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

Strengthening scrip for scrip roll-over, small business and other concessions

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to ensure that certain integrity rules in the small business concessions and the scrip for scrip roll-over apply to life insurance companies, superannuation funds and trusts in the same way that they apply to other types of entities.

Schedule 1 to this Bill also ensures that these integrity rules (and the capital gains tax (CGT) provisions more generally) are applied as if absolutely entitled beneficiaries, bankrupt individuals, companies in liquidation and security providers are the owners of relevant assets. That is, under these provisions, the nominal owners are looked through to the underlying owners of such assets.

Date of effect: The integrity rule changes that affect the CGT provisions take effect for CGT events that happen after 7:30 pm on 10 May 2011.

The look-through treatment provisions apply, to the extent they affect the CGT provisions, automatically from the commencement of these provisions and from the 2008-09 and later income years at the option of taxpayers.

The integrity rule changes are retrospective to align with the date when these changes were announced. This provides certainty for transactions that occur from the time of announcement. The look-through treatment provisions, whilst potentially retrospective, do not disadvantage taxpayers as they are optional until the commencement of these provisions.

For details on the application date of these amendments for non-CGT provisions, see paragraphs 1.35 to 1.42 in this explanatory memorandum.

Proposal announced: The integrity rule changes were announced on 10 May 2011 as part of the 2011-12 Budget. The look-through treatment provisions were announced on 8 May 2012 as part of the 2012-13 Budget.

Financial impact: This measure has these revenue implications:

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.45 to 1.50.

Compliance cost impact: These amendments have a low compliance cost impact, comprised of a low implementation impact and a low change in ongoing compliance costs for the affected group.

Tax exemption for ex-gratia payments for natural disasters

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to exempt from income tax the Disaster Income Recovery Subsidy for people who have lost income as a result of disasters occurring across Australia during the period 3 January 2013 to 30 September 2013.

Date of effect: This measure applies to payments relating to disasters occurring during the period starting on 3 January 2013 and ending on 30 September 2013.

Proposal announced: Not previously announced.

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.19 to 2.22.

Compliance cost impact: Nil.

Extending gift deductibility to ethics education

Schedule 3 to this Bill adds a new general deductible gift recipient (DGR) category into the Income Tax Assessment Act 1997.

This measure extends tax deductibility to donations to public funds established solely for providing education in ethics in government schools in Australia as an alternative to religious instruction, where the ethics education to be provided is in accordance with State or Territory law.

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

Proposal announced: This measure was announced in the Assistant Treasurer's Media Release No. 043 of 8 April 2013.

Financial impact: This measure is estimated to have the following revenue implications:

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.45 to 3.49.

Compliance cost impact: Low.

Chapter 1 - Strengthening scrip for scrip roll-over, small business and other concessions

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to ensure that certain integrity rules in the small business concessions and the scrip for scrip roll-over apply to life insurance companies, superannuation funds and trusts in the same way that they apply to other types of entities.

1.2 Schedule 1 to this Bill also ensures that these integrity rules (and the capital gains tax (CGT) provisions more generally) are applied as if absolutely entitled beneficiaries, bankrupt individuals, companies in liquidation and security providers are the owners of relevant assets. That is, under these provisions, the nominal owners are looked through to the underlying owners of such assets.

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

Context of amendments

1.4 The 'connected entity' test in the small business entity provisions ensures that assets and turnover of related entities are taken into account in determining whether the limits for access to the relevant small business concessions have been exceeded.

1.5 The 'significant' and 'common' stakeholder tests contained in the CGT scrip for scrip roll-over are designed to ensure that an entity that has a sufficiently high level of ownership in both the original and acquiring entity cannot use the roll-over to defer tax indefinitely on the disposal of the underlying assets of the original entity.

1.6 Broadly, the connected entity test and stakeholder tests seek to determine whether an entity controls, or has the potential to control or influence another entity having regard to the interests held in that other entity that carry voting, income and capital rights.

1.7 Currently, these tests apply only if entities hold the relevant interests 'for their own benefit'. On one view, this requirement prevents the tests from applying to interests held by life insurance companies, superannuation funds and trusts because these entities do not own these interests for their own benefit, but rather for the benefit of their policy holders, members or beneficiaries.

1.8 As these entities can control or influence other entities by virtue of the interests that they own in those entities, it is appropriate that these tests be based on the legal ownership of interests, rather than on who benefits from those interests.

