of time that is shorter than normal. [ Schedule 5, subitem 3(2 ), paragraph 51-42(2 )( b )]

10.12 It is intended that regulations to list the Queensland early completion bonus to apprentices be made as soon as this Bill receives Royal Assent.

Application and transitional provisions

10.13 These amendments apply to assessments for the 2007-08 income year and later income years.

Consequential amendments

10.14 Early completion bonuses for apprentices are added to the non-operative list of ordinary or statutory income which is exempt if derived by certain entities. [ Schedule 5, item 1, section 11-15 ]

Chapter 6 Deductible gift recipients

Outline of chapter

12.1 Schedule 6 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to update the list of deductible gift recipients (DGRs) to include nine new entities and to extend the time period of DGR status of four entities.

Context of amendments

12.2 The income tax law allows taxpayers who make gifts of $2 or more to DGRs to claim income tax deductions. To be a DGR, an organisation must fall within one of the general categories set out in Division 30 of the ITAA 1997, or be listed by name under that Division.

12.3 DGR status assists eligible funds and organisations to attract public support for their activities.

Summary of new law

12.4 These amendments add nine organisations to the list of specifically listed DGRs and extend the time period for which deductions are allowed for gifts made to four organisations. Gifts of $2 or more, made to these entities within each entity's eligible time period, are tax deductible.

Detailed explanation of new law

New listings

12.5 Schedule 6 allows deductions for gifts to the organisations listed in Table 6.1. [ Schedule 6, items 1, 2, 4, 5 and 8 to 10 ]

12.6 The AE 2 Commemorative Foundation Ltd aims to ensure that the Australian World War I submarine HMAS AE 2, currently lying in the sea of Marmara, Turkey, is preserved and its role in the Gallipoli campaign is appropriately recognised. [ Schedule 6, item 4 ]

12.7 Ian Thorpe's Fountain for youth Limited focuses on a range of activities such as:

•

improving the health and education outcomes of children, especially Indigenous children;

•

improving literacy as a step towards improving the health and life expectancy of children;

•

supporting Indigenous cultural education; and

•

supporting projects that help to establish or sustain viable business projects for Indigenous communities.

[ Schedule 6, item 2 ]

12.8 Wheelchairs for Kids Incorporated manufactures and distributes wheelchairs to disabled children in many developing countries. [ Schedule 6, item 8 ]

12.9 The Amy Gillett Foundation aims to raise awareness of cyclist safety through the use of media. This Foundation's efforts to raise awareness involve a range of communication strategies, conducting education, and funding research. [ Schedule 6, item 9 ]

12.10 The Spirit of Australia Foundation is an educational organisation that encourages and facilitates research into, and the dissemination of, knowledge of Australian history and heritage. [ Schedule 6, item 1 ]

12.11 The World Youth Day 2008 Trust is an international event targeted at Roman Catholic youth. World Youth Day 2008 will be held in Sydney between 15 and 20 July 2008, and is hosted by the Sydney Catholic Archdiocese. [ Schedule 6, item 8 ]

12.12 The Memorials Development Committee Ltd is an organisation established to develop, design and construct two separate, but complementary memorials to World War I and World War II in the Anzac Parade memorials precinct of the Australian Capital Territory. [ Schedule 6, item 4 ]

12.13 The Council for Jewish Community Security was established to assist in the provision of security and protection for members and institutions of the Australian Jewish community. [ Schedule 6, item 10 ]

12.14 Playgroup Australia Incorporated is an organisation which works in conjunction with the eight state and territory peak playgroup bodies to promote playgroup participation for all families with young children. It advocates learning through play and supporting parents through playgroups as an integral part of the early childhood experience. [ Schedule 6, item 5 ]

Extended listings

12.15 Schedule 6 extends the period for which deductions are allowed for gifts to the organisations listed in Table 6.2. [ Schedule 6, items 3, 6, 7 and 11 ]

12.16 The Dunn and Lewis Youth Development Foundation was established to assist with the building of a memorial complex dedicated to two victims of the Bali bombing. The complex will provide programs to address chronic issues affecting young people. [ Schedule 6, item 11 ]

12.17 The Finding Sydney Foundation is an organisation formed to find the cruiser HMAS Sydney and the German raider HSK Kormoran, which were sunk off the Western Australian coast in 1941. The Finding Sydney Foundation aims to ensure preservation of the war graves and to commemorate the memory with a virtual memorial. [ Schedule 6, item 3 ]

12.18 The Xanana Vocational Education Trust aims to create a self-sustaining vocational education system in Timor-Leste. It has initially focused on making distributions to institutions in Timor-Leste such as the Dili Institute of Technology. [ Schedule 6, item 7 ]

12.19 Australia for UNHCR (United Nations High Commissioner for Refugees) was established to raise funds in Australia for the UNHCR, and raise awareness locally about the plight of refugees. [ Schedule 6, item 6 ]

Application and transitional provisions

12.20 These amendments to list the organisations in Tables 6.1 and 6.2 apply from the dates of effect shown in those tables. [ Schedule 6, items 1 to 11 ]

Consequential amendments

12.21 A number of changes have been made to update the index to include the new entities. [ Schedule 6, items 12 to 20 ]

Chapter 7 Superannuation lump sum paid to a person with a terminal medical condition

Outline of chapter

14.1 Schedule 7 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax (Transitional Provisions) Act 1997 so that a superannuation lump sum paid to a person who has a terminal medical condition is tax free.

Context of amendments

14.2 The taxation treatment of a superannuation lump sum payment differs depending on the age of the recipient and whether the payment is from a taxed or an untaxed source. For example, superannuation lump sums paid to members of taxed schemes below preservation age are taxed at a maximum rate of 21.5 per cent (inclusive of the Medicare levy). For members of untaxed schemes below preservation age, superannuation lump sums are taxed at a maximum rate of 31.5 per cent up to $1 million, and at the top marginal rate plus the Medicare levy for amounts above $1 million.

