House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Glossary

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

General outline and financial impact

Native title benefits: Non-assessable non-exempt income

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 and the Income Tax Assessment Act 1936 to make it clear that native title benefits are not subject to income tax (including capital gains tax).

Date of effect: These amendments commence on the day this Bill receives the Royal Assent. These amendments will apply in relation to income years starting on or after 1 July 2008, and, in relation to capital gains tax, to events happening on or after 1 July 2008.

These amendments also allow taxpayers to seek an amendment to a previous assessment in certain circumstances where the amendment period has expired.

The amendments provide certainty and clarity to taxpayers. The retrospectivity and modification to the amendment period are beneficial to taxpayers accessing the amendments.

Proposal announced: This measure was announced by the Attorney-General at the Australian Institute of Aboriginal and Torres Strait Islander Studies Native Title Conference on 6 June 2012, and via a joint press release by the Attorney-General and the Minister for Families, Communities and Indigenous Affairs of the same date.

Financial impact: The financial impact of this measure is not zero, but rounded to zero, in each of the income years from 2012-13 to 2015-16.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.42 to 1.67.

Compliance cost impact: Nil

Deductible gift recipients

Schedule 2 to this Bill amends Income Tax Assessment Act 1997to update the list of deductible gift recipients (DGRs) by adding two entities as DGRs and extending the listing of another three entities.

Date of effect: The following dates of effect apply to each specifically listed entity:

•

the listing of AE1 Incorporated applies to gifts made after 25 September 2011 and before 26 September 2014;

•

Australia for UNHCR's listing had expired on 27 June 2012 but it is now extended;

•

One Laptop per Child Australia Ltd's listing had expired on 30 June 2012 but it is now extended to 30 June 2016;

•

the listing of Teach for Australia applies to gifts made after 31 December 2012; and

•

Yachad Accelerated Learning Project Limited's listing had expired on 30 June 2012 but it is now extended to 30 June 2015.

Proposals announced: The listing of AE1 was announced in the 2011-12 Mid-Year Economic and Fiscal Outlook. The time extension for One Laptop per Child Australia Ltd was announced in the 2012-13 Budget. The time extensions for Australia for UNHCR and the Yachad Accelerated Learning Project Limited, and the listing of Teach for Australia, were announced in the 2012-13 Mid-Year Economic and Fiscal Outlook.

Financial impact:

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.14 to 2.18.

Compliance cost impact: None.

Deductibility of geothermal energy exploration expenditure

Schedule 3 amends the Income Tax Assessment Act 199 to extend the immediate deductibility of exploration expenditure provided to mining and petroleum explorers to geothermal energy explorers. Geothermal energy explorers will be entitled to equivalent treatment for their exploration or prospecting expenditure incurred on or after 1 July 2012 as that afforded to mining and petroleum explorers. This includes an immediate tax deduction for the cost of depreciating assets first used for exploration or prospecting on or after 1 July 2012, provided certain criteria are met.

Under the existing law:

•

geothermal exploration rights and geothermal exploration information are not defined as depreciating assets and therefore no deduction under Division 40 is available in respect of these assets;

•

the definition of 'exploration or prospecting' does not include geothermal energy exploration activities, as a result, geothermal energy explorers may only deduct the cost of their depreciating assets over the effective life of the assets provided it can be demonstrated that the assets are being used for a taxable purpose;

•

mining and petroleum explorers may deduct immediately the cost of depreciating assets they hold if they first use those assets for exploration or prospecting and provided certain criteria are met;

•

expenditure incurred by geothermal energy explorers on activities in seeking to discover and evaluate geothermal energy resources may not be deductible at all in certain circumstances; and

•

geothermal energy explorers who stop holding a geothermal exploration right relating to an area because they acquire a geothermal energy extraction right relating to the same area (or an area that is not significantly different) may obtain a capital gains tax roll-over to avoid incurring an income tax liability as a result of this transaction.

The amendments in this Schedule will:

•

include geothermal exploration rights and geothermal exploration information in the list of intangible assets included in the definition of 'depreciating assets';

•

extend the definition of 'exploration or prospecting' to include exploration or prospecting for geothermal energy resources. This will allow geothermal energy explorers to deduct immediately the cost of the tangible and intangible depreciating assets they acquire if they first use the assets for exploration or prospecting, provided certain criteria are met;

•

allow geothermal energy explorers to deduct expenditure incurred on exploration or prospecting for geothermal energy resources in an equivalent manner to mining and petroleum explorers; and

•

provide for an outcome equivalent to that for mining and petroleum explorers where geothermal energy explorers stop holding a geothermal exploration right because they acquire a geothermal energy extraction right relating to the same area (or an area that is not significantly different).

Other consequential amendments are made to facilitate the intended treatment.

Date of effect: For more details on the application dates of these amendments, see the application section.

The measure may have a retrospective impact but is of a beneficial nature to affected entities.

Proposal announced: The measure was announced by the Minister for Resources, Energy and Tourism on 24 March 2011.

Financial impact: The measure has the following revenue implications:

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.78 to 3.81

Compliance cost impact: The measure is expected to have a low compliance cost.

Extension of interim streaming provisions for managed investment trusts

Schedule 4 to this Bill amends Schedule 2 of the Tax Laws Amendment (2011 Measures No. 5) Act 2011 to extend the interim streaming rules for managed investment trusts until the commencement of the new tax system for managed investment trusts.

Date of effect: Royal Assent. These amendments apply in relation to the 2012-13 and 2013-14 income years.

Proposal announced: This measure was announced in the Assistant Treasurer's Media Release No. 080 of 30 July 2012 and in the 2012-13Mid-Year Economic and Fiscal Outlook.

Financial impact: The amendments are expected to have an unquantifiable but not significant impact on revenue.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 4, paragraphs 4.16 to 4.20.

Compliance cost impact: Low.

Rebate for medical expenses

Schedule 5 to this Bill amends the Income Tax Assessment Act 1936to apply an income test to the rebate for medical expenses from 1 July 2012.

Date of effect: 1 July 2012. The announcement of this amendment on 8 May 2012 provided time for taxpayers to adjust prior to its commencement.

Proposal announced: 2012-13 Budget.

Financial impact: This measure will increase revenue of $370.0 million over the forward estimates period.

Human rights implications: This Schedule is compatible with human rights and freedoms. See Statement of Compatibility with Human Rights - Chapter 5, paragraphs 5.55 to 5.67.

Compliance cost impact: Nil.

Limited recourse debt

Schedule 6 to this Bill amends Division 243 of the Income Tax Assessment Act 1997 (the limited recourse debt provisions) to clarify that the definition of 'limited recourse debt' includes arrangements where, in substance or effect, the debtor is not fully at risk in relation to the debt.

Under such arrangements, the creditor's rights as against the debtor in the event of default in payment of the debt are, in substance or effect, limited wholly or predominantly to rights in relation to certain assets.

Date of effect: The measure applies in relation to debt arrangements terminated at or after 7.30 pm, AEST in the Australian Capital Territory, on 8 May 2012.

The application of the measure from the time of announcement is intended to ensure that there is consistent treatment of taxpayers who are not fully at risk in relation to capital expenditure, to give effect to the original policy intent of the limited recourse debt tax provisions.

Proposal announced: The measure was announced as part of the 2012-13 Budget.

Financial impact: The amendment is estimated to have no revenue impact but will protect a significant amount of revenue that would otherwise be at risk.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 6, paragraphs 6.20 to 6.23.

Compliance cost impact: The amendments clarify the definition of limited recourse debt to ensure that Division 243 operates as originally intended. The proposal is unlikely to have any compliance cost impact.

In-house fringe benefits under salary packaging arrangements

Schedule 7 to this Bill amends the Fringe Benefits Assessment Act 1986to remove the concessional fringe benefits tax treatment for in-house fringe benefits accessed by way of salary packaging arrangements.

Date of effect: This measure generally applies to benefits provided on or after 22 October 2012.

Transitional arrangements apply to certain salary packaging arrangements entered into prior to 22 October 2012.

Proposal announced: This measure was announced in the Mid-Year Economic and Fiscal Outlook 2012-13 and in the Deputy Prime Minister and Treasurer's Media Release No.099 of 22 October 2012.

Financial impact: This measure will have the following revenue implications:

This measure will also lead to an increase in GST revenue of $85 million over the forward estimates period.

Human rights implications: This Schedule raises a human rights issue. See Statement of Compatibility with Human Rights at paragraphs 7.48 to 7.57.

Compliance cost impact: Low.

Miscellaneous amendments

Schedule 8to this Bill makes miscellaneous amendments to the taxation laws and regulations as part of the Government's commitment to uphold the integrity of the taxation system.

Date of effect: The amendments in Part 1 will commence on 1 July 2007. While these amendments will have retrospective application, they will not adversely impact upon any taxpayers. The amendments in Part 2 will commence on Royal Assent. Further information about commencement and application provisions is provided in Chapter 8, paragraphs 8.4 to 8.9.

Proposal announced: The majority of these amendments were foreshadowed by release in draft form on the Treasury website on 15 August 2012.

Financial impact: These amendments will have a negligible impact on revenue over the forward estimates.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 8, paragraphs 8.10 to 8.17.

Compliance cost impact: Negligible.

Chapter 1 - Native title benefits: Non-assessable non-exempt income

Outline of chapter

1.1 Part 1 of Schedule 1 amends the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax Assessment Act 1936 (ITAA 1936) to make it clear that native title benefits are not subject to income tax. A change is also made to clarify that there are no capital gains tax (CGT) implications arising from certain CGT events involving native title rights.

1.2 Part 2 makes a number of technical changes to the ITAA 1997 and ITAA 1936 to update terminology.

1.3 References throughout this chapter are references to the ITAA 1997 unless otherwise specified.

Context of amendments

1.4 The Native Title Act 1993 (NTA) came into operation on 1 January 1994. The NTA provides for the recognition and protection of pre-existing native title rights over land and waters, and establishes processes for the resolution of native title claims, including through negotiated settlements.

1.5 The NTA also deals with actions that affect native title rights and interests. These actions can be validated for native title purposes under an Indigenous Land Use Agreement (ILUA) (Subdivisions B to E, Division 3, Part 2 of the NTA), or in some cases under an agreement reached in accordance with the 'right to negotiate' provisions of the NTA (Subdivision P, Division 3, Part 2 of the NTA).

1.6 Section 238 of the NTA provides that for certain acts that affect native title, the non-extinguishment principle will apply. This means that if the act affects native title in relation to land or waters, then native title is not extinguished on a whole or partial basis.

1.7 The NTA provides for payments to native title holders in relation to acts that affect their native title rights and interests. These payments may be determined through a specified negotiation process or by the courts. Section 51 of the NTA allows native title holders to request payments for acts that affect native title in monetary form, non-monetary form or as a combination of both.

1.8 In addition, the NTA provides that when the court is considering a native title determination the court may also determine that native title is held on trust by a Prescribed Body Corporate.

1.9 State and Territory legislation, such as the Victorian Traditional Owner Settlement Act 2010, also provides for the making of agreements in relation to native title.

1.10 The High Court has counselled against using traditional common law concept categories in the native title sphere. Instead it indicates native title should be considered on the basis of its uniqueness (See Mabo (No 2) v Queensland (1992) 175 CLR 1 at 89).

1.11 When applying the current rules of the income tax system based on traditional common law concepts, it is unclear whether benefits provided under a native title agreement would be assessable income.

1.12 In 2010, the Government released a consultation paper entitled Native title, Indigenous Economic Development and Tax. This paper provided and examined options to reduce the complexity and uncertainty of the income tax treatment of native title claims, including an option to clarify that certain payments under native title agreements are exempt from income tax.

1.13 Submissions to the consultation supported reforms to clarify that native title payments that are for the extinguishment or impairment of native title rights and interests are not subject to income tax. Expressly stating that such benefits are not subject to income tax presents a simple and clear path to providing broader clarity to native title groups.

1.14 On 27 July 2012 the Government released an exposure draft of a bill seeking to clarify the tax treatment of native title benefits. As part of consultation on the exposure draft, further clarification was sought regarding the CGT implications of certain acts relating to native title rights.

Summary of new law

1.15 The amendments confirm that benefits are not subject to income tax if they are provided for the extinguishment or impairment of native title.

1.16 In addition, the legislation confirms that there are no CGT consequences arising from certain events involving native title rights.

Comparison of key features of new law and current law

Detailed explanation of new law

Tax treatment of native title benefits

1.17 The amendments clarify that amounts or benefits that may otherwise be assessable income for an Indigenous person or an Indigenous holding entity are NANE income if the amount or benefit is a native title benefit. [Schedule 1, item 3, subsection 59-50(1)]

1.18 A native title benefit is the amount or benefit that an Indigenous holding entity or Indigenous person receives directly from entering into a relevant agreement or as compensation under the NTA.

Example 1.1 : Native title benefit received

An Indigenous person receives a $100,000 native title benefit directly from a mining company. This $100,000 is NANE income as it is a native title benefit.

1.19 An Indigenous holding entity or Indigenous person may also receive an amount or benefit, derived from a native title benefit but not from entering into a relevant agreement. Such an amount or benefit is not a native title benefit, but is an amount arising directly or indirectly from a native title benefit.

1.20 The amendments clarify that an amount or benefit is NANE income where it arises (directly or indirectly) from a native title benefit and an Indigenous person or an Indigenous holding entity receives the amount or benefit. This provides Indigenous communities with flexibility as to how they structure their financial affairs and confirms that the benefit remains NANE income where it continues to ultimately be held for the benefit of Indigenous persons. [Schedule 1, item 3, subsection 59-50(2)]

Example 1.2 : Native title benefit received indirectly

Indigenous Holding Entity A is a company acting as trustee in respect of a $2 million native title benefit it received from entering into an agreement with a mining company.

Indigenous Holding Entity A then transfers the full amount to Indigenous Holding Entity B. Indigenous Holding Entity B is a company acting as trustee in respect of the native title benefit. The amount transferred to Indigenous Holding Entity B is an amount arising directly from a native title benefit. Although Indigenous Holding Entity B did not receive a native title benefit, the amount received by Indigenous Holding Entity B is NANE income because the amount arose directly from a native title benefit of Indigenous Holding Entity A.

Indigenous Holding Entity B then transfers part of the amount it received from Indigenous Holding Entity A to an Indigenous person. The amount received by the Indigenous person is an amount arising indirectly from a native title benefit and is NANE income.

Limitations on non-assessable non-exemptincome status

Non-NANE income

1.21 NANE income status will not apply to an amount or benefit if the amount or benefit arises, directly or indirectly, in respect of an aspect of a native title benefit that is not NANE income of an entity. This ensures that in order to receive the NANE income status the amount or benefit must have retained its connection to the native title benefit along the chain of transfers. Once it passes to a person or entity for which it is not NANE income it cannot reacquire that status. [Schedule 1, item 3, paragraph 59-50(4)(a)]

Example 1.3 : Native title benefit and non-NANE income

A native title benefit is paid to Company A. Company A is not an Indigenous holding entity. An Indigenous person receives an amount from Company A. Neither the payment of a native title benefit to Company A nor the amount received by the Indigenous person from Company A is NANE income. It is not NANE income for Company A as it fails to meet the definition of Indigenous holding entity. It is not NANE income for the Indigenous person as it is not NANE income of Company A.

Interest income

1.22 NANE income status will also not apply to an amount or benefit to the extent that it arises from investing the native title benefit or an amount or benefit arising directly or indirectly from the native title benefit. This ensures that income earned from investing a native title benefit is subject to the normal income tax rules. [Schedule 1, item 3, paragraph 59-50(4)(b)]

Example 1.4 : Native title benefit and interest income

Indigenous Holding Entity C receives a $1 million native title benefit. It invests that money and derives $50,000 in interest. Indigenous Holding EntityC subsequently distributes an amount of $540,000 to Indigenous Holding EntityD, consisting of $500,000 arising directly from the native title benefit and $40,000 of interest. The interest derived by Indigenous Holding Entity C needs to be included in its assessable income. Therefore, only the $500,000 is made NANE income for Indigenous Holding Entity D and the other $40,000 it received needs to be included in its assessable income.

Administrative costs and payment for goods and services

1.23 Any amount or benefit someone provides to meet their administrative costs or as remuneration or consideration for the provision of goods or service is not NANE income, even if the amount is, or arises from, a native title benefit. This is the case even where the amount or benefit is provided to an Indigenous holding entity or Indigenous person (who would be entitled to receive the native title benefit). Administrative costs is a broad term and includes, but is not limited to, fees for legal and accounting services and other necessary costs associated with the ongoing administration of the entity. [Schedule 1, item 3, subsection 59-50(3)]

Example 1.5 : Native title benefit and administrative costs

Indigenous Holding Entity F provides administrative services for Indigenous Holding Entity E. Indigenous Holding Entity F charges Indigenous Holding Entity E $100,000 for this service. The $100,000 derived by Holding Entity F is not NANE income as it is for the administrative costs of the payer (Indigenous Holding Entity E).