1.9 However, in determining whether these tests are satisfied, it would be inappropriate to use legal ownership for arrangements involving assets held on trust in respect of which there is an absolutely entitled beneficiary, assets of bankrupt individuals that have vested in their trustee in bankruptcy, assets of a company in liquidation that have vested in the liquidator or assets provided by an entity as security. This is because the intention of the CGT provisions is to treat these underlying entities (that is, the absolutely entitled beneficiary, bankrupt individual, company in liquidation or security provider) as the relevant taxpayer in respect of the asset - rather than the entity that legally owns the asset.

1.10 Currently, the CGT provisions treat an act done by an entity that owns an asset in these circumstances as being done by the underlying entity. However, there is uncertainty as to whether that is sufficient for the stakeholder tests to apply to the underlying owner of the relevant interests. This is because simply treating certain acts done by the owner as having being done by the underlying entity may continue to acknowledge the holding entity as the owner of the asset. There is also uncertainty about how these rules extend to the connected entity test, which is located outside the CGT provisions.

Summary of new law

1.11 Schedule 1 ensures that the small business connected entity test and the CGT scrip for scrip roll-over stakeholder tests apply on the basis of who owns relevant interests in an entity, rather than who benefits from the interests. This ensures that the tests apply to interests owned by life insurance companies, superannuation funds and trusts in the same way that they apply to interests owned by other types of entities.

1.12 Also, for these integrity rules and the CGT provisions more generally, absolutely entitled beneficiaries, bankrupt individuals, companies in liquidation and security providers (underlying entities) are treated as the owners of relevant assets. This ensures that the underlying entity, rather than the holding entity, is considered in the connected entity and stakeholders tests and, more broadly, that all CGT consequences in respect of those assets rest with the underlying owner, rather than with the holding entity.

Comparison of key features of new law and current law

Detailed explanation of new law

Stakeholder and connected entity tests

1.13 The small business connected entity test in Subdivision 328-C and the scrip for scrip stakeholder tests in section 124-783 seek to determine whether an entity has the capacity to control or influence another entity by having regard to the ownership of interests in that other entity. Despite this, the tests do not apply if the entity that owns an interest, and thus has control of the entity, does not benefit from the interest.

1.14 These amendments ensure that the connected entity and stakeholder tests apply having regard only to the legal ownership of the relevant interests, rather than to who benefits from the ownership. As a result, the tests apply to interests held by life insurance companies, superannuation funds and trusts in the same way that they apply to other types of entities. [Schedule 1, items 1 to 4, 7 and 8, paragraphs 124-783(6)(b) and (c), note in subsection 124-783(6), subsection 124-783(7), paragraphs 124-783(9)(b) and (c), and (10)(a) and (b), 328-125(2)(a) and (b), and 328-125(8)(e)]

Example 1.1 : CGT scrip for scrip roll-over stakeholder tests

Zhang Superannuation Fund owns shares in Dollars Ltd, which gives Zhang the right to receive 40 per cent of the dividends in Dollars. Cents Ltd later takes over Dollars, with the result that Zhang replaces its shares in Dollars with shares in Cents.

To determine the CGT consequences of this transaction under the CGT scrip for scrip roll-over, Cents will need to determine whether Zhang is a significant or common stakeholder for the arrangement.

Zhang is a significant stakeholder for the arrangement because it had a right to receive at least 30 per cent of dividends in Dollars (before the arrangement) and it also has a right to receive at least 30 per cent of the dividends in Cents (after the arrangement).

As Zhang is a significant stakeholder for the arrangement, Cents is required to determine the cost base of the shares it acquires in Dollars by reference to the cost base of those shares in the hands of Zhang (see section 124-782).

1.15 In regards to the small business connected entity test, if an entity (the first entity) directly controls a second entity, and that second entity also controls a third entity, the first entity is taken to control the third entity (see subsection 328-125(7)). The indirect control test is designed to look through business structures that include interposed entities. To ensure consistency with direct ownership structures, these amendments also determine whether an entity controls another entity in an interposed structure based on legal ownership of the relevant interests. [Schedule 1, items 7 and 8, paragraphs 328-125(2)(a) and (b), and 328-125(8)(e)]

Example 1.2 : Small business connected entity test

Polish Unit Trust owns 100 per cent of the shares in Shoe Pty Ltd. These are ordinary shares that carry full voting rights. As Polish owns at least 40 per cent of the shares in Shoe that carry full voting rights, this means it controls, and is connected with, Shoe.