14.3 These amendments provide that a superannuation lump sum paid from either a taxed or an untaxed source to a person with a terminal medical condition is tax free.

Summary of new law

14.4 Section 303-10 is inserted into Division 303 of the ITAA 1997 with the effect that a superannuation lump sum paid to a person with a terminal medical condition is non-assessable and non-exempt income.

Comparison of key features of new law and current law

Detailed explanation of new law

14.5 Division 303 of the ITAA 1997 deals with the taxation of superannuation benefits paid in special circumstances. Section 303-10 is inserted into Division 303 with the effect that a superannuation lump sum member benefit received by a person is not assessable income and is not exempt income if a 'terminal medical condition' exists in relation to the person at the time they receive the payment or within 90 days after they receive it. The circumstances in which a 'terminal medical condition' will be taken to exist in relation to a person will be prescribed in the Income Tax Assessment Regulations 1997. [ Schedule 7, item 2, section 303-10 of the ITAA 1997, and item 3, definition of ' terminal medical condition' in subsection 995-1(1 ) of the ITAA 1997 ]

14.6 A consequential amendment is made to section 11-55 of the ITAA 1997 to include a reference to section 303-10 in the list of non-assessable non-exempt income provisions. [ Schedule 7, item 1, section 11-55 of the ITAA 1997 ]

Application and transitional provisions

14.7 The amendments made by this Schedule apply to payments made on or after 1 July 2007. As the amendments remove tax on the affected payments, the retrospective application of the changes will not disadvantage taxpayers. [ Schedule 7, item 5 ]

14.8 A transitional provision will apply for the 2007-08 financial year. Under this transitional provision the 90-day period from when a payment is received (referred to in section 303-10) can be extended to 30 June 2008 if this results in a longer period. [ Schedule 7, item 2, note to section 303-10 of the ITAA 1997, and item 4, section 303-10 of the Income Tax ( Transitional Provisions ) Act 1997 ]

Chapter 8 Capital expenditure for the establishment of trees in carbon sink forests

Outline of chapter

16.1 Schedule 8 to this Bill amends Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) to provide a deduction for capital expenditure for the establishment of trees in carbon sink forests.

Context of amendments

16.2 Carbon sink forests are forests which are established for the primary and principal purpose of sequestering carbon from the atmosphere. The carbon stored in the growing forest can then be used for greenhouse gas abatement purposes.

16.3 The costs of establishing trees in a carbon sink forest are capital in nature and income may be generated from exploiting rights over the carbon sequestered in the trees. Currently the costs of establishing trees in carbon sink forests are not deductible.

16.4 Capital expenditure for the establishment of trees in carbon sink forests will be inserted as a separate Subdivision in Division 40 of the ITAA 1997. Division 40 provides for a uniform capital allowances system. That system provides general rules that allow deductions for the decline in value of depreciating assets based on their effective lives. As well, Division 40 provides write-offs for certain other capital expenditures, which do not result in a taxpayer holding a depreciating asset, if that expenditure satisfies certain specific conditions.

16.5 Proposed Subdivision 40-J will be inserted to allow a deduction for capital expenditure for the establishment of trees in carbon sink forests.

Summary of new law

16.6 Establishment expenditure will be immediately deductible for trees established in carbon sink forests in the 2007-08 to 2011-12 income years (inclusive). After this initial period, establishment expenditure will be deductible over 14 years and 105 days at a rate of 7 per cent per annum.

Comparison of key features of new law and current law

Detailed explanation of new law

16.7 Proposed Subdivision 40-J will be inserted into Division 40 of the ITAA 1997 to allow deductions for establishment expenditure on trees in carbon sink forests.

Income years 2007-08 to 2011-12 (inclusive)

Who is entitled to the deduction?

16.8 Taxpayers carrying on a business can deduct capital expenditure incurred on establishing trees in a carbon sink forest. The requirement that taxpayers must be carrying on a business is sufficiently broad to allow those businesses who wish to abate their own greenhouse gas emissions via a carbon sink forest to be eligible for the deduction. [ Schedule 8, item 6, paragraphs 40-1010(1 )( a ) to ( c )]

16.9 The primary and principal purpose of establishing the trees must be for carbon sequestration and can not include the purposes of felling the trees or for using them in commercial horticulture. This deduction will only apply to those taxpayers who establish trees as part of a carbon sink forest. [ Schedule 8, item 6, paragraphs 40-1010(1 )( d ) and ( e )]

Example 16.1

A company acquires land and plants trees for the primary and principal purpose of carbon sequestration. The landholder also runs a tourism business, taking advantage of the spectacular location to run a bed and breakfast and accompanying hiking tours. The hiking routes run through the carbon sink forest to the edge of the property which takes in the panoramic views.

The company will be entitled to deductions for expenditure on establishing the carbon sink forest, as the primary and principal purpose is one of carbon sequestration and the secondary purpose of tourism is not an excluded purpose.

Example 16.2

A company specialises in the propagation of new species of trees for the purpose of commercial horticulture. The company acquires land and conducts 0.2 hectare test planting of a new species of waterless trees. They plan to tend the test planting for a number of years before the species will be ready for commercial sale. The trees in the test planting sequester carbon and the company decides to trade in carbon credits to supplement the tending costs.

The company will not be entitled to any deduction under the carbon sink forest provisions for establishing the trees as their primary and principal purpose was not one of carbon sequestration (see paragraph 40-1010(1)(d)). In addition, the purpose of commercial horticulture is excluded under subparagraph 40-1010(1)(e)(ii).

16.10 The deduction is not available for expenditure on establishing trees in a carbon sink forest incurred by a managed investment scheme or a forestry managed investment scheme. [ Schedule 8, item 6, paragraph 40-1010(1 )( f )]

16.11 This does not exclude a forestry manager entity from operating a separate business of trading in carbon offsets generated from an adjacent carbon sink forest.