Example 1.6 : Native title agreement and services provided

As part of an ILUA a native title group enters into with a mining company, the mining company agrees to employ some members of the native title group to undertake heritage surveys. The ILUA states that the amount that will be provided to the native title group for agreeing to perform this activity is $300,000. This $300,000, despite being an amount arising under an ILUA, is not NANE income for the native title holders as it is remuneration for a service.

Example 1.7 : Native title benefit and services provided

Indigenous Holding EntityG receives a $2 million native title benefit. An Indigenous person to whom the native title benefit relates provides accounting services for Indigenous Holding EntityG and receives remuneration for this service of $75,000. This remuneration of $75,000 will not be NANE income for the Indigenous person and will be treated under existing income tax provisions as it is a payment for a service.

Non-assessable non-exempt income and apportioning deductible expenses

1.24 Paragraph 8-1(2)(c) provides that a taxpayer is unable to deduct a loss or outgoing to the extent that it is incurred in relation to gaining or producing NANE income. This is relevant to expenses incurred in receiving a native title benefit that is NANE income. To the extent that a loss or outgoing is incurred in producing both assessable income and NANE income that expense will be apportioned between the two.

Definition of native title benefits

1.25 A native title benefit is defined as an amount or non-cash benefit:

•

that arises under an agreement made under Commonwealth, State or Territory legislation (or an instrument under such legislation), or an ancillary agreement to such an agreement, to the extent that the amount or benefit relates to an act that would extinguish native title or that would be otherwise wholly or partly inconsistent with the continuation of native title; or

•

that is compensation under Division 5 of Part 2 of the NTA.

[Schedule 1, items 3 and 8, subsections 59-50(5) and 995-1(1)]

1.26 'Native title' has the same meaning as in the NTA. The non-extinguishment principle, as set out in the NTA, therefore remains relevant to the consideration of whether native title exists. [Schedule 1, item 7, subsection 995-1(1)]

1.27 A native title benefit can arise under an agreement made under Australian legislation. Such agreements captured by this definition include, but are not limited to, ILUAs under the NTA and agreements under the Traditional Owner Settlement Act 2010 (Vic). [Schedule 1, item 3, subsection 59-50(5)]

Example 1.8 : Indigenous Land Use Agreement and native title benefits

An Indigenous group enters into an ILUA with a mining company. Under the agreement, the group sets up a trust as an Indigenous holding entity to receive cash payments in the form of profit-sharing payments and milestone lump-sum payments. The agreement also provides for non-cash benefits in the form of training for the beneficiaries of the trust. As the agreement is an ILUA entered into under the NTA and the trust satisfies the definition of an Indigenous holding entity, the benefits received by the trust and its Indigenous beneficiaries are native title benefits and thus NANE income.

1.28 It is possible for an amount or benefit arising under an agreement to qualify as a native title benefit even if it is later found that native title does not exist or no formal determination of native title is ever made. It is sufficient that the agreement is made under Australian legislation and the amount or benefit otherwise meets the criteria of the provision, if the acts to which the agreement pertains would extinguish or impair native title if it was found to exist. This is consistent with the treatment of agreements under the NTA, where the agreement continues in force even if it is later found that native title does not exist. [Schedule 1, item 3, paragraph 59-5(5)(a)]

Example 1.9 : Indigenous Land Use Agreement where subsequently no native title exists and native title benefits

Members of an Indigenous group enter into an ILUA with a mining company. While the members of the group assert native title rights and interests over the land in question, they do not have a native title determination at the time the ILUA is entered into. Under the agreement the mining company will pay two lump sum amounts to the group, one at the time of signing the ILUA and another five years later. Prior to the second payment being received by the Indigenous group a determination is made that native title does not exist. However, the NTA provides for the ILUA to continue in operation regardless of whether native title is ultimately found to exist. As the agreement is an ILUA entered into under the NTA and the payment is being made directly to Indigenous persons all the benefits received by members of the Indigenous group under the agreement are native title benefits and thus NANE income.

Example 1.10 : 'Right to negotiate' agreement and native title benefits

An Indigenous group has a registered application for native title in place, but a determination has not yet been made. The Indigenous group enters into negotiations with a mining company under the 'right to negotiate' provisions of the NTA. The parties subsequently enter into a contractual agreement under the NTA. Under the terms of the agreement the members of the Indigenous group will set up a trust to receive cash payments. The payments under the agreement are to be paid to the trust at four different times during the life of the agreement. As the payments are made under an agreement made under Commonwealth legislation, and the payments satisfy the other criteria, they are native title benefits and thus NANE income of the persons in the Indigenous group.

1.29 A native title benefit includes amounts or benefits that arise under ancillary agreements to an agreement made under Commonwealth or State or Territory legislation. An ancillary agreement is a subsidiary agreement that is directly connected to a primary agreement and may provide details not contained in the primary agreement. [Schedule 1, item 3, subparagraph 59-50(5)(a)(ii)]

Example 1.11 : Ancillary agreements and native title benefits

Members of an Indigenous group enter into an agreement under section 31 of the NTA. This agreement provides that an ancillary agreement will be made later setting out the details of the payment of the native title benefit being provided. The ancillary agreement specifies that the members of the group will receive payments every six months for the next 10 years. As the ancillary agreement is part of the agreement which is made under Commonwealth legislation, and assuming the benefit provided satisfies the other criteria, the native title benefit provided to the Indigenous group under the ancillary agreement will be NANE income.

Definition of Indigenous holding entity

1.30 An Indigenous holding entity means:

•

a distributing body; or

•

a trust whose beneficiaries can only be Indigenous persons or distributing bodies.

[Schedule 1, items 3 and 5, subsections 59-50(6) and 995-1(1)]

1.31 A 'distributing body' is a defined term in section 128U of the ITAA 1936. It is a body established under Australian law that can distribute the moneys it receives to, or for the benefit of, Indigenous persons. A distributing body includes Aboriginal Land Councils established under the Aboriginal Land Rights (Northern Territory) Act 1976 and corporations registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006.

1.32 Defining an Indigenous holding entity as including a trust for Indigenous persons and distributing bodies is intended to apply to a broad range of circumstances, such as where a native title benefit is held by an ordinary corporation but where that entity is acting as trustee in respect of the native title benefit.

Clarifying the capital gains tax implications for transfers of native title rights

1.33 The amendments confirm that there are no CGT implications resulting from native title rights (or the right to a native title benefit) being transferred to an Indigenous holding entity or to an Indigenous person, or from the creation of a trust that is an Indigenous holding entity over such rights. [Schedule 1, item 4, section 118-77]

Example 1.12 : No CGT implications for native title rights

As part of a native title determination process the Federal Court determines that Indigenous Holding Entity H holds native title rights on trust for a native title group. This provision confirms that there are no CGT implications arising from the transfer of native title rights to Indigenous Holding Entity H by the Federal Court.

1.34 In addition, the amendment puts beyond doubt that no CGT implications arise from a native title right being cancelled or surrendered or otherwise ended. [Schedule 1, item 4, subparagraph 118-77(1)(b)(iii)]

Application and transitional provisions

1.35 The amendments made by items 1 to 4 in Part 1 of Schedule 1apply in relation to income years starting on or after 1 July 2008 and in relation to CGT events happening on or after 1 July 2008. [Schedule 1, item 9]

1.36 The amendments provide much needed certainty and clarity to taxpayers. The retrospectivity does not negatively impact taxpayers.

1.37 The operation of section 170 of the ITAA 1936 is modified for taxpayers accessing the amendments. This ensures taxpayers are able to seek an amended assessment to take advantage of the amendments where their original assessment was made before the commencement of the amendments and their period for seeking an amendment to their tax return has expired. Broadly, taxpayers are able to seek an amended assessment in these circumstances within two years of that commencement noting the effect of section 170A of the ITAA 1936. [Clause 4]

Consequential amendments

1.38 A change is made to include native title benefits in the list of NANE income provisions in the Act. [Schedule 1, item 2, section 11-55]

1.39 A consequential change is made to the definition of 'mining payment' in section 128U of the ITAA 1936 to make it clear that a native title benefit is excluded from the definition of a mining payment so that the payee does not have to withhold an amount from the payment. This ensures that the withholding provisions align with the treatment of native title benefits as NANE income. [Schedule 1, item 1, subsection 128U(1) of the ITAA 1936]

1.40 A definition of 'Indigenous person' is inserted into the ITAA 1997 as a result of these changes. Indigenous person is defined to mean an individual who is a member of the Aboriginal race of Australia or a descendent of an Indigenous inhabitant of the Torres Strait Islands. This definition is consistent with the definition used in the NTA. [Schedule 1, item 6, subsection 995-1(1)]

1.41 Part 2 of Schedule 1 makes a number of technical changes to the ITAA 1997 and ITAA 1936 to replace references to 'Aboriginal' with 'Indigenous person' and references to 'Aboriginal land' with 'Indigenous land'. In some cases definitions are moved from the ITAA 1936 into the ITAA 1997. [Schedule 1, items 10 to 23, Division 11C (heading) and subsections 6(1) and 128U(1) of the ITAA 1936 and section 11-55 and subsections 30-300(2), 59-15(1) and (2) and 995-1(1)]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Tax treatment of native title benefits

1.42 Schedule 1 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

1.43 This Schedule amends the ITAA 1997 and the ITAA 1936 to clarify that certain native title benefits provided to Indigenous persons, or to Indigenous holding entities, for the loss or impairment of their native title rights are not subject to income tax (including capital gains tax). Such native title benefits will be NANE income.

1.44 There has been longstanding uncertainty about whether certain native title benefits are subject to income tax or not. The amendments in this Schedule came about as a result of open public consultation on a 2010 consultation paper entitled 'Native title, Indigenous Economic Development and Tax'. This consultation paper identified possible ways in which the uncertainty could be addressed, including making certain native title benefits NANE income. Submissions received supported the NANE income approach as a way of clarifying the application of the tax law.

1.45 This amendment defines native title benefits as an amount or non-cash benefit that:

•

arises under either an agreement made under Commonwealth, State or Territory legislation (or an instrument under such legislation) or an ancillary agreement to such an agreement, to the extent the amount or benefit relates to an act that would extinguish native title or would otherwise be wholly or partly inconsistent with the continued existence, enjoyment or exercise of native title; or

•

is compensation under Division 5 of Part 2 of the NTA.

1.46 Benefits which do not relate to the diminution in value of native title rights and result in a taxable gain will continue to be treated in the normal way. These include any payment or benefit provided out of a native title benefit to meet administrative costs or as consideration or remuneration for the provision of goods or services, and any returns received from investing or using the native title benefit.

1.47 This Schedule also makes a number of technical changes to the tax legislation, such as replacing references to 'Aboriginal' with 'Indigenous' in the ITAA 1936 and the ITAA 1997.

1.48 This Schedule is part of a package of reforms to native title announced by the Government to ensure a sustainable and fair native title system that creates economic and social opportunities for Indigenous Australians. These reforms were announced by the Attorney-General at the Australian Institute of Aboriginal and Torres Strait Islander Studies Native Title Conference on 6 June 2012.

Human rights implications

1.49 The Schedule engages the following human rights:

•

the right to self-determination in Article 1 of the International Covenant on Civil and Political Rights (ICCPR) and Article 1 of the International Covenant on Economic, Social and Cultural Rights (ICESCR); and

•

the rights of equality and non-discrimination in Articles 2 and 26 of the ICCPR, Article 2(2) of the ICESCR and Articles 1, 2 and 5 of the International Convention on the Elimination of All Forms of Racial Discrimination (CERD).

Right to self-determination

1.50 This Schedule promotes the right to self-determination as recognised in Article 1 of the ICCPR and Article 1 of the ICESCR. This includes peoples being free to pursue their economic, social and cultural development. Self-determination is a collective right applying to groups of 'peoples'. In Australia, this right is relevant to policies which impact on the rights of Indigenous peoples. This includes the rights and interests to land held by Indigenous persons under their traditional law and customs recognised by native title.

1.51 Also relevant are the principles contained in the United Nations Declaration on the Rights of Indigenous Peoples (the Declaration). While the Declaration is not included in the definition of 'human rights' under the Human Rights (Parliamentary Scrutiny) Act 2011, it provides some useful elaboration on how human rights standards under the international treaties apply to the particular situation of Indigenous peoples. In particular, the following Articles are relevant to this Schedule:

•

Article 8(2)(b), which provides that States shall provide effective mechanisms for prevention of, and redress for any action which has the effect of dispossessing Indigenous peoples of their lands, territories or resources.

•

Article 26(3), which provides that States shall give legal recognition and protection to these lands, territories and resources.

•

Article 39, which provides that Indigenous peoples have the right to have access to financial and technical assistance for the enjoyment of the rights contained in the Declaration.

1.52 This Schedule promotes these principles by making clear that certain benefits (amounts or non-cash benefits) received by native title holders as a result of acts that extinguish or are otherwise inconsistent with the continued existence, enjoyment or exercise of native title are not subject to income tax. The Schedule provides much needed clarity and certainty to Indigenous persons about how native title benefits interact with the tax system.

1.53 Open public consultation was conducted on a 2010consultation paper entitled Native title, Indigenous Economic Development and Tax, one outcome of which was the current amendment. Open public consultation was also conducted in mid-2012 on a draft of the legislative amendments contained in this Schedule. Native title representative bodies and native title service providers were directly notified of the release of the exposure draft amendments and were encouraged to make submissions as appropriate. This further supported the promotion of Indigenous persons' right to self-determination.

Rights to equality and non-discrimination

1.54 Article 2 of the ICCPR and Article 2(2) of the ICESCR require State Parties to respect and ensure to all individuals the rights recognised in the Covenants without distinction of any kind, such as race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status. The right to equal protection of the law in Article 26 of the ICCPR prohibits discrimination in law or in practice in any field regulated by public authorities. Article 26 precludes discrimination in relation to the same list of prohibited grounds as Article 2 of the ICCPR and Article 2(2) of the ICESCR. Articles 2 and 5 of CERD similarly prohibit discrimination on the basis of race.

1.55 Differences in treatment will not amount to prohibited discrimination (that is, they will be legitimate) if the reasons for such differentiation are reasonable and objective and if the aim is to achieve a purpose which is legitimate. The Committee on the Elimination of Racial Discrimination, in its General Recommendation No. 32 (at paragraph 8), recognises that 'non-discrimination' does not necessitate uniform treatment when there are significant differences in situation between one person or group and another, or, in other words, if there is an objective and reasonable justification for differential treatment.

1.56 This Schedule engages the rights to equality and non-discrimination because it applies only to a certain group of persons within the population and draws a distinction between persons who have native title rights (namely, Indigenous people) and persons who do not (namely, non-Indigenous people).

1.57 Although, prima facie, this Schedule provides differential treatment in favour of Indigenous people who obtain native title benefits, the purpose which the Schedule aims to achieve is legitimate and the reasons for differentiation are reasonable and objective.

1.58 The object of the main amendments in this Schedule is to clarify how the unique rights that only Indigenous people can hold interact with the tax system. Indigenous people will benefit from being given this clarity. As recognised in domestic law, native title has special qualities that require a different tax treatment from other forms of title, independently of which racial groups are eligible to hold native title. The High Court has counselled against using traditional common law concept categories in the native title sphere and has indicated that native title should instead be considered on the basis of its uniqueness (see Mabo (No 2) v Queensland (1992) 175 CLR 1 at 89).

1.59 Even applying the current rules of the income tax system based on traditional common law concepts, it is unclear whether benefits provided under a native title agreement for the extinguishment of impairment of a native title right would be assessable income. This Schedule puts into law the tax treatment that is typically and reasonably assumed to apply to such native title payments.

1.60 As noted at paragraph 1.46, NANE income status only applies to that part of a native title benefit that relates to the extinguishment or impairment of native title. Any amount or benefit provided out of a native title benefit to meet administrative costs or as remuneration or consideration for the provision of goods or services will not be NANE income, even if the amount or benefit is provided to an Indigenous holding entity or Indigenous person (who would be entitled to receive the native title benefit). This quarantines the application of the NANE income status.

1.61 The Schedule applies objectively to all native title holders who receive a native title benefit. It applies regardless of whether the native title benefit is received directly or indirectly. This provides Indigenous communities with flexibility to determine how they structure their financial affairs and confirms that the benefit remains NANE income provided it is held for the ultimate benefit of Indigenous persons.