Braxton is an individual who owns 100 per cent of the units in Polish that entitle him to 100 per cent of the distribution of capital. As such, Braxton is taken to control Polish. Therefore, as Braxton controls Polish, and Polish controls Shoe, Braxton is taken to control Shoe using the indirect control test.

1.16 It is argued that the law already applies in a way consistent with these integrity amendments. Consistent with that view, some taxpayers have prepared their income tax assessments on a basis consistent with these amendments, having done so based on how they understood the law applied.

1.17 These amendments accordingly ensure that the mere fact that there has been a change in the wording of the law cannot be used as evidence that there has been a change in the meaning of the law. [Schedule 1, items 6 and 10]

Absolutely entitled beneficiaries, bankrupt individuals, companies in liquidation and security providers

1.18 The CGT provisions apply on the basis that any act done by a trustee of an absolutely entitled beneficiary, a trustee in bankruptcy, a liquidator or a security holder is treated as if the act was done by the absolutely entitled beneficiary, bankrupt individual, company in liquidation or security provider (the underlying entity) as the case may be.

1.19 However, there is uncertainty as to whether those provisions (apart from the bankruptcy provisions - see paragraph 1.24) are sufficient to treat the underlying entity as the owner of an asset in applying the amended stakeholder tests that rely on the mere ownership or holding of an asset. That is, there is uncertainty whether passive acts (or things that simply happen to the holding entity) can be regarded as an act done by the holding entity. In addition, as the connected entity test is located outside of the CGT provisions, those provisions do not apply for the purposes of that test.

1.20 Accordingly, these amendments ensure that absolutely entitled beneficiaries, bankrupt individuals, companies in liquidation and security providers are treated as the owners of an asset for the purpose of the CGT provisions and the connected entity test.

Absolutely entitled beneficiaries

1.21 These amendments ensure that, just after a beneficiary becomes absolutely entitled to an asset of a trust (disregarding any legal disability), the asset is treated as an asset of the absolutely entitled beneficiary (and not an asset of the trustee) for the purpose of the CGT and connected entity provisions. In conjunction with treating any acts done by the trustee as being done by the absolutely entitled beneficiary, this has the effect that everything that happens to, or in respect of, the asset is taken into account in working out any CGT consequences in respect of that asset in the hands of the beneficiary. It also ensures that the connected entity and stakeholder tests in respect of the asset are determined by reference to the beneficiary. [Schedule 1, items 17 and 19, section 106-50 and note 2 in subsection 328-125(1)]

1.22 These amendments do not disregard the transfer of a taxpayer's asset to a trustee in the same way that the vesting of the asset is ignored in the case of bankrupt individuals, companies in liquidation and security providers - see paragraphs 1.24 to 1.34. Disregarding the transfer of the asset to the trustee may prevent that transfer giving rise to a CGT taxing point in an appropriate case.

Example 1.3 : Absolutely entitled beneficiary

Mary owns 50 per cent of the shares in Soil Limited. These are ordinary shares that give Mary full voting rights. Mary transfers these shares into a trust, and therefore CGT event E2 happens.

One year later, Marina becomes absolutely entitled to those shares and, as a consequence, CGT event E5 happens.

For the purposes of the CGT and the connected entity provisions, Marina is treated as the owner of the shares just after she becomes absolutely entitled to those shares.

Following this, Soil merges with Dirt Limited, with the shareholders in Soil exchanging their shares for shares in Dirt. To determine the CGT consequences of this transaction under the CGT scrip for scrip roll-over, Dirt will need to determine whether Marina is a significant or common stakeholder for the arrangement.

Marina is a significant stakeholder for the arrangement because she owned at least 30 per cent of the shares in Soil that carry voting rights before the arrangement and she now owns at least 30 per cent of the shares in Dirt that carry voting rights.

1.23 CGT events E1 and E2 do not happen if a taxpayer creates a trust over an asset or transfers an asset to an existing trust, so long as the taxpayer is absolutely entitled to the asset as against the trustee (see the conditions in subsections 104-55(5) and 104-60(5)). Whilst these amendments do not affect the operation of this exception, these cases still benefit from the amendments described in 1.21.

Bankrupt individuals

1.24 Section 106-30 provides that, for the purpose of the CGT provisions, the vesting of an asset in a trustee in bankruptcy under the Bankruptcy Act 1966 is ignored. This ensures that the bankrupt individual continues to be treated as the owner of the asset for the purpose of the CGT provisions so that all CGT consequences flow to that entity.