16.12 A taxpayer can deduct the capital expenditure incurred on establishing trees for the primary and principal purpose of carbon sequestration if one of the following is satisfied:

•

the taxpayer owns the trees and any holder of a lease, lesser interest or licence relating to the land occupied by the trees does not use the land for carbon sequestration purposes [ Schedule 8, item 6, subsection 40-1005(5 ), item 1 in the table ];

•

the trees are attached to land that the taxpayer leases (from anyone), or holds under a quasi-ownership right granted by an exempt Australian or exempt foreign government agency, and the lease or quasi-ownership right entitles the taxpayer to use the land for carbon sequestration. Further, if there is another entity that holds a lesser interest or licence relating to the land, that entity must not use the land for carbon sequestration [ Schedule 8, item 6, subsection 40-1005(5 ), item 2 in the table ]; or

•

the taxpayer is the licensee relating to the land occupied by the trees and uses the land for carbon sequestration purposes as a result of that licence [ Schedule 8, item 6, subsection 40-1005(5 ), item 3 in the table ].

16.13 Together, these rules ensure that the taxpayer who can claim the deduction is the taxpayer with the least interest in the land who is using the land for the primary and principal purpose of carbon sequestration. This will ensure that only one taxpayer is entitled to a deduction under section 40-1005 in respect of capital expenditure in establishing trees in a carbon sink forest on a given area of land.

Example 16.3

A company enters into a lease agreement with a landowner so that the company can establish trees for the purpose of carbon sequestration. The company then incurs expenditure to establish trees which satisfy subsection 40-1010(2). There is no other taxpayer that has a lesser interest in that land who is using the land for the primary and principal purpose of carbon sequestration. The company is therefore eligible to claim a deduction for the trees established on that land.

Example 16.4

Company A enters into a lease arrangement over 25 hectares of land with a landholder. The lease enables company A to use the land for the primary and principal purpose of carbon sequestration. Company A also incurs capital expenditure on the establishment of trees on 15 hectares of the land for the primary and principal purpose of carbon sequestration.

Company A subsequently enters into an agreement with company B to establish trees in a carbon sink forest on the other 10 hectares of land. Under the agreement company B is granted a licence over those 10 hectares allowing it to use the land and the trees for the primary and principal purpose of carbon sequestration.

As company B is using the land and the trees for the primary and principal purpose of carbon sequestration and it has the least interest in the 10 hectares of land, company B satisfies the conditions in the table in subsection 40-1005(5).

Company B pays company A to establish the trees on the 10 hectares for which company B has the licence. The expenditure incurred by company B is capital in nature. The expenditure in relation to the trees is also covered under section 40-1010. As company B has the least interest in that land and is using the land for the primary and principal purpose of carbon sequestration, it satisfies the condition in the table in subsection 40-1005(5) for the trees, and company B is able to claim the deduction for the expenditure it incurred. Even if the expenditure incurred by company A on establishing trees in the carbon sink forest on the 10 hectares of land is capital in nature, company A is not eligible for the deduction under section 40-1005 for the establishment expenditure as company B has a lesser interest in the 10 hectares of land and uses that land for the principal and primary purpose of carbon sequestration by the trees.

The expenditure incurred by company A in relation to the trees on the 15 hectares is covered under section 40-1010. As company A has a lease over the land on which it has established the trees that enables it to use the land for the primary and principal purpose of carbon sequestration and there is no holder of a lesser interest in the land company A satisfies a condition in the table in subsection 40-1005(5). Company A is therefore able to claim the deduction for the expenditure it has incurred.

16.14 The amount of the deduction for an income year is the amount of the expenditure incurred on establishing the trees. [ Schedule 8, item 6, subsection 40-1005(2 )]

Condition for deduction

16.15 The deduction is only available for expenditure incurred on establishing trees in a forest that can achieve the characteristics of a carbon forest sink forest. [ Schedule 8, item 6, paragraph 40-1010(1 )( g )]

16.16 The trees, when established, must satisfy the following conditions:

•

at the end of the income year, the trees occupy a continuous land area in Australia of 0.2 hectares or more;

•

at the time the trees are established, it is more likely than not that they will:

-

attain a crown cover of 20 per cent or more; and

-

reach a height of at least two metres; and

•

on 1 January 1990, the area occupied by the trees was clear of other trees that:

-

attained, or were more likely than not to attain, a crown cover of 20 per cent or more; and

-

reached, or were more likely than not to reach, a height of two metres or more.

[ Schedule 8, item 6, subsection 40-1010(2 )]

Example 16.5

A company acquires 0.5 hectares of land suitable for growing trees for the purpose of establishing carbon sink forests in the 2008-09 income year. The company establishes a plot of trees covering a geographically connected 0.3 hectare land area and another geographically separated plot of trees covering a 0.1 hectare land area in the 2008-09 income year.

The plot of trees covering the 0.1 hectare land area does not satisfy the condition in paragraph 40-1010(2)(a). The plot of trees covering the 0.3 hectare land area does satisfy the condition in paragraph 40-1010(2)(a).

As a result, the company will be able to claim a deduction for the capital expenditure incurred on establishing the 0.3 hectares of trees (as long as the trees will satisfy the remaining conditions in subsection 40-1010(2)), but will not be able to claim a deduction for the second plot (the 0.1 hectares).

Example 16.6

Continuing Example 1.5, the company established the remaining 0.1 hectare of land in the 2009-10 income year. This planting will be geographically connected to the planting that occurred in the 2008-09 income year (the other 0.1 hectare of land referred to in Example 1.5). As a result, the 0.2 hectare of trees satisfy the condition in paragraph 40-1010(2)(a) and will be considered a carbon sink forest, assuming all other conditions in subsection 40-1010(2) are met, for the carbon sink forest.

The company will be entitled to a deduction under subsection 40-1005(1) for capital expenditure the company incurred on establishing the second plot (regardless of what year the costs were incurred).

The deduction for capital expenditure on establishing a carbon sink forest will not be available until subsection 40-1010(2) is satisfied.