1.62 The differential treatment given by this Schedule is legitimate: a feature of native title rights is that they are uniquely held by only one group of persons within the population, and the object of the Schedule is to clarify how these rights interact with the tax system.

1.63 There is, additionally, an argument to support the Schedule being a 'special measure' as provided by Articles 1(4) and 2(2) of CERD. Article 1(4) provides that special measures taken for the sole purpose of securing adequate advancement of certain racial or ethnic groups or individuals requiring such protection as may be necessary to ensure such groups or individuals equal enjoyment or exercise of human rights and fundamental freedoms shall not be deemed racial discrimination. According to the Committee on the Elimination of Racial Discrimination in its General Recommendation No. 32 (at paragraph 16), special measures should be appropriate to the situation to be remedied, be legitimate, be necessary in a democratic society, respect the principles of fairness and proportionality, and be temporary.

1.64 As outlined above, the existence of native title rights and benefits for Indigenous people constitutes an inherent difference in situation between certain Indigenous people (those who have native title rights) and non-Indigenous people. In this context, the clarification provided by this Schedule is appropriate, legitimate, necessary and respects the principle of fairness. Proportionality is demonstrated by the quarantining of NANE income status to only that part of a native title benefit that is for the extinguishment or impairment of native title, as described above.

1.65 Two limitations on the use of special measures are provided for in Article 1(4) of CERD. The first is that a special measure should not lead to the maintenance of separate rights for different racial groups. Paragraph 26 of the Committee on the Elimination of Racial Discrimination's General Recommendation No. 32 provides that the notion of inadmissible 'separate rights' needs to be distinguished from rights that are accepted and recognised by the international community to secure the existence and identity of groups such as Indigenous peoples. Native title, and rights that flow from it, such as the right to receive a native title benefit, would constitute such rights. The clarification provided by this Schedule cannot be separated from the existence of native title rights and benefits.

1.66 The second limitation on the use of special measures provided for in Article 1(4) of CERD is that such measures must not be continued after the objectives for which they have been taken have been achieved (that is, they should be temporary). Paragraph 27 of the Committee on the Elimination of Racial Discrimination's General Recommendation No. 32 clarifies that special measures should cease to be applied when the objectives for which they were employed have been sustainably achieved. They should, essentially, be functional and goal-related. This Schedule is not inconsistent with this requirement. Although, once passed, the amendment will become permanent, so long as native title rights and benefits exist, permanence is the only way to sustainably achieve the objective of clarifying the tax treatment of native title benefits that are for the extinguishment or impairment of native title rights or interests. These amendments support the native title system, which recognises the need to secure the existence and identity of Indigenous peoples.

Conclusion

1.67 This Schedule is compatible with human rights because it advances the protection of human rights and to the extent that it may also limit human rights, those limitations are reasonable, necessary and proportionate.

Assistant Treasurer, the Hon David Bradbury

Chapter 2 - Deductible gift recipients

Outline of chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to update the list of deductible gift recipients (DGRs) by adding two entities as DGRs and extending the listing of a further three entities.

Context of amendments

2.2 The income tax law allows income tax deductions for taxpayers who make gifts of $2 or more to DGRs. 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 specifically listed by name in that Division.

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

Summary of new law

2.4 The amendments add AE1 Incorporated as a DGR for a time limited period and Teach for Australia for an indefinite period, extend the DGR listing of Australia for UNHCR indefinitely and extend the DGR listings of Yachad Accelerated Learning Project Limited and One Laptop per Child Australia Ltd for a time limited period.

Detailed explanation of new law

AE1 Incorporated (ABN 65 173 229 050)

2.5 AE1 Incorporated is specifically listed as a DGR. This allows taxpayers to claim a deduction for gifts made to AE1 Incorporated after 25 September 2011 and before 26 September 2014. [Schedule 2, item 4, item 9.2.9 in the table in subsection 30-80(2) of the ITAA 1997]

2.6 AE1 Incorporated has been given DGR listing for the purpose of raising funds to search for the AE1, Australia's first submarine, which was lost off the coast of Papua New Guinea in 1914.

Australia for UNHCR (ABN 35 092 843 322)

2.7 The limit on the period of time for which taxpayers may claim a deduction for gifts made to Australia for UNHCR is removed. This allows taxpayers to claim a deduction for gifts made to Australia for UNHCR for an indefinite period of time after 27 June 2007. [Schedule 2, item 5, item 9.2.10 in the table in subsection 30-80(2) of the ITAA 1997]

One Laptop per Child Australia Ltd (ABN 34 141 060 586)

2.8 The limit on the period of time for which taxpayers may claim a deduction for gifts made to One Laptop per Child Australia Ltd is modified to 1 July 2016. Taxpayers may claim a deduction for gifts made to One Laptop per Child Australia Ltd after 26 May 2010 and before 1 July 2016. [Schedule 2, item 2, item 2.2.38 in the table in subsection 30-25(2) of the ITAA 1997]

Teach for Australia (ABN 27 133 833 762)

2.9 Teach for Australia is specifically listed as a DGR. This allows taxpayers to claim a deduction for gifts made to Teach for Australia after 31 December 2012. [Schedule 2, item 3, item 2.2.41 in the table in subsection 30-25(2) of the ITAA 1997]

2.10 Teach for Australia operates a post-graduate conversion program for graduates of any discipline. Participants receive a teaching qualification and undertake a placement in a disadvantaged secondary school.

Yachad Accelerated Learning Project Limited (ABN 20 111 105 401)

2.11 The limit on the period of time for which taxpayers may claim a deduction for gifts made to Yachad Accelerated Learning Project Limited is modified to 1 July 2015. Taxpayers may claim a deduction for gifts made to Yachad Accelerated Learning Project Limited after 29 June 2005 and before 1 July 2015. [Schedule 2, item 1, item 2.2.34 in the table in subsection 30-25(2) of the ITAA 1997]

Consequential amendments

2.12 Duplicated numbering has been corrected for the table item reference for Rhodes Trust in Australia. [Schedule 2, item6, item 9.2.2 in the table in subsection 30-80(2) of the ITAA 1997]

2.13 Changes have been made to update the Index in Division 30 to add AE1 Incorporated and Teach for Australia and correct the table reference for Rhodes Trust in Australia. [Schedule 2, items7, 8 and 9, items 2AAC, 97AAA and 114A in the table in section 30-315 of the ITAA 1997]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Deductible gift recipients

2.14 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

2.15 This Schedule amends the list of deductible gift recipients (DGRs) in Division 30 of the Income Tax Assessment Act 1997. The income tax law allows income tax deductions for taxpayers who make gifts of $2 or more to DGRs.

2.16 AE1 Incorporated is listed as a DGR for a time limited period, Teach for Australia is listed as a DGR for an indefinite period of time, the DGR listing of Australia for UNHCR is extended indefinitely and the listings of Yachad Accelerated Learning Project Limited and One Laptop per Child Australia Ltd are extended for a time limited period.

Human rights implications

2.17 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

2.18 This Schedule is compatible with human rights as it does not raise any human rights issues.

Assistant Treasurer, the Hon David Bradbury

Chapter 3 - Extending deductibility of exploration expenditure to geothermal energy explorers

Outline of chapter

3.1 The provisions in Schedule 3 of the this Bill amends the Income Tax Assessment Act (ITAA 1997) to extend deductibility of exploration or prospecting expenditure to geothermal energy exploration or prospecting. Geothermal energy explorers will be able claim deductions in an equivalent manner to mining and petroleum explorers.

3.2 All references to legislative provisions in this chapter are to the ITAA 1997.

Context of amendments

3.3 Geothermal energy is heat energy contained or stored in rock, water or any other material occurring naturally within the Earth. It is an emerging clean and renewable energy source with the potential to be used for the generation of electrical power in a largely emissions-free manner. Prospective geothermal energy resources have been identified in every Australian State and the Northern Territory.

3.4 Currently the definition of 'exploration or prospecting' in the ITAA 1997 does not extend to geothermal energy exploration. For this reason, geothermal energy explorers are treated differently to their mining and petroleum exploration counterparts.

3.5 Consistent with the Government's policy objective of encouraging exploration or prospecting for geothermal energy resources, the legislation extends deductibility of exploration or prospecting expenditure to taxpayers exploring for geothermal energy resources on an equivalent basis to that currently enjoyed by taxpayers exploring for traditional energy resources obtainable by mining.

3.6 These amendments align deductions for geothermal energy exploration with the deductions available to mining and petroleum explorers.

3.7 The Policy Transition Group, established to consult on the detailed design of the Minerals Resource Rent Tax, recommended that that the income tax law should be amended to incorporate geothermal energy exploration into the wider definition of 'exploration or prospecting'. This recommendation is consistent with the Australian Government's policy objective of encouraging the development of geothermal energy production in Australia.

3.8 From 1 July 2012, geothermal energy explorers will be able to immediately deduct applicable exploration or prospecting expenditure incurred on or after that date on an equivalent basis to the deductions available to explorers for traditional resources obtainable by mining.

Summary of new law

3.9 The amendments extend deductions for expenditure incurred on geothermal energy exploration or prospecting on an equivalent basis to those provided for expenditure incurred on mining and petroleum exploration or prospecting. The amendments will allow taxpayers to immediately deduct their exploration or prospecting expenditure if they meet the applicable tests.

3.10 The amendments define 'geothermal exploration rights' and 'geothermal exploration information' as depreciating assets. Along with other depreciating assets first used for exploration or prospecting for geothermal energy resources (from which energy can be extracted by geothermal energy extraction), the cost of these assets can be deducted immediately in certain circumstances, rather than over the relevant asset's effective life.

3.11 The amendments also extend the definition of 'exploration or prospecting' to encompass activities associated with geothermal energy exploration or prospecting, allowing expenditure of this nature to be deducted immediately in certain circumstances.

3.12 These immediate deductions are available only if: the relevant depreciating asset is not first used for-or the relevant exploration or prospecting expenditure is not expenditure on-development drilling for geothermal energy resources or operations in the course of working a property containing geothermal energy resources. This limits the deductions to exploration or prospecting expenditures not related to development or extraction, as is the case with mining and petroleum exploration.

3.13 Other technical amendments are made to ensure:

•

that a balancing adjustment amount is not reduced to the extent that it is attributable to any non-taxable use of geothermal exploration information;

•

deductions can be attributed to particular periods;

•

deductions relevant to other types of activities (for such items as capital expenditure on landcare operations; connecting power to land or upgrading the connection; or the construction of capital works) are denied;

•

that no income tax liability arises where a geothermal energy explorer stops holding a geothermal exploration right because they acquire a geothermal energy extraction right relating to the same area (or an area that is not significantly different);

•

tax cost setting for exploration and prospecting assets, potentially applicable when an entity joins a consolidated group, is outlined; and

•

other relevant terms are defined.

Comparison of key features of new law and current law

Detailed explanation of new law

Geothermal exploration rights are included as depreciating assets

3.14 Mining, quarrying or prospecting rights are included as depreciating assets under Division 40. The cost of depreciating assets first used for exploration or prospecting for minerals obtainable by mining operations is able to be deducted immediately if certain criteria are met.

3.15 To bring deductions for geothermal energy exploration expenditure in line with those available to mining and petroleum exploration or prospecting expenditure, the amendments include geothermal exploration rights in the list of intangible assets that are defined as depreciating assets. It is important to note that geothermal extraction and production rights (or other related rights) have not been included as depreciating assets, only geothermal exploration rights. [Schedule 3, item 5, paragraph 40-30(2)(ba)]

3.16 The definition of 'geothermal exploration right' is inserted in subsection 995-1(1) of the ITAA 1997. A geothermal exploration right means: (a) an authority, licence, permit or right under an Australian law to explore for geothermal energy resources; or (b) a lease of land that allows the lessee to explore for geothermal energy resources on the land; or (c) an interest in such an authority, licence, permit, right or lease [Schedule 3, item 33, subsection 995-1(1)] . Geothermal exploration rights are issued by State and Territory governments.

3.17 Geothermal energy resources and geothermal energy extraction are defined in subsection 995-1(1) by reference to subsections 40-730(7A) and (7B). Geothermal energy resources are matter occurring naturally within the Earth and containing energy as heat. Geothermal energy extraction means operations that are for the extraction of energy from geothermal energy resources and that are for the purpose of producing assessable income [Schedule 3, item 22, subsection 40-730(7A)and (7B)] . References to these definitions are also included in subsection 995-1(1). [Schedule 3, items 31 and 29, subsection 995-1(1)]

Geothermal exploration information is included as a depreciating asset

3.18 Mining, quarrying or prospecting information is included in the list of intangible assets that are included in the definition of 'depreciating asset' under the ITAA 1997. The cost of such a depreciating asset is able to be immediately deducted under Division 40 provided certain criteria are met.

3.19 To align deductions for geothermal energy exploration with deductions available for mining and petroleum exploration or prospecting, the amendments include geothermal exploration information in the list of intangible assets that are included as depreciating assets. This allows for an immediate deduction for the cost of geothermal exploration information by applying new subsection 40-80(1A) if the other conditions of that provision are satisfied. [Schedule 3, item 5, paragraph 40-30(2)(bb)]

3.20 'Geothermal exploration information' is defined in subsection 995-1(1) by reference to new subsection 40-730(9). Geothermal exploration information is geological, geophysical or technical information that: (a) relates to the presence, absence or extent of geothermal energy resources in an area; or (b) is likely to help in determining the presence, absence or extent of such resources in an area [Schedule 3, item 23, subsection 40-730(9)] . A reference to the definition of 'geothermal energy information' is also inserted into subsection 995-1(1). [Schedule 3, item 32, subsection 995-1(1)]

Geothermal exploration information is held by an entity

3.21 In order to deduct an amount for the decline in value of a depreciating asset, you must first 'hold' the depreciating asset. The table in section 40-40 is used to work out the holder of a depreciating asset. If an entity holds geothermal exploration information that is relevant to geothermal energy extraction they carry on, or propose to carry on, or a business that includes exploration or prospecting for geothermal energy resources which they carry on, then the holder of the information is the entity. The entity holds the information even if the information is generally available because the information is still of special value to the entity. [Schedule 3, item 6, section 40-40, table item 9A]

The cost of a depreciating asset first used in geothermal energy exploration may be immediately deductible

3.22 Subsection 40-80(1) applies to depreciating assets first used for exploration or prospecting for minerals or quarry materials obtainable by mining operations. It provides that in certain circumstances an asset's decline in value is the asset's cost with the consequence that an immediate deduction of the asset's cost may be available. A depreciating asset starts to decline in value when it is first used or installed ready for use for any purpose by the taxpayer (section 40-60). Therefore, no deduction is available until the asset is actually used or installed ready for use.

3.23 Section 40-80 is amended to extend the immediate deductibility for the cost of a depreciating asset to geothermal energy explorers. Subject to a number of conditions, the decline in value of a depreciating asset a taxpayer holds is the asset's cost if the taxpayer first uses the asset for exploration or prospecting for 'geothermal energy resources' from which geothermal energy can be extracted by 'geothermal energy extraction'. 'Geothermal energy resources' and 'geothermal energy extraction' are defined terms and are explained at paragraph 3.16. [Schedule 3, item 7, paragraph 40-80(1A)(a)]

3.24 In the context of Division 40, the use of an intangible depreciating asset requires consideration of the nature of the asset. For example, a geothermal exploration right permits a holder to explore for geothermal energy resources in a particular area. Therefore, the taxpayer will use the right for the purposes of Division 40 if they use it to explore for geothermal energy resources.

3.25 The first use of a geothermal exploration right for exploration or prospecting may include the conduct of something that has been described as a 'proof-of-concept' demonstration. Such a demonstration is said to involve the drilling of an initial well of sufficient depth to reach the pre-determined necessary temperature and to tap a pre-existing underground heat reservoir, from which the heat might be able to be brought to the surface for exploitation. Fracturing of the rock may need to be undertaken to allow fluid injection and passage and to create a fluid reservoir and underground heat exchange. A second well may then need to be drilled to intersect the reservoir, away from the first hole, and testing undertaken to provide information to determine if the heat can be brought to the surface economically.

3.26 An immediate deduction is not available if, when the asset is first used, it is used for development drilling for geothermal energy resources or for operations in the course of working a property containing geothermal energy resources. This is to ensure that the immediate deduction is available for the cost of depreciating assets first used for exploration or prospecting only, and not used for development or extraction of a geothermal energy resource. [Schedule 3, item 7, paragraph 40-80(1A)(b)]

3.27 Examples of a disqualifying use under paragraph 40-80(1A)(b) are as follows:

•

preparing a site for geothermal energy extraction;

•

providing water, light and power for use on the site for future geothermal energy extraction;

•

determining the size and location of development wells and any other infrastructure;

•

any activity conducted in preparation for the drilling of development wells after exploitation of the geothermal energy resource has been proven to be technically feasible and economically viable; and

•

the construction of any infrastructure related to or to be used in the geothermal energy extraction.