1.25 The amendments extend the disregarding of the vesting so that the bankrupt individual is also treated as the owner of the asset for the purpose of the connected entity test. In conjunction with treating any acts done by the trustee as being done by the bankrupt individual, this ensures that the test is conducted with reference to the bankrupt individual, rather than to the trustee. [Schedule 1, items 12 to 14 and 19, subsections 106-30(1) and (2), and note 1 in subsection 328-125(1)]

1.26 As the vesting of the asset in the bankrupt trustee is ignored under section 106-30, it is not possible for a CGT event to happen as the asset is treated as though it continues to be owned by the bankrupt individual. Therefore, these amendments remove the bankruptcy exception in the CGT acquisition rules and in CGT event A1. [Schedule 1, items 11 and 18, subsection 104-10(7) and section 109-15]

Companies in liquidation

1.27 Generally, liquidators control the assets of a company in liquidation because they control the company. However, in some rare cases, the Court may order that the assets of the company vest in a special purpose liquidator.

1.28 Accordingly, these amendments ignore the vesting of the assets in the liquidator, ensuring that for the purposes of the CGT and the connected entity provisions, a company under liquidation continues to be treated as the owner of the asset. In conjunction with treating any acts done by the liquidator as being done by the company, this has the effect that everything that happens to or in respect of that asset is taken into account in working out any CGT consequences in respect of that asset in the hands of the company. It also ensures that the connected entity and stakeholder tests are determined by reference to the company. [Schedule 1, items 16 and 19, section 106-35 and note 1 in subsection 328-125(1)]

1.29 As the vesting of the asset in the liquidator is ignored under these amendments, it is not possible for a CGT event to happen as the asset is treated as though it continues to be owned by the company. Therefore, these amendments remove the liquidation exception in the CGT acquisition rules and in CGT event A1. [Schedule 1, items 11 and 18, subsection 104-10(7) and section 109-15]

Example 1.4 : Company in liquidation

Debbie Liquidators Pty Ltd has been appointed as a special purpose liquidator for Shandil Limited. All of Shandil's assets vest in Debbie.

As a result of a fire, certain CGT assets of the business are destroyed. These amendments ensure that any CGT consequences associated with the destruction of the assets rest with Shandil, rather than with Debbie.

Security provider

1.30 A security holder may own an asset while some of the rights of ownership remain with the security provider. This may happen where an asset is sold and the vendor holds the asset to secure payment for that sale from the purchaser. Although the vendor is the legal owner of the asset, it must exercise any voting rights at the direction of the purchaser, and it is the purchaser who is entitled to benefit from the income and capital of the asset.

1.31 Subdivision 106-D applies to acts done only 'for the purpose of enforcing or giving effect to a security, charge or encumbrance the entity holds over the asset'. A security holder may also do acts on behalf of a security provider that are not for this purpose. For example, they may exchange shares in a scrip for scrip transaction as part of a merger of the company that issued the shares held as security. Accordingly, these amendments ensure that any act done in relation to maintaining a security, charge or encumbrance over an asset is also taken to be done by the security provider and covers, for example, any act that is done to look after, protect and manage the asset whilst it is under a security arrangement. [Schedule 1, item 17, subsection 106-60(2)]

1.32 These amendments also ignore the vesting of an asset in a security holder, ensuring that, for the purposes of the CGT and connected entity provisions, the security provider is still treated as the owner of the assets. In conjunction with treating any acts done by the security holder as being done by the security provider, this has the effect that everything that happens to or in respect of that asset is taken into account in working out any CGT consequences in respect of that asset in the hands of the security provider. For the connected entity and stakeholder tests, this ensures that those provisions are determined with reference to the security provider. [Schedule 1, items 17 and 19, section 106-60 and note 3 in subsection 328-125(1)]

1.33 Where a security holder continues to own an asset that has vested in them from a security provider, but they cease to hold a security, charge or encumbrance over that asset, these amendments treat the asset as having vested in the security holder at that time. This ensures a CGT taxing point arises as a result of the vesting, recognising there has been a change in ownership and control of that asset from the security provider to the security holder. [Schedule 1, item 17, paragraph 106-60(1)(b)]

1.34 As the vesting of the asset in the security holder is ignored, no CGT consequences arise when the asset is transferred to the security holder, or redeemed from the security holder as a result of the security arrangement coming to an end as the asset is treated as though it continues to be owned by the security provider. Therefore, these amendments remove the security holder exception in the CGT acquisition rules and in CGT event A1. [Schedule 1, items 11 and 18, subsection 104-10(7) and section 109-15]

Example 1.5 : Security provider

Cissie owns shares in Chen Ltd which gives her rights to receive 30 per cent of the voting power and dividends of Chen Ltd. Cissie enters into a loan with Boyd Bank and transfers her shares in Chen Ltd as security.