16.17 Australia is a party to the Kyoto Protocol to the United Nations Framework Convention on Climate Change. Australia has a target under the Kyoto Protocol to limit emissions to 108 per cent of 1990 levels over the period 2008 to 2012, and follows internationally agreed rules in accounting for progress towards this target. The conditions in paragraphs 40-1010(2)(a) to (c) align with the criteria for carbon sink forest activities that can contribute to Australia's greenhouse gas target. This ensures that the tax deduction encourages the establishment of forests that can contribute to Australia's target.

16.18 The establishment of the trees must meet the requirements of the Environmental and Natural Resource Management Guidelines issued by legislative instrument, by the 'Climate Change Minister' (see paragraph 8.43). [ Schedule 8, item 6, paragraph 40-1010(2 )( d ) and subsection 40-1010(3 )]

When the deduction is available

16.19 For trees established wholly within an income year, the deduction is available in the income year the trees are established and if subsection 40-1010(2) is met. [ Schedule 8, item 6, paragraphs 40-1010(1 )( a ) to ( g )]

16.20 Where some or all of the trees are established after the end of the income year, but within the first four months of the following income year, expenditure incurred in the previous income year is immediately deductible. [ Schedule 8, item 6, subsection 40-1005(3 )]

16.21 Expenditure incurred in the four months from the end of the income year will be deductible in the year it is incurred. [ Schedule 8, item 6, subsection 40-1005(1 )]

16.22 Deductions for any prepayment of expenditure that would be incurred in the four months from the end of the income year are still subject to Subdivision H of Division 3 of the Income Tax Assessment Act 1936.

Example 16.7

A company acquires 0.5 hectares of land suitable for growing trees for the purpose of establishing carbon sink forests in the 2008-09 income year. The company establishes a plot of trees covering a geographically connected 0.3 hectare land area and another geographically separated plot of trees covering a 0.1 hectare land area in the 2008-09 income year.

The plot of trees covering the 0.1 hectare land area does not satisfy the condition in paragraph 40-1010(2)(a), at the end of the income year. The plot of trees covering the 0.3 hectare land area does satisfy the condition in paragraph 40-1010(2)(a).

However, in the four months after the 2008-09 income year, the company completes the 0.1 hectares that connects both the first 0.1 hectare and the 0.3 hectare plantings, resulting in a total of the 0.5 hectares as one planting. As such, all costs incurred until the end of the 2008-09 income year are deductible in the 2008-09 income year. The costs incurred in the four months after the end of the income year are deductible at the end of the 2009-10 year.

Example 16.8

A company acquires 0.5 hectares of land suitable for growing trees for the purpose of establishing carbon sink forests in the 2008-09 income year. The company establishes a plot of trees covering a geographically connected 0.3 hectare land area and another geographically separated plot of trees covering a 0.1 hectare land area in the 2008-09 income year.

The plot of trees covering the 0.1 hectare land area does not satisfy the condition in paragraph 40-1010(2)(a). The plot of trees covering the 0.3 hectare land area does satisfy the condition in paragraph 40-1010(2)(a).

The remaining 0.1 hectare is established after the four-month period at the end of the 2008-09 income year (ie, late in the 2009-10 income year) and therefore does not satisfy the four-month rule. This leads to the 0.1 hectare established up until the 2008-09 income year and the new 0.1 hectare just planted, satisfying subsection 40-1010(2) at the end of the 2009-10 income year.

The costs incurred in the 2008-09 income year on the 0.1 hectares as well as the additional 0.1 hectares established in the 2009-10 income year, will be deductible at the end of the 2009-10 income year.

16.23 Where a deduction has been claimed because trees are established in the first four months of a new income year and further trees are established before the end of that same income year, the initial planting must be ignored for the purposes of calculating whether the trees occupy the size requirement in paragraph 40-1010(2)(a). [ Schedule 8, item 6, subsection 40-1005(4 )]

Example 16.9

A company acquires three hectares of land suitable for growing trees for the purpose of establishing carbon sink forests in the 2008-09 income year. The company establishes a plot of trees covering a geographically connected 0.1 hectare land area in the 2008-09 income year.

However, in the four months after the 2008-09 income year, the taxpayer completes a further 0.1 hectares that connects the 0.2 hectares as one planting. As such, all costs incurred until the end of the 2008-09 income year are deductible in the 2008-09 income year. The costs incurred in the four months after the end of the income year are deductible at the end of the 2009-10 income year.

Over the remaining months in the income year, the company establishes the remaining 2.8 hectares. The costs of the final 2.8 hectares are deductible in the 2009-10 income year. This final 2.8 hectares is considered to be a separate planting for the purposes of the 0.2 hectare requirement in paragraph 40-1010(2)(a).

Notice of establishment

16.24 The owner of the trees must give a notice to the Commissioner of Taxation (Commissioner) providing all information necessary to determine whether all conditions in subsection 40-1010(2) are met. [ Schedule 8, item 6, paragraph 40-1010(1 )( h )]

16.25 The notice must be given to the Commissioner no later than the earlier of:

•

the lodgment of the taxpayer's income tax return; or

•

five months after the end of the income year.

[ Schedule 8, item 6, subsection 40-1010(4 )]

16.26 The notice may include, but is not limited to:

•

the Australian Business Number of the entity that gives the form to the Commissioner;

•

the latitude and longitude of a central point within the area occupied by the trees, as determined by reference to the Geocentric Datum of Australia;

•

the species of trees established;

•

the estimated number of trees established per hectare of the area occupied by the trees;

•

the rationale for the probability of meeting subsection 40-1010(2); and

•

the amount of expenditure incurred in establishing the trees on the woodlot.

16.27 This notice will allow the Commissioner to seek confirmation from the Secretary to the Department of Climate Change (Climate Change Secretary - see paragraph 8.43) that the trees established will be able to achieve the characteristics of a carbon sink forest. [ Schedule 8, item 6, subsection 40-1010(8 )]

16.28 However, the Climate Change Secretary must give the Commissioner a notice if the Climate Change Secretary is satisfied that one or more characteristics of a carbon sink forest has not been met or may not be met [ Schedule 8, item 6, subsection 40-1010(5 )]. The characteristics of a 'carbon sink forest' are defined in paragraphs 8.15 to 8.18.