3.28 In order to be entitled to the immediate deduction of a depreciating asset's cost, at that asset's start time the entity must be involved to some extent in geothermal energy extraction. That is, the entity either carries on geothermal energy extraction; or it would be reasonable to conclude that they proposed to carry on geothermal energy extraction; or the entity carries on a business of, or a business that included, exploration or prospecting for geothermal energy resources from which energy can be extracted by geothermal energy extraction, and expenditure on the asset was necessarily incurred in carrying on that business. The entity may satisfy more than one of these criteria. [Schedule 3, item 7, paragraph40-80(1A)(c)]

Example 3.13 : Immediately deducting the cost of a depreciating asset - tangible capital assets

Greensteam Pty Ltd is a geothermal energy exploration company searching for geothermal energy resources within geothermal exploration rights it holds in the Great Sandy Desert. Greensteam carries on a business that includes exploration or prospecting for geothermal energy resources from which energy can be extracted by geothermal energy extraction.

Greensteam estimates that it will need to drill over 500 exploration wells as part of its exploration program. Rather than lease drilling machinery to conduct the exploration work, Greensteam determines that it would be cheaper to purchase its own drill rig.

Greensteam purchases a drill rig on 15 May 2013 for $500,000 and uses it to explore for geothermal energy resources. The first exploratory drill hole undertaken as part of Greensteam's exploration program is drilled in search of hot underground water. The drilling of this first hole constitutes a use of the drill rig for exploration or prospecting for geothermal energy resources.

At that time Greensteam does not know that the required conditions will be found in the drill hole and so it does not use the drill rig for development drilling for geothermal energy resources or for operations in the course of working a property containing a geothermal energy resource.

Greensteam is able to immediately deduct the cost of the drill rig under subsection 40-25(1) by applying subsection 40-80(1A).

Example 3.2: Exploration expenditure which is not immediately deductible

CityLights Energy Co, having conducted exploration activities on its four geothermal exploration rights (tenements) which indicated geothermal energy resources that are technically feasible to extract, has also undertaken economic viability studies and determined that, coupled with the technical feasibility findings, geothermal energy extraction was economically feasible on all tenements and that an extraction plant should be established.

However, CityLights Energy Co, having insufficient funding to develop the resources on all four tenements, disposed of their least attractive tenement to Steamy Turbine Co for $2 million.

Steamy Turbine Co, concurrently with the decision to purchase the tenement, makes the decision to extract and develop the geothermal energy resource based on the findings of CityLights Energy Co's studies. The company applies to the relevant state government authority for the grant of a geothermal extraction right with the expectation that it will be approved within six months.

In the meantime, Steamy Turbine Co continues to use the geothermal exploration right it purchased from CityLights Energy Co by drilling further holes to determine where the best energy flows are located and where their extraction and power plant should be built.

The cost of Steamy Turbine Co's geothermal exploration right is not immediately deductible under subsection 40-80(1A). The purpose of the first additional hole drilled was to determine how to extract the geothermal energy resource and therefore the right was first used for operations in the course of working a property containing geothermal energy resources. Instead, Steamy Turbine Co will claim a decline in value deduction over the effective life of the geothermal exploration right under subsection 40-25(1) of Division 40.

Deduction for expenditure on exploration or prospecting for geothermal energy resources

3.29 Expenditure on exploration or prospecting that is not expenditure which forms part of the cost of a depreciating asset may qualify for an immediate deduction under subsection 40-730(1). Subsection 40-730(1) provides an immediate deduction for expenditure incurred on exploration or prospecting for minerals, petroleum or quarry materials which are obtainable by mining operations. Expenditure is only deductible if the taxpayer satisfies certain conditions. This deduction is extended to exploration or prospecting for geothermal energy resources. A new sub-heading is inserted to separate paragraphs relating to exploration and prospecting for minerals and exploration and prospecting for geothermal energy resources. [Schedule 3, item 15, above subsection 40-730(1)]

3.30 The legislation amends section 40-730 to allow an immediate deduction for expenditure incurred on exploration or prospecting for 'geothermal energy resources' that is not the cost of a depreciating asset. [Schedule 3, item 16, subsection 40-730(2A)]

3.31 In order to be entitled to a deduction under subsection 40-730(2A) a number of conditions must be satisfied.

3.32 The first condition is that expenditure must be incurred on exploration or prospecting for 'geothermal energy resources' from which energy can be extracted by 'geothermal energy extraction'. [Schedule 3, item 16, subsection 40-730(2A)]

3.33 To ensure that deductions cannot be made twice, expenditure that is included in the cost of a depreciating asset, for example, expenditure incurred on the asset's engineering design, is excluded from deductibility under new subsection 40-730(2A). Deductions for such expenditure included in the cost of assets are available under the general provision of Subdivision 40-B. [Schedule 3, item 17, subsection 40-730(3)]

3.34 Above subsection 40-730(4) a new heading 'Definitions' is inserted to indicate that the remaining subsections of the section refer to definitions. [Schedule 3, item 18, above subsection 40-730(4)]

3.35 The definition of 'exploration or prospecting' has been amended to include 'geothermal energy resources' in paragraph 40-730(4)(b). ('Geothermal energy resources' is a defined term and is explained at paragraph 3.16.)The amendment has been made in this way because the nature of exploration or prospecting activities for geothermal energy resources is more similar to exploration or prospecting activities associated with petroleum mining than with exploration or prospecting activities associated with mining in general or quarrying. The amendment allows for exploration expenditure incurred on geological, geophysical and geochemical surveys, exploration drilling and appraisal drilling for 'geothermal energy resources' (which is not the cost of a depreciating asset), to be immediately deductible. [Schedule 3, item 19, paragraph 40-730(4)(b)]

3.36 The definition of 'exploration or prospecting' is also amended by paragraph 40-730(4)(c) to include feasibility studies to evaluate the economic feasibility of extracting energy from geothermal energy resources, once they have been discovered. [Schedule 3, item 20, paragraph 40-730(4)(c)]

3.37 Finally, the definition of 'exploration or prospecting' is also amended to include obtaining 'geothermal exploration information' associated with the search for and evaluation of areas containing 'geothermal energy resources'. ('Geothermal exploration information' is a defined term and is explained in paragraph 3.20.) [Schedule 3, item 21, paragraph 40-730(4)(e)]

3.38 The second condition is that the entity must have carried on 'geothermal energy extraction'; or it would be reasonable to conclude that they proposed to carry on 'geothermal energy extraction'; or that the entity carried on a business of, or a business that included, exploration or prospecting for 'geothermal energy resources' from which energy can be extracted by 'geothermal energy extraction', and the expenditure on the asset was necessarily incurred in carrying on that business. [Schedule 3, item 16, subsection 40-730(2A)]

3.39 An entity is not entitled to an immediate deduction under subsection 40-730(2A) if the expenditure in question was on development drilling for 'geothermal energy resources' or on operations in the course of working a property containing geothermal energy resources. This is to ensure that the immediate deduction is available for expenditure incurred on exploration or prospecting only, and not expenditure on developmental work or extraction of a 'geothermal energy resource'. [Schedule 3, item 16, subsection 40-730(2B)]

Example 3.3: Immediately deducting expenditure incurred on a feasibility study

BubblyWater Pty Ltd carries on geothermal energy extraction. Following extensive drilling of exploration wells on one of its exploration tenements, BubblyWater is confident that they have discovered a geothermal energy resource from which geothermal energy extraction is technically feasible and thus may occur in the future.

BubblyWater engages a contractor, Ecofease, to undertake a feasibility study to evaluate the economic viability of extracting energy from the geothermal energy resource. The feasibility study will allow BubblyWater to determine whether, coupled with the technical feasibility findings, the geothermal energy resource is economically feasible for future development. The feasibility study costs BubblyWater $450,000.

The expenditure incurred by BubblyWater on the feasibility study is not incurred on development drilling for geothermal energy resources or on operations in the course of working a property containing geothermal energy resources.

The cost of the feasibility study is immediately deductible to BubblyWater under subsection 40-730(2A).

3.40 Examples of expenditure that are disqualified from deduction by subsection 40-730(2B) are similar to those that disqualify expenditure found in paragraph 3.27.

Example 3.4: Exploration expenditure which is not immediately deductible

Percolating Power Co holds a geothermal exploration right and conducts exploration activities on the tenement, the results of which indicate a geothermal energy resource that is technically feasible to extract. The company undertakes further work to determine if development of the resource is economically feasible. Based on the these findings, the company determines that geothermal energy extraction is economically feasible and that a power plant should be established to utilise the geothermal energy extracted to produce electricity to be fed into the transmission lines of the local grid.

The company applies to the relevant State government authority for the grant of a geothermal energy extraction right with the expectation that it will be approved within six months.

In the meantime, Percolating Power Co continues to use its exploration right to drill further holes to determine where the best energy flows are located and where the power plant should be built. It spends $1 million on this additional work.

The expenditure incurred on the additional drilling is not incurred on exploration or prospecting for geothermal energy resources from which energy can be extracted by geothermal energy extraction. Rather, the character of the expenditure is such that the expenditure is directed towards operations in the course of working a property containing geothermal energy resources under subsection 40-730(2B). As a result, the cost of the additional drilling work is not immediately deductible under subsection 40-730(2A).

Example 3.5: No deductions for non-geothermal businesses

Energy For The Future Co currently carries on a business generating solar energy. It is considering expanding its business by exploring for geothermal energy resources in Queensland. Before it applies for geothermal exploration rights, it purchases a series of maps providing geothermal exploration information from the Queensland Geological Survey Service for $30,000.

Energy For The Future Co is not entitled to an immediate deduction under subsection 40-730(2A) for the expenditure incurred on the geothermal exploration information contained in the maps. This is because they do not carry on geothermal energy extraction, nor do they carry on a business of, or a business that included, exploration or prospecting for geothermal energy resources from which energy can be extracted by geothermal energy extraction. Due to the preliminary nature of Energy For The Future Co's activities regarding a possible geothermal energy venture, it would not be reasonable to conclude that it proposed to carry on geothermal energy extraction.

An amount received for the provision of geothermal exploration information is assessable income

3.41 Under section 15-40 an amount received for providing mining, quarrying or prospecting information to another entity is assessable income if the entity continues to hold the information and the amount received is not assessable as ordinary income under section 6-5.

3.42 Consideration received for dealing with or disclosing such information will be ordinary income assessable under section 6-5 where:

•

the information is disclosed for the purpose of profit-making, or

•

the information is dealt with or disclosed under an agreement for the provision of a service that involves sharing the information with another person and has no adverse effect on the profit-yielding structure of the business.

3.43 However, where the consideration received for dealing with or disclosing such information does not give rise to ordinary income, the amount is not assessable under section 6-5. The amount is statutory income and is included in assessable under section 15-40.

3.44 To ensure that geothermal exploration information is treated in the same manner as mining, quarrying or prospecting information, section 15-40 is amended to ensure that an amount received by an entity for providing geothermal exploration information to another entity is assessable income, providing they continue to hold that information and the information is not assessable as ordinary income. [Schedule 3, item 4, section 15-40]

3.45 'Geothermal energy' and a reference to providing geothermal exploration information are added to the list of provisions about assessable income. [Schedule 3, item 1, section 10-5]

3.46 The heading for section 15-40 has been substituted with the new heading 'Providing mining, quarrying or prospecting information or geothermal exploration information'. [Schedule 3, item 3, section 15-40]

Geothermal energy information and balancing adjustments

Balancing adjustments

3.47 Where a balancing adjustment event occurs for a depreciating asset and the termination value differs from the adjustable value of the asset, the difference between those two amounts (the balancing adjustment amount) is either assessable (if the termination value exceeds adjustable value) or deductible (if the adjustable value exceeds termination value) (section 40-285).

3.48 Section 40-290 provides for the balancing adjustment amount to be reduced if the taxpayer's deductions for the depreciating asset (or deductions of specified earlier holders of the asset) were reduced under section 40-25.

3.49 If a balancing adjustment event occurs in relation to a depreciating asset which is 'mining, quarrying or prospecting information' (as defined in subsection 40-730(8)), there can be no reduction to the balancing adjustment amount under subsection 40-290(5). This is intended to reflect the exclusion of such information from any residual capital gains consideration; as such information is not a CGT asset.

3.50 Like mining information, geothermal exploration information is not a CGT asset and so it is appropriate that there also be no reduction to any balancing adjustment amount concerning it under section 40-290. [Schedule 3, item 8, subsection 40-290(5)]

Attributing deduction to periods

3.51 Section 165-55 sets out the rules for attributing deductions to particular periods. This is one of the steps involved in determining the notional loss or notional taxable income for the period under section 165-50.

3.52 Under subsection 165-55(2), certain deductions are attributable to periods in proportion to the length of the period. The deductions include deductions for depreciating assets; deductions for exploration and prospecting or mining capital expenditure in connection with mining or quarrying; any other deductions for expenditure which are spread over two or more years, and deductions for capital expenditure in connection with Australian films.

3.53 The legislation amends subsection 165-55(2) by the inclusion of a paragraph (ba) which creates a new category of deductions that are attributed to each period in proportion to the length of the period. The new subparagraph includes deductions for exploration and prospecting for geothermal energy resources. This amendment ensures consistent treatment between the attribution of mining exploration or prospecting expenditure and geothermal energy exploration or prospecting expenditure. [Schedule 3, item 26, paragraph165-55(2)(ba)]

Denying deductions for landcare

3.54 Section 40-630 provides an immediate deduction for capital expenditure incurred by a taxpayer on a landcare operation. 'Landcare operation' is defined in section 40-635.

3.55 The deduction is available if the taxpayer incurs the capital expenditure at a particular time in an income year on a landcare operation for land in Australia, and at that time the land is used by the taxpayer for carrying on a 'primary production business' (as defined in subsection 995-1(1)). Alternatively, the operation has to be on rural land in Australia used by the taxpayer at the time for carrying on a business for a taxable purpose from the use of that land.

3.56 No deduction is available if the land is used for carrying on a business of 'mining operations' (defined in subsection 40-730(7)).

3.57 To ensure consistency between the treatment of mining operations and geothermal energy extraction, the legislation extends the denial of landcare deductions to geothermal energy extraction. [Schedule 3, items 10 to 12, paragraph 40-630(1)(b), note in subsection 40-630(1)and paragraphs 40-630(1A)(b, 1B)(b) and (3)(b)]

Example 3.6: Deduction for expenditure on landcare operation not available

ExplosiveGeo is a geothermal energy company extracting geothermal energy from a tenement where they hold a geothermal energy extraction licence in South Australia. ExplosiveGeo incurs expenditure installing a drainage control system to assist with water run-off in the production area.

ExplosiveGeo is not entitled to an immediate deduction for the expenditure incurred on installing the drainage system as it is carrying on a business of geothermal energy extraction and the drainage system is not a 'landcare operation' under section 40-630. However, ExplosiveGeo may be entitled to a decline in value deduction for the cost of the drainage system under subsection 40-25(1).

Denying deductions for electricity and phone lines

3.58 Section 40-650 deals with the amounts that cannot be deducted under Subdivision 40-G which relates to capital deductions for primary producers. The section limits the deductions available for the cost of connecting electricity and telephone lines under section 40-645.

3.59 The effect of subsection 40-650(3) is to deny a deduction for capital expenditure incurred in providing water, light or power for use on, access to or communication with, the site of mining operations or geothermal energy extraction. Similarly a deduction is denied for contributions to the cost of providing water, light or power for mining operations or that extraction.

3.60 The excluded expenditure would generally qualify for a deduction as 'mining capital expenditure' (paragraph 40-860(1)(d)) over the life of the project under section 40-830.

3.61 To ensure consistency between the treatment of mining operations and geothermal energy extraction, the legislation extends the denial of these deductions to geothermal energy extraction. [Schedule 3, items 13 and 14, paragraphs 40-650(3)(a) and (3)(b)]

Example 3.7: Denying deductions for expenditure on electricity and phone lines

Brokenshire Resources carries on geothermal energy extraction activities on Shaun's Camel Farm in outback Queensland. Brokenshire Resources has promised its contracted scientist, Birgit, air-conditioning to allow her to work in the extreme heat.

In lieu of paying Shaun for access to his farm and for the use of his workers quarters for Birgit, Brokenshire Resources uses its technicians to install power and air-conditioning into Shaun's employee housing.