Chen's shareholders enter into a scrip for scrip transaction with another entity. Boyd Bank chooses the CGT scrip for scrip roll-over on behalf of Cissie for the capital gains that would otherwise be made.

Although accepting a scrip for scrip transaction is not an active act for the purpose of enforcing a security, these amendments ensure that any act done in relation to maintaining the security arrangement is done by Cissie. Cissie is also treated as the owner of the shares for the purposes of the CGT and connected entity provisions.

No CGT consequences arise when the original shares are transferred to Boyd Bank or subsequently when the replacement shares are redeemed from the Bank on completion of the security agreement.

Application provisions

1.35 Table 1.1 describes the application provisions that are relevant to the integrity amendments to the connected entity and stakeholder tests.

[Schedule 1, items 5 and 9]

Implications for provisions outside the wine equalisation tax regime

1.36 The integrity changes that affect the CGT provisions are retrospective to ensure that transactions that have taken place after the announcement are covered by these amendments. This provides certainty for transactions that have occurred since the time of announcement. [Schedule 1, items 5 and 9]

1.37 To the extent that provisions are affected other than the CGT and wine equalisation tax regimes, the amendments apply from the 2011-12 income year and later income years. This covers the concept of a small business entity in the Excise Act 1901, the Customs Act 1901 and in the provisions listed in items 5 to 12 in the table in section 328-10. This date ensures that taxpayers are not affected by these changes mid-way through an income year. [Schedule 1, items 5 and 9]

Implications for the wine equalisation tax regime

1.38 The connected entity test is used to define an 'associated producer' for the purposes of the A New Tax System (Wine Equalisation Tax) Act 1999 (WETA 1999). These rules ensure that a wine producer cannot access an additional amount of wine equalisation tax rebate by dividing its business into separate entities.

1.39 Eligibility for the wine equalisation tax rebate is based on financial years rather than income years. Therefore, to be consistent with these provisions and to ensure there are no retrospective impacts on the WETA 1999, these changes apply from the first financial year on or after the commencement of the amendments. [Schedule 1, item 9]

Look-through treatment for certain entities

1.40 Table 1.2 describes the application provisions that are relevant to the amendments that provide look-through treatment for certain entities.

[Schedule 1, item 20]

1.41 Whilst these look-through changes can be retrospective, they are only so at the option of the taxpayer. Therefore, taxpayers are not disadvantaged by the potential retrospectivity.

1.42 To the extent these provisions affect non-CGT provisions, they apply automatically from the first income year (or financial year for WETA 1999 cases) on or after the day these amendments commence. This ensures taxpayers will not be disadvantaged by these changes mid-way through an income year and may be particularly relevant for provisions under the WETA regime (see paragraphs 1.38 to 1.39).

Amendment of assessments

1.43 The operation of section 170 of the Income Tax Assessment Act 1936 (which provides time limits for amending assessments) is modified for these amendments if they apply prior to their commencement. Therefore, taxpayers can seek an amended assessment to access changes where their amendment period would otherwise expire. Broadly, taxpayers are able to seek an amended assessment in these circumstances within two years of these amendments commencing. [Clause 4]

Consequential amendments

1.44 Consequential amendments provide an example to the CGT bankruptcy provisions demonstrating that disregarding the vesting in the bankruptcy trustee produces no CGT taxing point when the vesting occurs. In addition, any CGT consequences associated with that asset are taken to be made by the bankrupt individual, rather than the bankruptcy trustee. [Schedule 1, item 15, example in section 106-30]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Strengthening scrip for scrip roll-over, small business and other concessions

1.45 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

1.46 Schedule 1 ensures that the small business connected entity test and the scrip for scrip roll-over stakeholder tests apply on the basis of who owns relevant interests in an entity, rather than who benefits from the interests. This ensures that the tests apply to interests owned by life insurance companies, superannuation funds and trusts in the same way that they apply to interests owned by other types of entities.