16.29 No deduction can be claimed if the Climate Change Secretary is not satisfied that subsection 40-1010(2) has been, or will be, met and has given the Commissioner a notice stating this. [ Schedule 8, item 6, subsections 40-1010(5 ) and ( 6 )]

16.30 A taxpayer may apply to the Administrative Appeals Tribunal for a review of a decision taken by the Climate Change Secretary in relation to the notice provided to the Commissioner. [ Schedule 8, item 6, subsection 40-1010(7 )]

16.31 The Climate Change Secretary is required to provide the taxpayer a copy of the notice under section 27A of the Administrative Appeals Tribunal Act 1975.

16.32 This notice will ensure that a deduction is only available in respect of trees that can achieve the characteristics of a carbon sink forest.

Establishment expenditure

16.33 Establishment expenditure is expenditure incurred on establishing trees for the purpose of carbon sequestration. [ Schedule 8, item 6, paragraph 40-1010(1 )( d )]

16.34 Establishment occurs when the trees are planted, grown from seed or deliberately regenerated from natural seed sources in their long-term growing medium, in the ground, in a permanent way.

16.35 Carbon sequestration by a tree or forest means the process by which the tree or forest absorbs carbon dioxide from the atmosphere [ Schedule 8, item 6, section 40-1015 ]. An amendment to subsection 995-1(1) is also made to include this definition [ Schedule 8, item 8, definition of ' carbon sequestration' in subsection 995-1(1 ) of the ITAA 1997 ].

16.36 The costs of establishing trees for the purpose of carbon sequestration may include the following:

•

the costs of acquiring the trees or seeds;

•

the costs of planting the trees or seeds;

•

the costs of pots and potting mixtures where the potted plants are being nurtured prior to being established in their long term growing medium, in the ground, in a permanent way;

•

the costs incurred in grafting trees and germinating seedlings;

•

the costs of allowing seeds to germinate (whether by broadcasting, deliberate regeneration or planting seeds directly);

•

any costs incurred on preparing to plant which may, in some cases, include that part of the costs of ploughing, scarifying, contouring, top dressing, fertilising, weed spraying, stone removal, and top soil enhancement that is for the purpose of establishing trees for carbon sequestration; and

•

the costs of surveying the planted area.

16.37 Establishment expenditure incurred on establishing trees for the purpose of carbon sequestration does not include expenditure on other plants (eg, trees for felling, horticultural plants). However where trees are used for associated purposes, for example, companion planting for the purpose of carbon sequestration, then expenditure incurred in establishing those trees will fall within the operation of proposed Subdivision 40-J.

16.38 Establishment expenditure does not include expenditure incurred in draining swamps or low-lying land or on clearing land. [ Schedule 8, item 6, section 40-1020 ]

16.39 Expenditure on assets separate from the trees is not considered to be establishment expenditure. Examples of this include:

•

fencing;

•

water facilities for the trees in the carbon sink forest;

•

roads within the forest; and

•

fire breaks.

16.40 Expenditure incurred on rights that allow access to land or for carbon credits to be traded in the future is not considered to be establishment expenditure. Even though this expenditure may be incurred at the time of establishment, it is not considered to have a sufficient nexus for a direct expense to be incurred on establishing the trees. Examples of these costs include the costs of acquiring a right to enter land and establish the forest (commonly known as forestry rights) and the costs of acquiring the right to create a carbon credit (commonly known as carbon sequestration rights).

16.41 Nothing in this measure denies a taxpayer access to other provisions in the tax law that may provide deductions for expenditure on failed projects.

Non-arm's length transactions

16.42 The amount of capital expenditure on which a deduction is based cannot exceed the market value of what the expenditure was for, if any of the parties to an arrangement under which the expenditure is incurred are not dealing at arm's length. [ Schedule 8, item 6, section 40-1025 ]

Climate Change Minister and Climate Change Secretary

16.43 An amendment is made to subsection 995-1(1) to include a definition for the 'Climate Change Minister' and the 'Climate Change Secretary'. The Climate Change Minister is the Minister administering the National Greenhouse and Energy Reporting Act 2007. The Climate Change Secretary is the Secretary of the Department that administers the National Greenhouse and Energy Reporting Act 2007. [ Schedule 8, items 9 and 10, definition of ' Climate Change Minister' and ' Climate Change Secretary' in subsection 995-1(1 ) of the ITAA 1997 ]

Income year 2012-13 and later income years

Who is entitled to the deduction?

16.44 Taxpayers carrying on a business and who satisfy the conditions outlined in paragraph 8.12 can deduct capital expenditure incurred by them or another establishing entity on the establishment of trees for the purpose of carbon sequestration. [ Schedule 8, item 12, subsection 40-1005(1 )]

16.45 The primary and principal purpose of establishing the trees must be for carbon sequestration and can not include felling the trees or using the trees in commercial horticulture. This deduction will only apply to trees planted as part of a carbon sink forest. [ Schedule 8, item 12, paragraphs 40-1010(1 )( d ) and ( e )]

16.46 The deduction is not available for expenditure incurred on trees in a carbon sink forest by a managed investment scheme or a forestry managed investment scheme. [ Schedule 8, item 12, paragraph 40-1010(1 )( f )]

16.47 A forestry manager entity may operate a separate business of carbon trading by establishing a qualifying carbon sink forest.

16.48 The trees must meet the conditions for deduction as outlined in paragraphs 8.15, 8.16 and 8.18.

How is the deduction calculated?