The cost of installing power by Brokenshire Resources cannot be deducted under the electricity and telephone line provisions of sections 40-645 and 40-650.

Deductions for construction expenditure

3.62 Capital works that are currently written off under other specific provisions such as those associated with exploration and prospecting are specifically excluded from Subdivision 43-B.

3.63 Subdivision 43-B explains the meaning of construction expenditure. Subsection 43-70(1) defines 'construction expenditure' as capital expenditure incurred in respect of the construction of capital works (section 43-20). However, subsection 43-70(1) is limited by subsection 43-70(2) which lists exclusions from the definition of 'construction expenditure'.

3.64 Subparagraph 43-70(2)(fa)(iv) precludes consideration under Division 43 in respect of expenditure that is the cost of a depreciating asset that the taxpayer can deduct applying subsection 40-80(1), that is, the cost of depreciating assets first used for exploration or prospecting of minerals or quarrying materials.

3.65 The legislation extends this preclusion of consideration under Division 43 to expenditure incurred on depreciating assets that the taxpayer can deduct by applying the subsection 40-80(1A) which deals with depreciating assets first used in exploration and prospecting for geothermal energy resources. [Schedule 3, item 24, subparagraph 43-70(2)(fa)(iv)]

Example 3.8: Denying deductions for construction expenditure

MeziMoo Corporation is a geothermal energy explorer that constructs temporary housing on one of its exploration tenements to house its team of geologists who are conducting exploration drilling.

The expenditure on the temporary housing forms the cost of a depreciating asset that is first used for exploration or prospecting for geothermal energy resources from which geothermal energy can be extracted by geothermal energy extraction. As an immediate deduction is available under subsection 40-80(1A), consideration of the expenditure under Division 43 is precluded by subparagraph 43-70(2)(fa)(iv).

Preserving relief from income tax liability for geothermal energy explorers

3.66 As these amendments provide that geothermal exploration rights are depreciating assets, if a geothermal energy explorer stops holding a geothermal exploration right relating to an area because they acquire a geothermal energy extraction right relating to the same area or an area that is not significantly different, a balancing adjustment event will happen. This may result in an amount being either assessable (if the termination value exceeds the asset's adjustable value) or deductible (if the asset's adjustable value exceeds its termination value).

3.67 These amendments set the termination value of the exploration right to zero, ensuring there is no immediate tax liability when the geothermal energy explorer stops holding a geothermal exploration right and acquires a geothermal energy extraction right. This modification only applies where the area that the geothermal energy extraction right relates to is the same as, or not significantly different from, the area to which the geothermal exploration right related. [Schedule 3, item 9, at the end of the table in subsection 40-300(2)]

3.68 As the geothermal energy extraction right that is acquired is not a depreciating asset, the right is subject to taxation under the CGT provisions. Because of the amendment to termination value for Division 40 purposes described in paragraph 3.66, permitting the ordinary cost base rules in Division 110 to apply would result in an inappropriate outcome.

3.69 These amendments accordingly provide that the first element of the cost base (and reduced cost base) of the geothermal extraction right be set to nil where the area the extraction right relates to is the same as, or not significantly different from, the area to which the geothermal exploration right related. [Schedule 3, item 25, section 112-38]

3.70 To facilitate the operation of the modification, the term 'geothermal energy extraction right' is defined in subsection 995-1(1). A geothermal energy extraction right is an authority, licence, permit or right under an Australian law to carry on geothermal energy extraction; or a lease of land that allows the lessee to carry on geothermal energy extraction on the land, or an interest in such an authority, licence, permit, right or lease. [Schedule 3, item 30, subsection 995-1(1)]

Tax cost setting for exploration and prospecting

3.71 Under subsection 40-80(1), the decline in value of a depreciating asset that is first used for exploration or prospecting is taken to be the cost of the asset so long as the taxpayer has met the conditions ascribed in subsection 40-80(1). Generally, this will mean that an immediate deduction is available for the cost of the asset in that year under subsection 40-25(1). Where subsection 40-80(1) applies, the taxpayer does not have to make a choice to use either the diminishing value method (section 40-70) or the prime cost method (section 40-75) to calculate the decline in value of the asset.

3.72 However, section 716-300 ensures that where an entity joins a consolidated group and the entity had previously deducted the cost of a depreciating asset first used for exploration or prospecting applying subsection 40-80(1), the asset's decline in value is deemed to have been calculated by the joining entity using the prime cost method. This affects the method and the effective life to be used by the head company of the consolidated group in working out the decline in value of the asset.

3.73 If the joining entity deducted an amount for the decline in value of a depreciating asset other than by applying subsection 40-80(1) (for example the decline in value of a depreciating asset other than one first used for exploration or prospecting was calculated on the basis of its effective life under section 40-70 or section 40-75), section 716-300 would not apply and whichever method was adopted by the joining entity would continue to apply to the head company under subsection 701-55(2).

3.74 The legislation extends section 716-300 treatment to depreciating assets first used for geothermal energy exploration or prospecting. That is, if a joining entity deducted an amount for the decline in value of a depreciating asset applying the new subsection 40-80(1A), the asset's decline in value is deemed to have been calculated using the prime cost method. This will affect the method and the effective life to be used by the head company of the consolidated group in working out the decline in value of the asset. [Schedule 3, items 27 and 28, paragraphs 716-300(1)(b) and (c) and note in subsection 716-300(1)]

List of Provisions about deductions

3.75 The legislation updates the list of provisions about deductions. Under the 'capital allowances' section of the table, references to exploration an prospecting are updated to includes references to section 40-80(1A) and 40-730. 'Geothermal exploration information' and 'geothermal exploration rights' are also added to their table with references to Subdivision 40-B. [Schedule 3, item 2, section 12-5, table item headed 'capital allowances']

Application

3.76 Broadly, the legislation is effective from 1 July 2012.

3.77 The legislation applies to amounts received on or after 1 July 2012 (for amendments to section 15-40), depreciating assets whose start time is on or after 1 July 2012 (for amendments to sections 40-30, 40-40, 40-80, 40-290 and 716-300), (depreciating assets that started to be held on or after 1 July 2012 for amendments to section 40-300), expenditure incurred on or after 1 July 2012 (for amendments to sections 40-630 and 40-650 and subsection 40-730(2A) and (2B)) and to geothermal energy extraction rights acquired on or after 1 July 2012 (for section 112-38). [Schedule 3, item 34, Application]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Extending deductibility of exploration expenditure to geothermal energy explorers

3.78 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.79 The legislation extends the immediate deductibility of exploration expenditure provided to mining and petroleum explorers to geothermal energy explorers.

Human rights implications

3.80 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.81 This Schedule is compatible with human rights as it does not raise any human rights issues.

Assistant Treasurer, the Hon David Bradbury

Chapter 4 - Extension of interim streaming provisions for managed investment trusts

Outline of chapter

4.1 Schedule 4 to this Bill amends Schedule 2 of the Tax Laws Amendment (2011 Measures No. 5) Act 2011 (TLA No. 5 2011) (the interim trust streaming provisions) to extend the exemption from the application of the interim trust streaming provisions for managed investment trusts (MITs) and other trusts that are treated in the same way as MITs for the purposes of Division 275 of the Income Tax Assessment Act 1997 (ITAA 1997).^[1]

4.2 Schedule 4 to this Bill extends the current exemption to include the 2012-13 and 2013-14 income years. This ensures that the current interim arrangements continue to operate until the end of the 2013-14 income year. The new tax system for MITs (the new MIT regime) is scheduled to commence on 1 July 2014.

4.3 These amendments affect MITs that have not made an election to have the amendments contained in Schedule 2 of the TLA No. 5 2011 apply to them.

Context of amendments

4.4 Schedule 2of the TLA No. 5 2011 amended the ITAA 1997 and the Income Tax Assessment Act 1936 (ITAA 1936) to enable the 'streaming' of capital gains and franked dividends to beneficiaries, subject to relevant integrity provisions.

4.5 Part 3 of Schedule 2 of the TLA No. 5 2011 provided an exemption from the application of these amendments for MITs for the 2010-11 and 2011-12 income years. This was in recognition of the fact these types of trusts generally do not 'stream' income to their beneficiaries. However, the trustee of a MIT may elect to irrevocably apply the amendments contained in Schedule 2 of the TLA No. 5 2011.

4.6 The exemption was intended to operate until the new MIT regime commenced, originally scheduled for 1 July 2012. However, as part of the 2011-12 Mid-Year Economic and Fiscal Outlook, the start of the new MIT regime was deferred for 12 months, to allow more time for consultation with stakeholders and to provide industry with more time to change their business systems.

4.7 Further, in Media Release No. 080 of 2012, the Assistant Treasurer announced that the Government would progress the implementation of the new MIT regime in line with the update and rewrite of Division 6 of Part III of the ITAA 1936 and defer the commencement date of the new MIT regime to 1 July 2014.

4.8 Because the current exemption is intended to apply until the new MIT regime is introduced, the Government also announced it would extend the exemption until the announced commencement of the new MIT regime.

Summary of new law

4.9 This Schedule amends item 51 of TLA No. 5 2011 to allow the trustee of a MIT that has not made an election to apply the interim trust streaming provisions in relation to the 2010-11 or 2011-12 years to continue to disregard those provisions in the 2012-13 and 2013-14 income years, unless they choose to apply them. MITs that have previously made the election to apply the interim trust streaming provisions continue to apply those provisions for the 2012-13 and 2013-14 income years.

4.10 These amendments apply in relation to the 2012-13 and 2013-14 income years.

Comparison of key features of new law and current law

Detailed explanation of new law

4.11 A MIT is exempt from the application of the interim trust streaming provisions for the 2010-11 and 2011-12 income years unless the trustee of the MIT has made an irrevocable election to apply those rules. If a valid election was made in relation the 2010-11 income year, then that election also applies to the 2011-12 income year.

4.12 The amendments in this Schedule provide that MITs that have not made an election in the 2010-11 or 2011-12 income years to apply the interim trust streaming provisions can continue to disregard those provisions for the 2012-13 and 2013-14 income years. This ensures that the current tax treatment for MITs is maintained until the scheduled commencement of the new MIT regime. [Schedule 4, items 1 to 3]

4.13 MITs where the trustees have not previously made an election to apply the interim trust streaming provisions may do so in relation to the 2012-13 and 2013-14 income years. That election applies from the start of the income year in relation to which the election is made until the end of the 2013-14 income year. Consistent with the current provisions, the election must be made within two months after the end of the income year in relation to which the election is to apply.

Example 4.14

Celestia Managed Investments is a MIT. The trustee of Celestia Managed Investments did not elect to apply the amendments contained in Schedule 2 of TLA No. 5 2011 for the 2010-11, 2011-2012 or 2012-13 income years.

On 1 July 2013, the trustee of Celestia Managed Investments makes an election, in writing, to apply the amendments contained in Schedule 2 of TLA No. 5 2011 for the 2013-14 income year. Celestia Managed Investments is therefore subject to the amendments contained in that Schedule for the 2013-14 income year.

4.14 A MIT where the trustee has made an election in the 2010-11 or 2011-12 income years to apply the interim trust streaming provisions will continue to apply those provisions in the 2012-13 and 2013-14 income years.

Example 4.15

The Luna Trust is treated in the same way as a MIT for the purposes of Division 275 for the 2010-11 to 2013-14 income years. The trustee of the Luna Trust did not choose to apply the amendments contained in Schedule 2 of TLA No. 5 2011 for the 2010-11 income year.

On 1 July 2011, the trustee of the Luna Trust makes an election, in writing, to apply the amendments in Schedule 2 of TLA No. 5 2011 for the 2011-12 income year. The Luna Trust is therefore subject to the amendments contained in that Schedule for the 2011-12, 2012-13 and 2013-14 income years.

Application provisions

4.15 The amendments made by Schedule 4 to this Bill commence on Royal Assent and apply in relation to the 2012-13 and 2013-14 income years.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Extension of interim streaming provisions for managed investment trusts

4.16 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

4.17 This Schedule provides that MITsand other trusts that are treated in the same way as managed investment trusts for the purposes of Division 275 of the ITAA 1997 may continue to disregard the interim trust streaming provisions for the 2012-13 and 2013-14 income years unless they have elected or elect to apply those rules. MITs that have previously made the election to apply the interim trust streaming provisions continue to apply those provisions in the 2012-13 and 2013-14 income years.

4.18 This amendment ensures that the current treatment of MITs continues until the commencement of the new tax system for MITs.

Human rights implications

4.19 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

4.20 This Schedule is compatible with human rights as it does not raise any human rights issues.

Assistant Treasurer, the Hon David Bradbury

Chapter 5 - Rebate for medical expenses

Outline of chapter

5.1 Schedule 5 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to better target the rebate for medical expenses by introducing an income test from 1 July 2012. The rebate for medical expenses is commonly referred to as the net medical expenses tax offset (NMETO).

5.2 For individuals who have an adjusted taxable income for rebates above the singles tier 1 threshold of $84,000 (indexed) for a single individual and the family tier 1 threshold for an individual who has a spouse or one or more dependants ($168,000 (indexed)), the threshold above which an individual can claim the NMETO for out-of-pocket medical expenses will be increased to $5,000 (indexed). The family threshold is increased by $1,500 for every dependent child after the first. In addition, for singles and families above their respective tier 1 threshold, the rate of NMETO will be reduced to 10 per cent for the amount of out-of-pocket expenses greater than $5,000.

5.3 Legislative references in this Chapter are to the ITAA 1936 unless otherwise stated.

Context of amendments

5.4 The NMETO provides taxpayers with a non-refundable tax offset for out-of-pocket medical expenses (that is, medical expenses less available reimbursements, such as those through the Medicare Benefits Schedule (MBS), the Pharmaceutical Benefits Scheme (PBS) and the Repatriation Pharmaceutical Benefit Scheme (RPBS) or Government aged care subsidies and private health insurance refunds) above the NMETO claim threshold.

5.5 The threshold of out-of-pocket expenses above which the NMETO can be claimed in 2012-13 is $2,120 (indexed to changes in the consumer price index (CPI)) with the offset available at a rate of 20 per cent of out-of-pocket medical expenses.

5.6 Eligible NMETO expenses are defined in subsection 159P(4) and broadly include expenses relating to an illness or operation which has been paid to a legally qualified doctor, nurse, chemist or hospital. Therapeutic expenses such as physiotherapy are eligible for the NMETO if prescribed by, and carried out under the direction of a doctor. The cost of medical aids and artificial limbs, artificial eye or hearing aids are also eligible expenses for the NMETO. Expenses incurred as a result of strictly cosmetic operations are ineligible for the NMETO.

5.7 There is no monetary limit to the total amount of offset a taxpayer can receive, but the amount of offset available is limited by the taxpayer's tax liability. That is, a taxpayer cannot receive a greater amount of offset than their basic income tax liability.

5.8 Where a taxpayer has paid eligible medical costs for themself or their Australian resident dependants, the taxpayer totals those expenses to reach the claim threshold.

5.9 In the 2012-13 Budget the Government announced it would better target expenditure on the NMETO by income testing the threshold above which a taxpayer may claim the offset and the rate at which the offset applies from 1 July 2012.

5.10 Australian Government annual health expenditure is expected to reach around $100 billion by 2022. Better targeting support through the NMETO is one of a number of measures the Government has identified to ensure a strong and sustainable health care system.

5.11 The Government is continuing to provide substantial support for health expenses, including around $27 billion in 2012-13 through the MBS the PBS and related safety nets.

Summary of new law

5.12 Schedule 5 applies an income test to eligibility for the NMETO and reduces the offset to 10 per cent where the taxpayer's adjusted taxable income for rebates exceeds the income test thresholds.

5.13 The income tests generally align with those for the Medicare levy surcharge. Broadly, the thresholds in 2012-13 are $84,000 for singles and $168,000 for families. Where the taxpayer has more than one dependent child the income threshold is increased by $1,500 for each dependent child after the first. These thresholds are indexed annually by average weekly ordinary time earnings (AWOTE).

5.14 Taxpayers who have an adjusted taxable income for rebates above the relevant threshold will be able to claim the NMETO at a rate of 10 per cent where their annual out-of-pocket expenses exceed $5,000 (indexed by CPI).

5.15 Those taxpayers who have an adjusted taxable income for rebates below the income test thresholds will continue to receive a rebate of 20 per cent of the amount of their out-of-pocket expenses where those expenses are greater than $2,120 in 2012-13 (indexed by CPI).