1.47 Also, for these integrity rules and the CGT provisions more generally, absolutely entitled beneficiaries, bankrupt individuals, companies in liquidation and security providers are treated as the owners of relevant assets. This ensures that the underlying entity, rather than the holding entity, is considered in the connected entity and stakeholders tests and, more broadly, that all CGT consequences in respect of those assets rest with the underlying owner, rather than with the holding entity.

Human rights implications

Integrity changes

1.48 The integrity changes largely apply from the time of announcement to provide certainty for transactions that occur from this time. Whilst these changes are retrospective, it is not expected that this produces any disadvantage that taxpayers were unaware of, as taxpayers were put on notice about these amendments, including the application date for them, by the 2011-12 Budget announcement. A proposals paper detailing these changes was released shortly after the announcement on 27 May 2011.

Look-through treatment for certain entities

1.49 Whilst the look-through changes are largely retrospective from the 2008-09 income year, they are only so at the option of the taxpayer. Therefore, taxpayers are not disadvantaged by the retrospectivity of these changes.

Conclusion

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

Assistant Treasurer, the Hon David Bradbury

Chapter 2 - Tax exemption for ex-gratia payments for natural disasters

Outline of chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to exempt from income tax the Disaster Income Recovery Subsidy (DIRS) for people who have lost income as a result of disasters occurring across Australia during the period 3 January 2013 to 30 September 2013.

Context of amendments

Disaster Income Recovery Subsidy

2.2 The DIRS provides financial assistance to employees, small business persons and farmers who have lost their income as a result of natural disasters.

2.3 The DIRS is an ex-gratia payment which is made to eligible individuals who are residents for tax purposes, and to eligible New Zealand non-protected special category visa holders (subclass 444).

2.4 The ex-gratia payment is administered by the Department of Human Services, and can generally be claimed for six months after the disaster has occurred.

2.5 Schedule 2 to the Tax and Superannuation Laws Amendment (2013 Measures No. 2) Bill 2013 (TSLAB 2) contained amendments to the ITAA 1997 to exempt DIRS payments made in relation to the floods that occurred in Queensland during the period starting on 21 January 2013.

2.6 This includes the local government areas (LGAs) of Banana, Bundaberg, Fraser Coast, Gladstone, Goondiwindi, Gympie, Ipswich, Locker Valley, North Burnett, Scenic Rim, Somerset, South Burnett, Southern Downs and Toowoomba.

2.7 Schedule 2 to this Bill broadens the exemption to DIRS payments for a disaster occurring during the period starting on 3 January and ending on 30 September 2013. This will cover individuals in the LGAs affected by the bushfires in Tasmania that occurred in January 2013 and other subsequent disasters where DIRS is activated up to and including 30 September 2013.

2.8 This includes the DIRS that was activated for the additional LGAs in Queensland, namely Central Highlands, Gold Coast, Logan, Rockhampton, Sunshine Coast and Western Downs. This also includes DIRS activated for the LGAs of Sorell and Tasman, which were affected by the Tasmanian bushfires, and subsequent DIRS activated from 8 March 2013.

2.9 Providing this payment with tax exempt status is consistent with previous activations of the DIRS.

Summary of new law

2.10 This measure amends the ITAA 1997 to list the DIRS as exempt from income tax if it is claimed within the required time period.

Detailed explanation of new law

2.11 Section 51-30 of the ITAA 1997 contains a table detailing welfare payments that are exempt from income tax and any exceptions and special conditions that must be met to qualify for the exemption.

2.12 Schedule 2 amends section 51-30 of the ITAA 1997 to insert a new item 5.4 into the table, making the ex-gratia payment known as DIRS made in relation to a disaster occurring during the period starting on 3 January 2013 and ending on 30 September 2013 exempt from income tax. [Schedule 2, item 1, item 5.4 in table in section 51-30]

2.13 The special conditions in item 5.4 inserted in the table in section 51-30 reflect the dates by which the payments must be claimed. The payment can generally be claimed for six months after the disaster has been announced, until and including 31 March 2014 (before 1 April 2014).

2.14 Section 11-15 of the ITAA 1997 lists income which is exempt from income tax. TSLAB 2 amends this list to include the DIRS, and no further amendment is made in Schedule 2 to this Bill.