16.49 The deduction is worked out using the following formula:

[ Schedule 8, item 12, subsection 40-1005(2 )]

16.50 The types of expenditure included in establishment expenditure are as set out in paragraphs 8.33 to 8.41.

16.51 The write-off days in income year is the number of days in the income year starting on the first day of the income year in which the trees are established and ending 14 years and 105 days later. The first day of the income year is 1 July unless the taxpayer has, or is transiting into or out of, a substituted accounting period. [ Schedule 8, item 12, subsection 40-1005(2 )]

16.52 The number of write-off days does not include days in the income year on which the taxpayer did not use the land for the purpose of carbon sequestration by the trees, or did not meet the conditions for the deduction as set out in paragraph 8.12. Therefore, if the taxpayer sells their trees during the income year, the number of write-off days in the income year does not include the days after the sale of the trees. [ Schedule 8, item 12, paragraph 40-1005(2 )( a )]

16.53 The write-off rate is constant at 7 per cent per annum. [ Schedule 8, item 12, subsection 40-1005(2 )]

16.54 This deduction will allow a straight line write-off of 7 per cent per income year over 14 years and 105 days. However, the taxpayer is not able to deduct more than the total amount incurred on establishing the trees. [ Schedule 8, item 12, subsection 40-1005(3 )]

Example 16.10

Matthews Carbon Sinks Services Ltd establishes trees for the purpose of carbon sequestration on 1 September 2012. Matthews Carbon Sinks Services Ltd incurred establishment expenditure of $400,000.

The allowable deduction for these trees is:

2012-13 income year

2013-14 income year

2027-28 income year

As the write-off period is 14 years 105 days after the first day of the income year in which the trees were established, 105 days are remaining in the 2027-28 income year.

That is, $8,000 as subsection 40-1005(3) limits the deduction to the amount of capital expenditure incurred.

Notice of establishment

16.55 At the time the trees are established, the owner of the trees must give a notice to the Commissioner. Further details are provided in paragraphs 8.24 to 8.32.

Non-arm's length transaction

16.56 The amount of capital expenditure on which a deduction is based cannot exceed the market value of what the expenditure was for, if any of the parties to an arrangement under which the expenditure is incurred are not dealing at arm's length. [ Schedule 8, item 6, section 40-1025 ]

Destruction of trees in a carbon sink forest

16.57 A taxpayer cannot claim the deduction for trees in a carbon sink forest if the trees are destroyed. The number of write-off days used in the formula in paragraph 8.51 will not include the days in the income year after which the trees were destroyed.

16.58 However, an extra deduction for any undeducted establishment expenditure will be allowed for an income year if the trees are destroyed in an income year after they are established and the write-off period has not ceased. [ Schedule 8 item 20, section 40-1030 ]

16.59 To work out the deduction, the first step is to calculate the total amounts the taxpayer could have deducted for the trees for the period that starts when the trees were established and ends when they were destroyed. [ Schedule 8 item 20, subsection 40-1030(2 ), paragraphs ( a ) and ( b ) of step 1 ]

16.60 Secondly, subtract from the capital expenditure incurred for establishing the trees, the result from step 1 as well as any amount received for the destruction (such as the proceeds of an insurance policy). The remaining amount is the deduction allowed for the destruction. [ Schedule 8, item 20, subsection 40-1030(2 ), paragraphs ( a ) and ( b ) of step 2 ]

16.61 This deduction for destruction is in addition to any other deduction for the trees for the income year under these provisions. [ Schedule 8, item 20, subsection 40-1030(3 )]

Example 16.11

Matthews Carbon Sinks Services Ltd establishes trees for the purpose of carbon sequestration on 1 September 2012. Matthews Carbon Sinks Services Ltd incurred establishment expenditure of $400,000.

On 8 February 2015, the trees are destroyed due to fire. An insurance payout of $200,000 is received.

The deduction is worked out as follows:

Step 1

2012-13 income year

2013-14 income year

2014-15 income year

The trees are destroyed on 8 February. The number of days in the 2014-15 income year that the expenditure can be written off is 223 days:

Total amount that could have been deducted = $73,107

Step 2

Establishment expenditure: $400,000

Less result from step 1: $73,107

Less any insurance moneys received: $200,000

Total deduction available for destruction of trees: $126,893

This is in addition to the deduction of $17,107 the taxpayer would have claimed for the trees for that income year.

16.62 If trees in a carbon sink forest, which received an immediate deduction, are destroyed, no extra deduction can be obtained. This is because the total amount of the establishment expenditure is deducted in the income year in which it is incurred and there is no undeducted establishment expenditure. Therefore, this extra deduction for destruction is not available for trees established in carbon sink forests that receive an immediate deduction in the 2007-08 to 2011-12 income years (inclusive).

Obtaining information for the acquisition of trees in a carbon sink forest

16.63 When a taxpayer acquires trees in a carbon sink forest from another entity in circumstances that makes the taxpayer eligible to claim the deduction, section 40-1035 will ensure sufficient information is given to a taxpayer who acquired the trees in a carbon sink forest from the last taxpayer who deducted an amount for this capital expenditure. [ Schedule 8, item 20, subsection 40-1035(1 )]

16.64 The inclusion of amounts of establishment expenditure used by the entity in calculating the deduction, as well as the period when the deductions started in the calculations for the trees, must continue to be applied by the taxpayer who acquired the trees.

16.65 The taxpayer who acquired the trees may, within 60 days of satisfying a condition in subsection 40-1005(5), give a written notice to the other entity seeking certain information [ Schedule 8 item 20, subsections 40-1035(2 ) and ( 3 )]. Only one notice can be served on the other entity [ Schedule 8, item 20, subsection 40-1035(8 )]. The written notice must address the following matters:

•

a request that the other entity provide information as to the amount of establishment expenditure for the trees, and the first day of the income year in which the trees were established [ Schedule 8, item 20, subsection 40-1035(2 )];

•

the other entity has at least 60 days in which to reply to the taxpayer who acquired the trees [ Schedule 8, item 20, paragraph 40-1035(3 )( b )]; and

•

the notice must advise the other entity that failure to comply with the request will subject the entity to a penalty of 10 penalty units if the entity does not have a reasonable excuse and fails or intentionally refuses to comply with the notice [ Schedule 8, item 20, subsection 40-1035(4 )].