5.16 The main features of the impact of the income test on the rate of NMETO applied are presented in table 5.1.

Comparison of key features of new law and current law

Detailed explanation of new law

5.17 The new law better targets the NMETO by providing for those with greater capacity to pay, that is those with income of greater than $84,000 or $168,000 if they are a family, to bear more of their out-of-pocket medical costs. The new law applies an income test, meaning that taxpayers who have an income greater than the income test will have a higher medical expense claim threshold and will receive a lower rate of NMETO. In doing this a number of new definitions are inserted into the law to refer to the income test, claim threshold and rebate amounts. The new law also provides for the application of the income test in specific situations such as trusts.

5.18 A new term, 'adjusted taxable income for rebates', is used to replace the existing adjusted taxable income which is used to define what is considered to be income for some rebates. The new term is created to avoid confusion with other definitions of adjusted taxable income, such as in the A New Tax System (Family Assistance) Act 1999, that are different to the income test required for the NMETO income thresholds. [Schedule 5, item 1, subsection 6(1)]

5.19 The terms 'singles tier 1 threshold' ($84,000 in 2012-13) and 'family tier 1 threshold' ($168,000 in 2012-13) are inserted in the ITAA 1936. These terms define the income threshold at which a higher amount of out-of pocket medical expenses ($5,000 in 2012-13) is required before the NMETO is applied to singles and families respectively. These terms are the same as those used in the Private Health Insurance Act 2007 and A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999. Using these terms reduces taxpayer confusion as they provide consistency in the terminology used for the NMETO income thresholds with those used for the Medicare levy surcharge. [Schedule 5, items 1and 6, subsection 6(1)]

5.20 The terms 'medical expense rebate higher phase-in limit' ($5,000 in 2012-13) and 'medical expense rebate lower phase-in limit' ($2,120 in 2012-13) are inserted that define the amount of out-of pocket medical expenses the taxpayer is required to have before being able to have the NMETO applied. The different amounts at which the NMETO is applied further ensures for those with greater capacity to pay to bear more of their out-of-pocket medical costs. [Schedule 5, items 3 and 4, subsection 6(1)]

5.21 Finally, the new term 'rebatable medical expense amount' is inserted into the law. The rebatable medical expense amount is the rate at which NMETO is applied. For those taxpayer who have an income greater than the income test and they have out-of-pocket medical expenses above the medical expense rebate higher phase-in limit ($5,000) a rate of NMETO applied is 10 per cent. If the taxpayer has income equal to or less than their relevant tier threshold, and has out-of-pocket medical expenses above the medical expense rebate lower phase-in limit ($2,120), the rate of NMETO applied is 20 per cent. [Schedule 5, items 5, subsection 6(1)]

5.22 The existing definition of indexable amount at subsection 159HA(7) is repealed and substituted with a new definition of indexable amount. The new definition provides a clearer presentation of existing indexable amounts and includes the indexable amounts relating to the NMETO income test. This is done by inserting a table into subsection 159HA(7) which sets out the indexable amounts and the first indexable year of the amount. [Schedule 5, item 9, subsection 159HA(7)]

5.23 The new indexable amounts which relate to the new income test for the NMETO - the medical expense rebate higher phase-in limit and the medical expense rebate lower phase-in limit - are included as indexable amounts. [Schedule 5, item 9, subsection 159HA(7), items 4 and 5 in the table]

5.24 The medical expense rebate higher phase-in limit is increased each year through CPI indexation from its first year of effect, that is in the 2013-14 year of income. [Schedule 5, item 9, subsection 159HA(7), item 4 in the table]

5.25 The medical expense rebate lower phase-in limit is increased each year through CPI indexation from its first year of effect, that is in the 2011-12 year of income and has resulted in the medical expense rebate lower phase-in limit being $2,120 in 2012-13. [Schedule 5, item 9, subsection 159HA(7), item 5 in the table]

5.26 The term 'adjusted taxable income' is omitted and substituted with 'adjusted taxable income for rebates' in paragraph 159J(1AB)(a), subsection 159J(1AC) including in the formula and note contained within the subsection, and subsections 159J(4) and (5). This change has been made to clarify that the measure of adjusted taxable income for the purposes of section 159J, which deals with rebates for dependants, and section 159Q is different to the measure 'adjusted taxable income' defined in Schedule 3 the A New Tax System (Family Assistance) Act 1999 and used elsewhere in the tax law. [Schedule 5, items 10 to 13, paragraph 159J(1AB)(a), subsections159J(1AC), 159J(4) and (5)]

5.27 Adjusted taxable income for rebates differs from adjusted taxable income in Schedule 3 of the A New Tax System (Family Assistance) Act 1999 in that adjusted taxable income for rebates excludes those elements of the adjusted taxable income definition which involves a taxpayer's spouse's income or how a spouse is treated under special circumstances.

5.28 The medical expense rebate higher phase-in limit ($5,000) applies when a principal individual (a taxpayer) has an adjusted taxable income for rebates that exceeds their relevant tier 1 threshold ($84,000 for a single and $168,000 for a family). [Schedule 5, item 20, subsection 159Q(1)]

5.29 A taxpayer is eligible for the $168,000 family tier 1 threshold, where they are married, that is they are in a relationship as a couple on a genuine domestic basis with a person of the same or different sex, on the last day of the income year or has dependants on any day of the year. [Schedule 5, item 20, subsection 159Q(1), item 1 in the table]

5.30 To qualify as a family for the family tier 1 threshold, a taxpayer must be married on the last day of the income year or have a dependant on any day of the income year.

5.31 The new law uses the term 'married' to provide consistency in the new provisions with those for the Medicare levy surcharge. As the new law applies the income threshold features of the Medicare levy surcharge, it also needs to adopt a number of the elements used in the Medicare levy surcharge provisions. The Medicare levy surcharge is applied taking into account the taxpayer's relationship and dependants. The provisions applying the Medicare levy surcharge thresholds to the NMETO therefore adopt the definition of married.

5.32 The law providing for the Medicare levy surcharge considers people to be married where two people of the same sex or different sex are in a relationship as a couple on a genuine domestic basis. A person will also be considered to be married where they are in a relationship that is registered for the period under a law of a State or Territory prescribed for the purposes of section 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section. Section 7 of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 sets out what is considered to be the meaning of married.

5.33 A taxpayer is also eligible for the family tier 1 threshold, where he or she has dependants on any day of the year and is not married (that is, is not in a genuine domestic relationship with a partner of the same or different sex) on the last day of the income year. [Schedule 5, item 20, subsection 159Q(1), item 2 in the table]

5.34 The medical expense rebate lower phase-in limit applies if the taxpayer's adjusted taxable income for rebates is less than the family tier 1 threshold. The medical expense rebate lower phase-in limit is $2,120 in 2012-13 and has increased over time from $2,000 due to its annual indexation according to section 159HA. The same indexation will be applied to the medical expense rebate higher phase-in limit. [Schedule 5, item 20, subsection 159Q(5), section 159HA(7)]

5.35 Where two people are married (according to section 7 of the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999) on the last day of the year of income the adjusted taxable income for rebates of the taxpayer and the person they are considered to be married to, are added together to calculate the taxpayer's adjusted taxable income for rebates. [Schedule 5, item 20, subsection 159Q(1) item 1 in the table]

5.36 The amendments in the Schedule also ensure that the income test is applied appropriately where medical expense are paid by a trustee on behalf of an individual who is under a legal disability.

5.37 In the situation where a trust estate operates and the beneficiary of the trust estate is under a legal disability such that the trustee is liable to be assessed on income to which a beneficiary is presently entitled (as described in paragraph 159P(3)(a)), the income to which the beneficiary is presently entitled for the year of income is used to determine if the medical expense rebate higher phase-in limit applies. This occurs in the same way adjusted taxable income for rebates is used for non-trust situations. [Schedule 5, item 20, subparagraph 159Q(1)(a)(ii), subsection 159Q(4) and paragraph 159P(3)(a)]

5.38 The relevant tier 1 threshold that applies to income to which a beneficiary is presently entitled is determined by whether the beneficiary of the trust estate is considered to be married on the last day of the year of income or whether the beneficiary has dependants on any day during the year of income. If the beneficiary is considered to be married on the last day of the year, or has one or more dependants on any day of the year, the family tier 1 threshold applies. [Schedule 5, item 20, subparagraph 159Q(1)(a)(ii)]

5.39 As part of ensuring higher income earners bear more of their out-of-pocket medical costs, those income earners with a greater capacity to pay have a lower rate of NMETO applied and require a higher amount of out-of-pocket medical expenses before they have NMETO applied. The tier 1 thresholds and the phase-in limits operate in conjunction to determine the amount of NMETO available. [Schedule 5, item 20, subsection 159Q(1)]

5.40 When the taxpayer is eligible for the family tier 1 threshold, and has an adjusted taxable income for rebates greater than the family tier 1 threshold the taxpayer must have out-of-pocket expenses of greater than the medical expense rebate higher phase-in limit (that is $5,000 in 2012-13) before any NMETO is available. [Schedule 5, item 20, subsection 159Q(1), items 1 and 2 in the table]

5.41 The NMETO available is 10 per cent of the taxpayer's out-of-pocket expenses greater than the medical expense rebate higher phase-in limit. [Schedule 5, item 17, paragraph 159P(3AA)(a)]

5.42 When the taxpayer is eligible for the family tier 1 threshold, and has an adjusted taxable income for rebates equal to or less than the family tier 1 threshold, the taxpayer must have out-of-pocket expenses of greater than the medical expense rebate lower phase-in limit (that is $2,120 in 2012-13) before any NMETO is available. [Schedule 5, item 20, subsection 159Q(1), items 1 and 2 in the table]

5.43 The NMETO available in this circumstance is 20 per cent of the taxpayer's out-of-pocket expenses greater than the medical expense rebate lower phase-in limit. [Schedule 5, item 17, paragraph 159P(3AA)(b)]

Example 5.16

Will and Sofia met during the income year and become a couple living together for three months, including the last day of the income year. Because Will and Sofia would be considered to be married on the last day of the year, the family tier 1 threshold of $168,000 in 2012-13 applies.

The amount of Will and Sofia's adjusted taxable income for rebates for the income year is determined by adding together their respective adjusted taxable income for rebates of the year they were each other's spouse. Will's individual adjusted taxable income for rebates for the full income year is $89,900 and Sofia's is $61,960. This amount is combined to be an adjusted taxable income for rebates of $151,860 for the income year.

Because this amount is below the family tier 1 threshold, the rate of NMETO available is 20 per cent of the out-of-pocket expenses above the medical expense rebate lower phase-in limit (that is $2,120 in 2012-13).

Will has incurred a number of medical expenses during the income year for Sofia and himself. After reimbursements from Medicare and his health care insurer, Will has out-of-pocket expenses of $3,750.

The amount of NMETO Will is eligible for is 20 per cent of $1,630, that is $326.

Example 5.17

Nic and Tony separate during the year and the care and maintenance for their child, Sam, is shared between them such that Sam would be considered a dependant of both Nic and Tony in accordance with item 2 in column 1 of the table in subsection 159Q(1).

Nic and Tony both incur medical expenses for Sam.

While neither Nic nor Tony have a spouse on the last day of the year, the fact that Sam is considered a dependant of both Nic and Tony enables both Nic and Tony to be eligible for the family tier 1 threshold.

Nic has an adjusted taxable income for rebates of $185,000 and Tony has an adjusted taxable income for rebates of $140,000.

Nic has out-of-pocket medical expenses for herself and Sam of $4,500. Tony has out-of-pocket medical expenses for himself and Sam of $3,000.

Because Nic has an adjusted taxable income for rebates greater than the family tier 1 threshold she needs out-of-pocket expenses greater than $5,000 to be eligible for the NMETO. Nic is therefore ineligible for any NMETO.

Tony is eligible for some NMETO as his adjusted taxable income for rebates is less than the family tier 1 threshold and he only needs to have eligible medical expenses greater than the medical expense rebate lower phase-in limit (that is $2,120). Tony is eligible for $176 of NMETO.

5.44 Where a taxpayer is not married (according to section 7 of the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1999) on the last day of the year and has no dependants on all days of the year, the singles tier 1 threshold applies [Schedule 5, item 20, subsection 159Q(1), item 3 in the table] .The singles tier 1 threshold is an adjusted taxable income for rebates of $84,000 in 2012-13.

5.45 The medical expense rebate lower and higher phase-in limits operate in the same way where the taxpayer is not married or has no dependants as they operate where the taxpayer is married or has dependants.

5.46 When a single taxpayer has an adjusted taxable income for rebates greater than the singles tier 1 threshold the taxpayer must have out-of-pocket expenses greater than the medical expense rebate higher phase-in limit before any NMETO is available.

5.47 When a single taxpayer has an adjusted taxable income for rebates less than or equal to the singles tier 1 threshold the taxpayer must have out-of-pocket expenses greater than the medical expense rebate lower phase-in limit before any NMETO is available.

5.48 The family tier 1 threshold and the singles tier 1 threshold are the income thresholds used for the Medicare levy surcharge. To ensure that the same people are considered to be a couple or a family for eligibility for the family tier 1 threshold as those for the Medicare levy surcharge income thresholds a person is considered to be married to another person where they are in a genuine domestic relationship with someone of the same or different sex. [Schedule 5, item 20, subsection 159Q(1), table]

5.49 A person is considered to be the dependant of another person for the purposes of determining whether the other person qualifies for the family tier 1 threshold in the same way as a person is considered to be a dependant under section 5 of the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999. However, for the purposes of section 159Q a person is considered to not be a dependant of the other person if the two people are married to each other. [Schedule 5, item 20, subsection 159Q(3)]

5.50 This is because a taxpayer qualifies to have the family tier 1 threshold applied where they are married on the last day of the income year or by having a dependant on any day of the income year. To allow the person to whom they are married to be a dependant could result in the taxpayer qualifying for the family tier 1 threshold on the basis that they were married to the person during the year when they were not married on the last day of the year.

5.51 A person to whom the taxpayer is married cannot be a dependant for the purposes of the income test. If the taxpayer has no other dependants they must be married on the last day of the income year to qualify for a family threshold. [Schedule 5, item 20, subsection 159Q(3)]

5.52 Where a person dies, the last day they are alive is taken to be the last day of the income year of which they were alive. [Schedule 5, item 20, subsection 159Q(2)]

Application and transitional provisions

5.53 These amendments apply on or after1 July 2012 for the 2012-13 and later income years. [Schedule 5, item 21]

Consequential amendments

5.54 A number of consequential amendments are required to ensure consistent wording in sections 159HA and 159P due to the new definitions inserted in subsection 6(1). Other amendments have been made to update headings or references to take account of new terminology. [Schedule 5, items 7 and 8, 14 to 16, 18 and 19, subsection 6(1), sections 159HA and 159P]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Rebate for medical expenses

5.55 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

5.56 This Schedule amends the Income Tax Assessment Act 1936 to introduce an income test to the rebate for medical expenses from 1 July 2012. The rebate for medical expenses is commonly referred to as the net medical expenses tax offset (NMETO).

5.57 The NMETO provides taxpayers with a non-refundable tax offset for out-of-pocket medical expenses (that is medical expenses less available reimbursements, such as those through the Medicare Benefits Schedule, the Pharmaceutical Benefits Scheme and the Repatriation Pharmaceutical Benefit Scheme or Government aged care subsidies and private health insurance refunds) above the NMETO claim threshold.

5.58 The threshold of out-of-pocket expenses above which the NMETO can be claimed in 2012-13 is $2,120 (indexed to changes in the consumer price index) with the offset available at a rate of 20 per cent of out-of-pocket medical expenses.

5.59 This Schedule applies a higher claim threshold ($5,000 indexed) where the taxpayer has an adjusted taxable income for rebates of $84,000 (indexed) for a single taxpayer and $168,000 (indexed) for a taxpayer who has a spouse or has dependants. In addition, the rate of NMETO is reduced to 10 per cent for the amount of out-of-pocket expenses greater than $5,000.

Human rights implications

5.60 This Schedule engages the following human rights: Right to Health

5.61 Article 12(1) of the International Covenant on Economic Social and Cultural Rights (ICESCR) recognises the right to the enjoyment of the highest attainable standard of physical and mental health.

5.62 While ICESCR contains no definition of health, the UN Committee on Economic Social and Cultural Rights has stated that the right to health is not to be understood as a right to be healthy.

5.63 The income test applied to the net medical expenses tax offset does not reduce the availability or access to comprehensive medical services in Australia.

5.64 The application of the income test reduces the Government rebate for the out-of-pocket cost of medical expenses for higher income earners who are considered to have a greater capacity to pay than those on lower incomes.

5.65 Australian Government annual health expenditure is expected to reach around $100 billion by 2022. Better targeting support for out-of-pocket medical expenses through the NMETO is one of a number of measures the Government has identified to ensure a strong and sustainable health care system.