16.66 Where the other entity is a partnership, the notice is properly served where the taxpayer gives the notice to any one of the partners of the partnership. [ Schedule 8, item 20, paragraph 40-1035(5 )( a )]

16.67 The obligation to provide the information requested by the taxpayer is imposed on each of the partners, not the partnership. In order to discharge the obligation, any one of the partners may respond to the request. [ Schedule 8, item 20, paragraph 40-1035(5 )( b )]

16.68 There is a penalty of 10 penalty units if a partner fails, or intentionally refuses, to comply with the request for information from the taxpayer. [ Schedule 8, item 20, subsection 40-1035(6 )]

Application and transitional provisions

16.69 Amendments provided for the income years 2007-08 to 2011-12 (inclusive) apply to the 2007-08 income year and later income years. [ Schedule 8, item 11 ]

16.70 Amendments provided for the income year 2012-13 and later years apply to the 2012-13 income year and later income years. [ Schedule 8, item 21 ]

Consequential amendments

16.71 An amendment is made to subsection 40-50(1) to ensure that expenditure for the establishment of trees in carbon sink forests cannot be written off under Subdivision 40-B of the uniform capital allowances provisions. [ Schedule 8, item 4, subsection 40-50(1 )]

16.72 An amendment is made to section 40-630 to ensure that trees in carbon sink forests cannot be deducted under Subdivision 40-G of the uniform capital allowances provisions. [ Schedule 8, item 5, subsection 40-630(2B )]

16.73 An amendment is made to section 70-120 to ensure that a taxpayer cannot claim a deduction under the trading stock provisions for felling a carbon sink forest. [ Schedule 8, item 7, subsection 40-120(5 )]

16.74 Consequential amendments are made to paragraphs 40-1010(1)(b) to (f), (h) and (4)(a) for changes to the write-off rate to 7 per cent for the income year 2012-13 and later income years. [ Schedule 8, items 13 to 19 ]

16.75 Consequential amendments are made to the guide material in section 12-5 to reflect the introduction of this measure. [ Schedule 8, items 1 and 2, section 12-5, item in the table headed ' capital allowances' and after the item in the table headed ' travel expenses' ]

16.76 A consequential amendment is made to the simplified outline of Division 40 to reflect the introduction of this measure. [ Schedule 8, item 3, section 40-10, at the end of the table ]

Chapter 9 Extension of the beneficiary tax offset to the Equine Workers Hardship Wage Supplement Payment

Outline of chapter

18.1 Schedule 9 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 individuals in receipt of the Equine Workers Hardship Wage Supplement Payment (the Supplement).

Context of amendments

Equine Workers Hardship Wage Supplement Payment

18.2 The Supplement provides ex-gratia income support to individuals who can demonstrate loss of their primary source of income, which is derived from the commercial horse industry, as a direct result of the Equine Influenza outbreak and its associated quarantine and movement restrictions.

18.3 The Supplement was part of a broader Equine Influenza assistance package which was announced on 9 September 2007.

18.4 The rates of the Supplement are equivalent to the single rate, couple rate and single with dependent child rate of Newstart Allowance (Newstart) depending on the applicant's circumstances. Applicants must satisfy an income test but there are no assets or activity tests.

Taxable status

18.5 It is a general principle of income tax law that any payment received by a person as income support, or as a replacement for lost salary, wages or other assessable income, is taxable. Therefore, payments of the Supplement will be taxable in the hands of the recipient as they will be treated as ordinary income.

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

18.7 This amendment will extend the beneficiary tax offset to the Supplement to ensure consistent taxation treatment with the taxation treatment of Newstart.

Summary of new law

18.8 This measure amends:

•

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

•

section 13-1 of the ITAA 1997 to list the Supplement as a payment that is allowed a tax offset.

Detailed explanation of new law

Include the Equine Workers Hardship Wage Supplement Payment in the definition of rebatable benefit for beneficiary tax offset purposes

18.9 Subsection 160AAA(1) of the ITAA 1936 has a definition of 'rebatable benefit' for the purposes of the beneficiary tax offset. Included in the definition of rebatable benefit are payments made under provisions of the Social Security Act 1991 such as Newstart.

18.10 This amendment to subsection 160AAA(1) of the ITAA 1936 includes the Supplement as a 'rebatable benefit' to which the beneficiary tax offset applies. This ensures that taxpayers in receipt of the Supplement are treated consistently with recipients of Newstart. [ Schedule 4, item 1, subsection 160AAA(1 )]

18.11 Subsection 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 the Equine Workers Hardship Wage Supplement Payment in the Division 13 guide of tax offsets

18.12 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.

18.13 The first amendment to section 13-1 of the ITAA 1997 will include the Supplement in the list of payments that attract a tax offset and direct readers to the item headed 'social security and other benefit payments'. [ Schedule 9, item 2, section 13-1 ]

18.14 The second amendment to section 13-1 lists the reference to the Supplement under the item headed 'social security and other benefit payments'. [ Schedule 9, item 3, section 13-1 ]

Application and transitional provisions

18.15 These amendments apply to assessments for the 2007-08 income year and later income years.

Chapter 10 Tax-free grants for certain tobacco growers

Outline of chapter

20.1 Schedule 10 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide tax-free grants, under the Tobacco Growers Adjustment Assistance Programme 2006, to tobacco growers who undertake to exit all agricultural enterprises for at least five years.

Context of amendments

20.2 On 26 October 2006, the then Minister for Agriculture, Fisheries and Forestry announced that tobacco growers will receive up to $150,000 from the Australian Government to assist them to move into alternative business activities.

20.3 Generally, government grants paid to assist businesses to exit an industry are assessable under the capital gains tax (CGT) provisions, rather than as ordinary or statutory income.

20.4 The former Government decided to make the grants tax free for those tobacco growers who undertake to exit all agricultural enterprises for at least five years.

Summary of new law

20.5 This measure amends:

•

section 53-10 of the ITAA 1997 to list the Tobacco Growers Adjustment Assistance Programme 2006 grant as exempt income; and

•

subsection 118-37(1) of the ITAA 1997 to exempt the Tobacco Growers Adjustment Assistance Programme 2006 grant from CGT for Tobacco Growers Adjustment Assistance Programme 2006 grant recipients who fulfil certain conditions.

Detailed explanation of new law

The Tobacco Growers Adjustment Assistance Programme 2006 grant as exempt income

20.6 Section 53-10 of the ITAA 1997 lists various payments which are wholly or partly exempt from income tax. The exemptions may be subject to certain conditions as listed within the section.

20.7 The amendment to section 53-10 of the ITAA 1997 ensures that the Tobacco Growers Adjustment Assistance Programme 2006 grant is exempt from income tax. [ Schedule 10, item 3, section 53-10 ]

20.8 This exemption only applies to those recipients who undertake to exit all agricultural enterprises for at least five years. This provides certainty for those grant recipients who qualify for the exemption.

The Tobacco Growers Adjustment Assistance Programme 2006 grant is exempt from CGT

20.9 Subsection 118-37(1) of the ITAA 1997 lists various payments for which capital gains and losses are disregarded for tax purposes.

20.10 The amendment to subsection 118-37(1) of the ITAA 1997 ensures that the Tobacco Growers Adjustment Assistance Programme 2006 is exempt from CGT. [ Schedule 10, item 4, subsection 118-37(1 )]

20.11 This exemption only applies to those recipients who undertake to exit all agricultural enterprises for at least five years.

Application and transitional provisions

20.12 This measure applies to the 2006-07 and later income years. [ Schedule 10, item 5 ]

Consequential amendments

20.13 A reference to the Tobacco Growers Adjustment Assistance Programme 2006 grant is added to the table in section 11-15 of the ITAA 1997. [ Schedule 10, item 2 ]

20.14 The reference to 'sugar industry exit grants' is shifted from section 11-10 to section 11-15 of the ITAA 1997. [ Schedule 10, items 1 and 2 ]

Chapter 11 Farm management deposits

Outline of chapter

22.1 Schedule 11 to this Bill amends the farm management deposit (FMD) scheme in the Income Tax Assessment Act 1936 (ITAA 1936) to align the tax law with the guidelines for declaring either all primary producers in a geographical area, or specified classes of primary producers within a geographical area, to be in exceptional circumstances.

Context of amendments

22.2 Schedule 2G to the ITAA 1936 contains the provisions for FMDs. An FMD is a tax-linked, financial risk management tool for eligible primary producers. It is designed to allow eligible primary producers to set aside income in profitable years for subsequent withdrawal in low-income years. This reduces the risk to eligible primary producers of income variability owing to factors such as drought.

22.3 FMDs cannot be withdrawn within 12 months of the deposit other than because the owner dies, becomes bankrupt, ceases to be an eligible primary producer, or transfers their deposit to another financial institution. Failure to comply with this rule may result in the deposit not being treated as an FMD from the time the deposit was made.

22.4 The FMD scheme provides an exception to the 12-month rule for primary producers who conduct their primary production business wholly or partly in exceptional circumstance areas. These persons are able to withdraw deposits early and still retain the tax benefit in the year of income in which the deposit was made. This is subject to the exceptional circumstances declaration not being in force when the deposit was made.

22.5 An exceptional circumstances declaration allows eligible primary producers, who have an exceptional circumstances certificate, access to their FMD within 12 months of deposit and the retention of their tax benefits.

22.6 To confirm their exceptional circumstances status at the time of the relevant withdrawal, the owner of the FMD will have until three months after the end of the year of income, in which the withdrawal was made, to obtain an exceptional circumstances certificate from the Secretary of the Department of Families, Housing, Community Services and Indigenous Affairs. This ensures that primary producers will be able to take advantage of the exceptional circumstances concession prior to the certificate actually being issued.

22.7 A minor inconsistency exists under the current law, which denies eligible primary producers the tax benefits of an FMD as a consequence of withdrawing their FMD early. This inconsistency exists because certain classes of primary producers are in an area that has previously been declared in exceptional circumstances, even though the exceptional circumstances declaration did not apply to them because of their producer class.

Summary of new law

22.8 This measure will remove a minor inconsistency where an eligible primary producer is denied the tax benefits as a consequence of withdrawing their FMD early when they are in an area that has previously been declared in exceptional circumstances, even though the exceptional circumstances declaration did not apply to them because of their producer class.

Comparison of key features of new law and current law

Detailed explanation of new law

22.9 Eligible primary producers can retain the tax benefit in the year the FMD is made, despite the withdrawal of all or part of their FMD within 12 months if:

•

the withdrawal is made in the year of income following the year of income in which the deposit occurs;

•

at the time of the withdrawal, the owner of the FMD is eligible to be issued an exceptional circumstances certificate in relation to their primary production business;

•

the owner of the FMD obtains an exceptional circumstances certificate no later than three months after the year of income of the withdrawal; and

•

the owner made the deposit before the exceptional circumstances declaration relating to that primary production business was in force.

[ Schedule 11, item 1, paragraphs 393-37(3 )( b ) to ( d ) in Schedule 2G to the ITAA 1936 ]

Application and transitional provisions

22.10 This measure will commence retrospectively from 1 July 2002. This will ensure that those taxpayers that were previously disadvantaged by this inconsistency get the opportunity to receive the tax benefit, despite the early withdrawal of their FMD. [ Schedule 11, item 2 ]

Index

Schedule 1: Amounts misappropriated by an employee or agent

Schedule 2: Late payment offset for superannuation guarantee contributions

Schedule 3: CGT market value substitution rule for interests in widely held entities

Schedule 4: Endeavour Research Fellowships and Executive Awards

Schedule 5: Early completion bonuses for apprentices

Schedule 6: Deductible gift recipients

Schedule 7: Superannuation lump sum paid to a member having a terminal medical condition

Schedule 8: Capital expenditure for the establishment of trees in carbon sink forests

Schedule 9: Tax offset for Equine Workers Hardship Wage Supplement Payments

Schedule 10: Tobacco industry exit grants

Schedule 11: Farm management deposits