5.66 The Government is continuing to provide substantial support for health expenses, including around $27 billion in 2012-13 through the Medicare Benefits Schedule, the Pharmaceutical Benefits Scheme and related safety nets.

Conclusion

5.67 This Schedule is compatible with human rights because it advances the protection of human rights in relation to health by ensuring a sustainable health care system and, to the extent that it may also limit access to support for certain individuals, those limitations are reasonable, necessary and proportionate.

Assistant Treasurer, the Hon David Bradbury

Chapter 6 - Limited recourse debt

Outline of chapter

6.1 Schedule 6 to this Bill amends Division 243 of the Income Tax Assessment Act 1997 (ITAA 1997) (the limited recourse debt provisions) to clarify that the definition of 'limited recourse debt' includes arrangements where, in substance or effect, the debtor is not fully at risk in relation to the debt.

6.2 Under such arrangements, the creditor's rights as against the debtor in the event of default in payment of the debt are, in substance or effect, limited wholly or predominantly to rights in relation to certain assets.

6.3 All references to legislative provisions in this chapter are references to the ITAA 1997 unless otherwise stated.

Context of amendments

6.4 The purpose of the limited recourse debt tax provisions is to recoup excess capital allowance deductions claimed with respect to capital expenditure where the taxpayer:

•

has not been fully at risk in relation to the expenditure because it is financed by a limited recourse debt; and

•

has not fully repaid the debt upon termination.

6.5 The provisions operate to reverse capital allowance deductions that, at the time the debt is terminated, are excessive having regard to the amount of the debt repaid.

6.6 Limited recourse debt refers to financing arrangements where the creditor's rights of recourse, are wholly or predominantly limited to rights in respect of specific assets. This is determined at the start of the arrangement (or when varied prior to termination).

6.7 A creditor's rights of recourse can be limited by contractual terms or by the overall effect of an arrangement, for example, where a special purpose entity debtor predominantly holds and operates the financed assets. In both situations, the debtor is not fully at risk with respect to the debt and therefore the capital expenditure which is financed by the debt.

6.8 The current definition of 'limited recourse debt' in section 243-20 is intended to include contractually limited recourse debt arrangements as well as debt arrangements where recourse is effectively limited through arrangements.

6.9 That is, Division 243 is intended to apply to a debt arrangement irrespective of whether the limited recourse element of the debt is achieved using an explicit contractual limitation or because of the overall effect of the arrangement.

6.10 However, the High Court, in Commissioner of Taxation v BHP Billiton Limited [2011] HCA 17, held that the current definition only includes debt arrangements where the recourse is contractually limited or is capable of being legally limited.

6.11 As such, amendments to the law are needed to ensure that the limited recourse debt tax provisions operate as originally intended.

Summary of new law

6.12 The definition of 'limited recourse debt' is clarified to include a debt arrangement where it is reasonable to conclude that the debtor has not been fully at risk with respect to the debt because the creditor's recourse is effectively limited to the financed property or property provided to secure the debt.

Comparison of key features of new law and current law

Detailed explanation of new law

6.13 To ensure that the limited recourse debt tax provisions achieve their original policy intent, this Schedule clarifies the definition of 'limited recourse debt' so that it includes debt arrangements where it is reasonable to conclude that the creditor's rights against the debtor in the event of default are, in substance or effect, limited wholly or predominantly to the rights in relation to the financed property or property provided to secure the debt (being the same rights as those listed in current paragraph 243-20(1)(a)). [Schedule 6, item 1, subsection 243-20(2)]

6.14 The amendments ensure that the limited recourse debt tax provisions are not circumvented through the use of other arrangements which have the same commercial effect as contractually limited recourse debt arrangements.

6.15 Consistent with the current law, the question of whether the creditor's rights of recourse are limited in substance or effect is determined at the start of the arrangement (as varied prior to the termination of the debt).

6.16 In working out whether it is reasonable to conclude that the creditor's rights against the debtor in the event of default in payment of the debt or of interest are limited in substance or effect, regard must be given to:

•

the debtor's assets (other than assets that are indemnities or guarantees provided in relation to the debt);

•

any arrangement to which the debtor is a party; and

•

whether the debtor and the creditor are dealing at arm's length in relation to the debt.

[Schedule 6, items 2 and 3, subsections 243-20(3) and (3A)]

Example 6.18

Company C is a specific purpose business vehicle owned by an offshore company. Company C has $60 million in cash and no other assets.

In year 1, Company C acquires an asset for $320 million and finances the acquisition of the asset using $60 million of its own funds and $260 million of debt borrowed from Bank B. Under the loan agreement, there is no contractual limitation on Bank B's rights to recover the debt from Company C. As such, Bank B has recourse to the asset and revenue of Company C in the event of default.

The debt is a limited recourse debt for the purposes of Division 243 as Bank B's rights against Company C are effectively limited wholly or predominantly to the assets of Company C, which are predominantly financed by the debt, notwithstanding there is no contractual limitation on Bank B's rights of recourse.

In this case, Company C is at risk with respect to the $60 million of its own funds and not fully at risk with respect to the $260 million debt borrowed from Bank B.

For tax purposes, assume that the asset depreciates on a straight line basis over a 10 year period.

In year 5, Company C defaults on the loan. At the time of default, the market value of the asset is nil and no interest payments or principal repayments have been made on the loan by Company C.

Company C has claimed capital allowance deductions of $128 million (that is, ($320 million/10) ×4) with respect to the asset, but only incurred expenditure of $60 million for the asset.

As such, in Year 5, an adjustment of the capital allowance deductions claimed is made and $68 million (that is, $128 million reduced by $60 million) is added to Company C's assessable income for the year.

In year 6 and future years (to year 10) Company C's remaining capital allowance deductions are adjusted such that no further amounts are allowable except where additional payments are made.

Overall, this ensures that Company C's capital allowance deductions are limited to the company's actual expenditure of $60 million.

Example 6.19

Head Co is the head company of a tax consolidated group that includes a special purpose business vehicle (SPE Co) which is a wholly owned subsidiary of Head Co. SPE Co was specifically formed to establish and operate Heart Gold Mine.

Finance Co loans $2 billion to SPE Co. Under Finance Co's standard loan terms, Finance Co's rights of recourse in the event of default by SPE Co are not contractually limited. There are no collateral arrangements (such as a loan guarantee or letter of support from Head Co) in place in relation to this loan.

SPE Co's assets comprise project assets of the Heart Gold Mine that are financed wholly by the $2 billion loan. SPE Co has no other substantial assets.

Heart Gold Mine has not been profitable. No principal payments or interest repayments have been made on the loan. Five years into the loan arrangement, Finance Co decided to write off the loan as a bad debt. At the time of the write-off, SPE Co's assets have a market value of $200 million. However, the proceeds arising from the sale of these assets are not applied against the debt until the commencement of the year following the write-off of the loan.

Up until the debt write-off, Head Co has claimed capital allowance deductions of $1 billion for the capital expenditure on project assets of the Heart Gold Mine.

Tax consequences without the amendments

Without the amendments Division 243 does not apply, since there is neither a contractual limitation on Finance Co's recourse to SPE Co's assets, nor a legal limitation on Finance Co's legal rights which arise otherwise than by contract.

No adjustment needs to be made to the $1 billion capital allowance deductions already claimed by Head Co and Head Co is able to claim the remaining $1 billion of capital allowance deductions if SPE Co continues to be in operation.

This is so despite the fact that SPE Co has not been fully at risk with respect to the $2 billion of debt that financed the project assets, and has not repaid the debt.

If the unpaid amount of the debt is not included in assessable income under another provision, the commercial debt forgiveness rules in Division 245 may apply to the debt. If those rules apply, the unpaid amount may be offset against amounts that could otherwise reduce Head Co's taxable income in the same or later income year.

Tax consequences with the amendments

With the amendments, the debt is a limited recourse debt as Finance Co's right of recourse is predominantly limited to the financed asset. As such, Division 243 applies, unless in all circumstances it would be unreasonable for the debt to be treated as a limited recourse debt.

Consequently, the $1 billion capital allowance deductions claimed by Head Co is included in Head Co's assessable income in the year of the write-off of the debt. The $200 million application of proceeds realised from sale of SPE Co's assets against the debt in the following year would give rise to a $200 million allowable deduction for Head Co in that year.

The remaining capital expenditure amounts of $1 billion that would otherwise be allowable in the following year and/or future years would be reduced such that no further amounts are allowable except where additional payments are made.

6.17 Subsection 243-20(6) provides that an obligation covered by subsection 243-20(1), (2) or (3) is not limited recourse debt if, having regard to all relevant circumstances, it would be unreasonable for the obligation to be treated as limited recourse debt. This subsection operates to ensure that a debt which is technically limited recourse because of the application of the amendments is not treated as a limited recourse debt for the purposes of Division 243 where, in a practical sense, the debtor is fully at risk with respect to the loan or the financed expenditure.

6.18 The explanatory memorandum to the Taxation Laws Amendment Bill (No. 5) 1999 provide examples of circumstances where subsection 243-20(6) may apply. Paragraph 2.75 of the explanatory memorandum stated that:

'It might be unreasonable to apply new Division 243, for example, if all but a very minor component of a debtor's relevant deductible capital expenditure has been funded by limited recourse debt and, in a practical sense, the debtor is fully at risk of loss for the expenditure. The debt would not, in a practical sense, be limited recourse if it is fully secured by assets other than the financed property.'

Application and transitional provisions

6.19 The amendments made by this Schedule apply in relation to debt arrangements terminated at or after 7.30 pm (AEST) on 8 May 2012. [Schedule 6, item 4]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Limited recourse debt

6.20 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

6.21 This Schedule amends the Income Tax Assessment Act 1997 by clarifying that a debt is a limited recourse debt if it is reasonable to conclude that the rights of the creditor as against the debtor upon default in payment are, in substance or effect, limited wholly or predominantly to rights relating to the financed property or property provided to secure the debt, having regard to certain factors.

Human rights implications

6.22 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

6.23 This Schedule is compatible with human rights as it does not raise any human rights issues.

Assistant Treasurer, the Hon David Bradbury

Chapter 7 - In-house fringe benefits under salary packaging arrangements

Outline of chapter

7.1 Schedule 7 to this Bill amends the Fringe Benefits Assessment Act 1986 (FBTAA) to remove the concessional fringe benefits tax (FBT) treatment for in-house fringe benefits accessed by way of salary packaging arrangements.

7.2 All references to legislative provisions in this Chapter are references to the FBTAA unless otherwise stated.

Context of amendments

7.3 The FBT system was introduced in 1986 to ensure that all forms of employee remuneration are taxed, whether provided as salary and wages or in a non-cash form. However, to ensure that the system was fair, and recognising the practicalities of taxing non-cash employee remuneration, a number of concessions and exemptions were provided for in the FBT law.

7.4 Most relevantly for this measure, there are a number of concessions in the FBT law that apply to in-house fringe benefits. An in-house fringe benefit is broadly a benefit that is provided either by the employer, an associate of the employer or a third party to an employee where the provider of the benefit carries on a business that consists of, or includes, providing identical or similar goods or services to customers at arm's length.

7.5 These concessions were originally included in the FBT law to reflect, amongst other things, the true cost of the benefits to the employers and are provided in the law by way of special valuation rules, specific exemption provisions and reductions of aggregate taxable value.

7.6 The concessions were not intended to allow employees to access goods and services by agreeing to reduce their salary and wages (through salary packaging arrangements) in order to buy goods and services out of pre-tax income.

7.7 Since the in-house fringe benefits concessions were included in the FBT law, changes in technology have increased access to salary sacrifice arrangements.

7.8 As a result of expansion in the availability of salary sacrifice arrangements, employees are increasingly accessing concessionally taxed fringe benefits under these arrangements and receiving tax-free non-cash remuneration benefits for goods and services.

7.9 In comparison, other employees or self-employed persons who acquire these items are required to pay for them out of their after-tax income. This is because FBT applies to virtually all employers, including government and is designed to be as inclusive as possible in the coverage of benefits received by employees in respect of their employment.

Summary of new law

7.10 Schedule 7 to this Bill removes concessions for in-house fringe benefits where those benefits are accessed by way of a salary packaging arrangement.

7.11 In particular, these amendments:

•

remove the concessional taxable value calculation method for particular benefits;

-

The concession associated with the valuation of particular in-house expense payment benefits, in-house property benefits or in-house residual benefits no longer applies where the benefit is accessed by way of a salary packaging arrangement.

-

Instead, the taxable value of the benefit is based on the 'notional value' of the benefit.

•

remove the exemption that applies for residual benefits that are provided for transport from home to work (for employers in the transport business) and accessed through a salary packaging arrangement; and

•

remove the annual $1,000 reduction of aggregate taxable value in respect of in-house fringe benefits where they are provided under a salary packaging arrangement.

7.12 However, these amendments do not affect the concessions relating to in-house benefits provided by employers where those benefits are provided outside of a salary packaging arrangement or are paid for out of after-tax income.

Comparison of key features of new law and current law

Detailed explanation of new law

7.13 Under the FBT law, there are different types of benefits that may be provided by employers in-house where the employer is in the business of providing the same goods and services to their clients. Concessions are granted in the law to change the way those benefits are valued and to reduce the extent to which they are taxed.

7.14 Under this measure, these concessions no longer apply where the in-house benefits are accessed under a salary packaging arrangement.

What is a salary packaging arrangement'?

7.15 The concept of a 'salary packaging arrangement' has been introduced to the FBT law as a defined term as part of these amendments. [Schedule 7, item 12, subsection 136(1)]

7.16 The defined term of 'salary packaging arrangement' has been modelled closely on the wording that was used in subsection 41(2) which essentially captured the concept of a salary packaging arrangement (also commonly referred to as salary sacrifice or total remuneration packaging).

7.17 'Salary packaging arrangements' means arrangements where the employee receives a benefit:

•

in return for a reduction in salary or wages that would not have happened apart from the arrangement; or

•

as part of the employee's remuneration package, and the benefit is provided in circumstances where it is reasonable to conclude that the employee's salary or wages would be greater if the benefit were not provided.

7.18 This most commonly covers situations where the employee enters into an agreement with their employer to have their salary and wages reduced (or 'sacrificed') in order to receive a benefit.

Example 7.20 : Negotiated salary packaging arrangement

Felicity has just started working for a car company and in negotiating her remuneration package agrees with her new employer to forego $25,000 of her yearly salary in order to receive the use of a car.

As she has entered into an agreement to reduce her salary and wages, Felicity would be taken to have entered into a salary packaging arrangement.

7.19 However, it also covers situations where a reduction in salary might not have been negotiated but the employee is given a benefit as part of their employment contract, and it is reasonable to assume that the salary and wages they would have received would have been greater without that benefit being provided.

Example 7.21 : Implicit salary packaging arrangement

McKenzie has started employment with an IT firm. His job was previously advertised as having a total remuneration package of $100,000 per year.

McKenzie only receives $95,000 in salary and wages but is given by his employer, free of charge, gaming and photography software of which the notional value would be $5,000.

In this case, whilst McKenzie has not entered into a separate agreement to reduce his salary and wages, the salary and wages he would have received would clearly have been greater if the benefit had not been provided. Therefore, McKenzie has entered into a salary packaging arrangement.

Amendments to in-house property fringe benefits

7.20 In general, a property fringe benefit includes:

•

goods (including gas and electricity, unless provided through a reticulation system) and animals;

•

real property, such as land and buildings; and

•

rights to property, such as shares or bonds.

7.21 These benefits can be provided in-house by an employer most commonly where those goods are manufactured or produced by the provider or purchased and sold as part of the employer's business.

7.22 Different valuation rules apply to in-house property fringe benefits depending on whether the goods are made by the employer or sold as part of the employer's business.

7.23 These amendments modify the operation of section 42 so that the taxable value of an in-house property fringe benefit provided under a salary packaging arrangement is its 'notional value'. [Schedule 7, item 2, paragraph 42(1)(aa)]

7.24 The 'notional value' of an in-house property fringe benefit accessed through a salary packaging arrangement takes its meaning from subsection 136(1) and means the amount that the employee could reasonably be expected to have been required to pay to obtain the property from the provider under an arm's length transaction (that is, market or fair value).

Example 7.22 : Taxable value of an in-house property fringe benefit

Kane works at the Geelong Meat Works abattoir and as part of his annual remuneration negotiations agrees to a reduction in his salary in exchange for a meat pack for Christmas which includes hams, steaks and other choice cuts. This meat pack is an in-house property fringe benefit.

The taxable value of the benefit would have previously been 75 per cent of the lowest price paid for the meat, which would have been the wholesale price.

However, under this measure the taxable value of the benefit provided to Kane would be the notional value of the meat, which is its market value. As Kane is not a wholesaler the taxable value would therefore be the retail price of the meat.

Amendments to in-house residual fringe benefits

7.25 Residual benefits are benefits that are not a specific type of benefit covered by any other provision of the FBTAA. They often include intangible benefits such as services.

7.26 Residual benefits will be an in-house residual fringe benefit if the employer (or an associate) provides a benefit to the employee that is identical or similar to rights, services or facilities provided to the public in the ordinary course of its business.

7.27 These amendments alter two concessions that apply to in-house residual benefits:

•

the valuation rule for all in-house residual fringe benefits; and

•

the exemption that applies for public transport from home to work (provided by employers and associates of the employer in the public transport business).

-

But only to the extent that the benefit is provided in-house and under a salary packaging arrangement.

Changes to the valuation rules for in-house residual fringe benefits

7.28 Under sections 48 and 49, different valuation rules apply to in-house residual fringe benefits depending on whether the benefits are provided on an ongoing periodical manner and whether they are provided on an identical basis to members of the public or not.

7.29 These amendments modify sections 48 and 49 so that the taxable value of an in-house residual fringe benefit provided under a salary packaging arrangement is its 'notional value' at the comparison time (see paragraph 7.22) reduced by any recipient's contribution. [Schedule 7, items 7 and 9, paragraphs 48(aa) and 49(aa)]

Example 7.23 : Taxable value of an in-house residual fringe benefit

Cecilia works for an appliance rental franchise and as part of her remuneration, she agreed to salary package the rental of a flat screen television and video gaming console for a six month period.

Ordinarily her employer would value the rental for the purposes of FBT at 75 per cent of the lowest price paid by other customers.

However, under this measure, the employer would instead determine the taxable value on the basis of its notional value which is its market value and is therefore determined to be the retail price of the rental contract.

Changes to the specific exemption for in-house residual fringe benefits

7.30 These amendments modify subsection 47(1) so that a residual benefit is not exempt where the benefit was provided in-house and was accessed by way of a 'salary packaging arrangement'. [Schedule 7, item 6, paragraph 47(1)(f)]

7.31 The exemption in subsection 47(1) covers the provision of a benefit in respect to work-related travel of an employee through public transport where the employer operates a business of providing transport to the public. Or, where the benefit is provided by an associate of the employer, and both the employer and the associate operate a business of providing transport to the public.

7.32 This exemption covers residual benefits that are provided in-house because it requires both the employer and any associate of the employer to be in the business of providing public transport services for the exemption to apply and the benefit specifically relates to the provision of work-related travel by public transport.

7.33 Consequently, where this benefit is accessed under a salary packaging arrangement, the exemption will no longer be available. [Schedule 7, item 6, paragraph 47(1)(f)]

Example 7.24 : No exemption for a residual benefit provided in-house and through a salary packaging arrangement

The McGahee Bus company provides public transport in an inner city community. Willis is a bus driver for the company and lives in a neighbouring town which is serviced by BJGE Buses (an associate of the McGahee Bus company).

In order to get to work Willis salary packages his bus travel to and from work and the benefit is exempt so the McGahee Bus company pays no FBT.

Under this measure, the exemption will not apply as Willis has a salary packaging arrangement in place.

Changes to in-house expense payment fringe benefits

7.34 An expense payment benefit arises when a payment is made in discharge of an obligation of an employee or when a reimbursement is made to an employee for expenditure incurred by him or her.

7.35 An in-house expense payment fringe benefit arises where the expenditure reimbursed or paid for was incurred by the employee (or family member) in purchasing goods or services that the employer (or an associate) sells in the ordinary course of business.

7.36 In-house expense payment fringe benefits are either in-house property expense payment fringe benefits or in-house residual expense payment fringe benefits.

7.37 Consequently, as the concessions related to in-house expense payment fringe benefits are co-located with the relevant in-house property or residual benefits, no amendments are needed for the in-house expense payment fringe benefit provisions.

7.38 Rather, the concessions are appropriately limited where they are accessed under a salary packaging arrangement through the amendments that are detailed above.

Amendments to the reduction of the aggregate taxable value of certain fringe benefits

7.39 Section 62 reduces the aggregate taxable value of in-house fringe benefits provided by an employer to an employee in an FBT year by up to $1,000. This reduction is applied after the taxable values are calculated under the relevant sections depending on the type of in-house fringe benefits provided.

7.40 These amendments modify section 62 so that the $1,000 reduction for aggregate taxable value of the in-house fringe benefits does not apply to benefits provided by way of a salary packaging arrangement. [Schedule 7, item 11, paragraph 62(2)(a)]

Example 7.25 : Reduction of aggregate taxable value of salary packaged and non-salary packaged in-house benefits

Ronita works for an electricity and gas provider and receives two types of in-house benefits. The first is an in-house residual expense payment benefit in respect to her quarterly electricity bill. The taxable value of the benefit is $500 a year and it is provided under a salary packaging arrangement.

The second benefit is the provision of bottled gas and is an in-house property benefit. The taxable value of the benefit is $500 and it is not provided under a salary packaging arrangement.

Under this measure, Ronita's employer would not reduce the aggregate taxable value of the electricity bill benefit because it is provided under a salary packaging arrangement and therefore would only reduce the aggregate taxable value of the gas bottle benefit to zero (as the sum of the taxable value of the non-salary packaged in-house benefits is less than $1,000).

Application and transitional provisions

7.41 These amendments will apply in relation to benefits provided on or after the day that this measure was announced, which was22 October 2012. [Schedule 7, item 13]

7.42 However, there are transitional arrangements that apply to certain salary packaging arrangements that were entered into by the employer and employee before 22 October 2012 ('existing salary packaging arrangements'). [Schedule 7, subitems 13(2) and (3)]

7.43 Benefits under such an arrangement that are provided before 1 April 2014 continue to apply the law as it applied before the amendments. All benefits provided on or after 1 April 2014 to employees will be subject to this measure.

Meaning of existing salary packaging arrangement'

7.44 An 'existing salary packaging arrangement' means a 'salary packaging arrangement' (as introduced by these amendments) that was both agreed to (employer and employee agree to conditions of arrangement) and was entered into (the arrangement was given legal force) before 22 October 2012.

7.45 There is no requirement for the actual reduction of salary and wages or provision of the benefit to occur prior to 22 October 2012, only that the arrangement to do so was entered into and had legal force prior to 22 October 2012.

Example 7.26 : Existing salary packaging arrangement where salary deductions start after 22 October 2012

An employer offers a salary packaging arrangement to employees which must be taken up prior to 22 October 2012. The benefits will be available to employees during the months of December 2012 and January 2013. However, the pre-tax salary deductions do not commence until the employee has submitted a claim for expenses incurred during the relevant period.

Assuming that an employee accepted the offer prior to 22 October 2012 and the employee receives the reimbursement for expenses prior to 1 April 2014, this arrangement would be covered by the transitional provisions.

Example 7.27 : Existing salary packaging arrangement where employer offers arrangement and employee takes it up prior to 22 October 2012

A retail employer provides its employees with the option to salary package certain in-house property fringe benefits. There is no end date for the offer to salary package and no details on the terms or conditions that apply to particular employees.

Harold works for the retail employer and has previously utilised the salary packaging offer to purchase a coffee machine that his employer sells. He is now deciding whether to take up the offer to salary package a kayak which his employer sells. On 18 October 2012, he decides to take up the offer and fills in the requisite forms that lock him into the salary packaging arrangement.

As he has entered into the pre-existing offer for salary packaging (in respect to the kayak) and has an agreement that is binding prior to 22 October 2012, Harold's benefits would be covered by the transitional provisions.

Example 7.28 : Existing salary packaging arrangement where employer offers arrangement and employee does not take it up prior to 22 October 2012

As per Example 7.8 above, with the exception that Harold delays his decision and decides on 24 October 2012 (after the announcement date) that he wants to take up the salary packaging offer.

In this case, whilst his employer has offered a salary packaging arrangement prior to 22 October 2012 and despite the fact that he entered into a previous arrangement for the purchase of the coffee machine, Harold does not have a binding agreement in place in respect to the packaging for a kayak. For that reason, Harold's benefits would not be covered by the transitional provisions.

Material alteration or variation to an existing salary packaging arrangement

7.46 Where an existing salary packaging arrangement is materially altered or varied on or after 22 October 2012, it will no longer be subject to the transitional arrangements. [Schedule 7, subitem 13(2)]

7.47 In determining whether an alteration or variation is material to the existing salary packaging arrangement, regard must be had to the particular wording of the agreement and what constitutes material will often depend on the facts and circumstances of the arrangement.

7.48 Alterations or variations of an existing salary packaging arrangement that would more than likely be considered material include, but are not limited to:

•

a change of employer;

•

alteration of the fixed end date of the arrangement; and

•

variation to the types of benefits covered under the arrangement.

Consequential amendments

7.49 There are a number of minor consequential amendments that are made to update cross references in provisions that are amended to give effect to this measure. [Schedule 7, items 1, 3 to 5, 8 and 10]

STATEMENTOFCOMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

In-house fringe benefits under salary packaging arrangements

7.50 Schedule 7 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

7.51 Schedule 7 to this Bill amends the FBT law to remove the concessional FBT treatment for in-house fringe benefits accessed by way of salary packaging arrangements.

7.52 These amendments apply retrospectively to benefits provided on or after the announcement date of the measure, which was 22 October 2012. However, those arrangements entered into prior to that date will receive transitional treatment until 1 April 2014.

Human rights implications

7.53 Article 15of the International Covenant on Civil and Political Rights requires that laws must not impose criminal liability for acts that were not criminal offences at the time they were committed. This Article prohibits retrospective criminal laws.

7.54 However, these amendments do not engage with this human right because whilst they apply retrospectively they do not impose a criminal liability for acts that were not criminal offences at the time they were committed.

7.55 The retrospective application of these amendments may, however, be considered to trespass unduly on personal rights and liberties, in breach of principle 1(a)(i) of the Standing Orders of the Senate.

7.56 However, retrospective application dates for revenue measures are both common and necessary because, as with this measure, it is important that the measure apply from the date of announcement to ensure that entities do not change their arrangements or behaviour to take advantage of a timing gap between the announcement of a new tax treatment and the existing law which will undermine the integrity of the tax system.

7.57 These amendments are consistent with the position of the Senate Standing Committee for the Scrutiny of Bills in so far as retrospective application of the amendments is legitimate because the amendments are both a revenue measure and they have been introduced within six months of announcement (as required under Senate Resolution No. 40 of 8 November 1988).

7.58 Moreover, entities affected by these amendments were provided with sufficient detail about the proposed changes on the day of announcement in order to manage their affairs. Furthermore, those entities that have pre-existing arrangements affected by these amendments have been given a sufficient transitional period to bring those arrangements to a close.

Conclusion

7.59 This Schedule is compatible with human rights because the aim of protecting the integrity of the tax system is legitimate. To the extent that this Schedule may limit those rights, those limitations are reasonable, necessary and proportionate to the aim.

Assistant Treasurer, the Hon David Bradbury

Chapter 8 - Miscellaneous amendments

Outline of chapter

8.1 Schedule 8 to this Bill makes miscellaneous amendments to various taxation laws.

Context of amendments

8.2 Amendments to the taxation laws, such as these, are periodically made to correct technical or drafting defects, remove anomalies and correct unintended outcomes in the tax legislation. Progressing such amendments gives priority to the care and maintenance of the tax system, as supported by a 2008 recommendation from the Tax Design Review Panel.

Summary of new law

8.3 These miscellaneous amendments address minor technical deficiencies and legislative uncertainties which have been identified in the regulations affecting superannuation, and the tax legislation more generally.

Detailed explanation of new law

Part 1 - Amendments of superannuation regulations

Part 2 - >Other amendments of taxation laws

GST margin scheme and subdivided land

Example 8.1: Using the GST inclusive market value to calculate the margin on subdivided land

John carries on a property development enterprise and is registered for GST. In July 2012, John makes a taxable supply of real property by selling a newly developed residential lot to Patrick for $400,000. The residential lot sold to Patrick was subdivided from land that John acquired from his father, Aston, on 10 August 2010 for no consideration. Aston held the land for private purposes and at the time that John acquired the land, Aston was not registered for GST. The GST inclusive market value of the land at 10 August 2010 was $1,800,000.

John and Patrick agreed in writing that the margin scheme was to apply to the sale of the residential lot to Patrick. John acquired the land from his father who is his associate for the purposes of the A New Tax System (Goods and Services Tax) Act 1999, and subsection 75-11(7) applies for the purposes of calculating John's margin for the sale of the residential lot to Patrick. The margin for John's sale to Patrick is equal to the difference between the sale price of $400,000 and the relevant proportion of the $1,800,000 GST inclusive market value of the land that John acquired from Aston at 10 August 2010.

Assuming the land that John acquired from Aston on 10 August 2010 was subdivided into twelve lots of equal size and value, then the margin for the sale of the residential lot to Patrick may be calculated as being: $400,000 - ($1,800,000/ 12) = $250,000.

Certain records are to be kept and preserved

Urban water tax offset

Meaning of affiliate

Farm management deposit scheme

Correcting a reference

Extra-territorial application of promoter penalty provisions

Updating a reference

Commencement and application arrangements

8.4 The amendments in Part 1 of Schedule 8 commence on 1 July 2007. These amendments correct a technical oversight in the law that has existed since then, but are not expected to have any practical impact on the operation of the law in this area.

8.5 Although the amendments in Part 2 of Schedule 8 all commence on Royal Assent, some have individual application provisions.

8.6 The amendments made by items 17 and 18 apply in relation to supplies made on or after the start of the first quarterly tax period starting on or after Royal Assent. It does not matter whether the taxpayer has quarterly tax periods or other tax periods. [Schedule 8, item 19]

8.7 The amendments made by item 25only apply in relation to offences committed on or after Royal Assent. [Schedule 8, item 26]

8.8 The amendments made by item 30 apply to assessments for the 2010-11 and subsequent income years, whereas the amendments made by subitems 31(2) and (3) apply to assessments for income years prior to the 2010-11 income year. These amendments require retrospective application to ensure the current FMD provisions (in Division 393 of the Income Tax Assessment Act 1997) and the former FMD provisions (in Schedule 2G to the ITAA 1936) allow for any deposit, which is repaid on the one year anniversary date of the deposit, to be considered a FMD. [Schedule 8, item 31]

8.9 The amendment made by item 35only applies in relation to acts and omissions happening on or after Royal Assent. [Schedule 8, item 36]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Miscellaneous amendments

8.10 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

8.11 This Schedule makes miscellaneous amendments to the taxation laws and regulations as part of the Government's commitment to uphold the integrity of the taxation system.

Human rights implications

8.12 Part 1 of this Schedule makes amendments to superannuation regulations to provide equitable treatment of superannuation interests in the retirement phase that are subject to splitting for Family Law Act 1975 purposes. The amendments merely correct a technical oversight in the law that has existed since 2007, and do not engage any of the applicable rights or freedoms.

8.13 Part 2 of this Schedule makes a variety of technical and machinery amendments to other taxation laws.

8.14 These include amendments affecting the Farm Management Deposit scheme, all of which have retrospective application. However, all these amendments can only operate to the benefit of people seeking to claim a Farm Management Deposit, and as such, these amendments do not engage any of the applicable rights or freedoms.

Presumption of innocence

8.15 Part 2 of this Schedule also includes amendments to section 132 of the Fringe Benefits Tax Assessment Act 1986, which make it a strict liability offence to fail to keep or provide certain records. The creation of a strict liability offence technically engages Article 14(2) of the International Covenant on Civil and Political Rights, which protects the right of a person charged with a criminal offence to be presumed innocent until proved guilty.

8.16 However, treating this offence as one of strict liability simply aligns it with many other offence provisions in the taxation laws, where it is reasonable, necessary and proportionate to require certain entities which ought to be responsible for maintaining and or producing certain taxation records, to be able to maintain and or produce them when requested.

Conclusion

8.17 This Schedule is compatible with human rights as it does not encroach upon any applicable rights or freedoms.

Assistant Treasurer, the Hon David Bradbury

Index

Schedule 1: Tax treatment of native title benefits

Schedule 2: Deductible gift recipients

Schedule 3: Geothermal energy

Schedule 4: Extension of interim streaming provisions for managed investment trusts

Schedule 5: Rebate for medical expenses

Schedule 6: Limited recourse debt

Schedule 7: In-house fringe benefits under salary packaging arrangements

Schedule 8: Miscellaneous amendments