Application and transitional provisions

2.15 These amendments exempt from income tax ex-gratia DIRS payments made in relation to the disasters in Australia during the period 3 January 2013 and 30 September 2013, provided these payments are claimed in accordance with the special conditions in the table in section 51-30 of the ITAA 1997.

2.16 Schedule 2 commences on Royal Assent or immediately after the commencement of Part 1 of Schedule 2 to TSLAB 2, so that the new item 5.4 inserted by this Schedule (which provides a broader exemption), replaces the previous item 5.4 (which provided a more narrow exemption).

2.17 However, the provisions in this Schedule do not commence at all if TSLAB 2 does not pass. This reflects the fact that this Schedule replaces item 5.4, whereas if TSLAB 2 does not pass, there will be no item 5.4 to replace.

2.18 TSLAB 2 also contained sunsetting provisions which would result in item 5.4 being repealed on 1 July 2017, by which time the item would have become inoperative. As the sunsetting provision still remains relevant to these circumstances, Schedule 2 to this Bill does not change the operation of the sunsetting provision.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Tax exemption for ex-gratia payments for natural disasters

2.19 Schedule 2 to this Bill 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

2.20 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to exempt from income tax the Disaster Income Recovery Subsidy for people who have lost income as a result of disasters occurring across Australia during the period 3 January 2013 to 30 September 2013.

Human rights implications

2.21 This Schedule does not engage any of the applicable rights or freedoms, and the amendments are beneficial to taxpayers.

Conclusion

2.22 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 gift deductibility to ethics education

Outline of chapter

3.1 Schedule 3 to this Bill adds a new general deductible gift recipient (DGR) category into the Income Tax Assessment Act 1997 (ITAA 1997).

3.2 This measure extends tax deductibility to donations to public funds established solely for providing education in ethics in government schools in Australia as an alternative to religious instruction, where the ethics education to be provided is in accordance with State or Territory law.

Context of amendments

3.3 The ITAA 1997 allows a tax deduction to taxpayers who make a gift or contribution to a fund, authority or institution where they are covered in the law under either a general DGR category, or, where the fund, authority or institution is specifically listed by name in the law. Gifts of $2 or more in cash or property to DGRs may be tax deductible.

3.4 There are more than 30 existing general DGR categories. Organisations which meet the criteria (and special conditions) under these categories can apply for endorsement from the Commissioner of Taxation (Commissioner) as a DGR.

3.5 Currently, under one of the general categories of DGRs (item 2.1.8 in the table in subsection 30-25(1) of the ITAA 1997), a public fund established and maintained solely for the purpose of providing religious instruction in government schools in Australia is eligible for endorsement as a DGR and thereby able to accept tax deductible donations. Similarly, another general category (item 2.1.9 in the table in subsection 30-25(1) of the ITAA 1997) provides that a public fund of a Roman Catholic archdiocesan or diocesan authority established and maintained solely for the purpose of providing religious instruction in government schools in Australia is also eligible for endorsement as a DGR.

3.6 The Government announced in Media Release No. 043 of 8 April 2013 that to provide comparable treatment with religious education, it would amend the tax law to allow taxpayers to claim an income tax deduction for donations made to providers of ethics classes in government schools where a State or Territory government has approved the organisation to provide ethics classes as an alternative to religious education. The availability of ethics education in government schools as an alternative to religious instruction provides parents with a greater choice of education options for their children.

3.7 Ethics is a philosophy that examines ethical concepts and issues. It enquires into such things as goodness, right action, and moral responsibility. Ethics education may aim to give students a deeper understanding of ethics, helping them to form moral opinions and judgments and enabling them to respond more thoughtfully to many of the problems and issues they will face in their lives.

3.8 Gifts to the public funds established and maintained under this new DGR category are intended for covering the costs incurred in conducting ethics education, such as salaries of employees who manage and direct the ethics education program in government schools, curriculum development and learning materials for training volunteers and for students.

3.9 Currently, the State of New South Wales (NSW) is the only State or Territory that has legislation in place to allow the teaching of ethics in government schools as an alternative to religious instruction.

3.10 Section 33A of the Education Act 1990 (NSW) allows for special education in ethics as a secular alternative to special religious education at NSW government schools. The right to attend religious instruction is established under section 32 of the Education Act 1990 (NSW).

Summary of new law

3.11 This measure allows taxpayers to claim an income tax deduction for certain gifts of money or property to public funds that are:

•

a registered charity (or operated by a registered charity);

•

endorsed as a DGR by the Commissioner; and

•

established and maintained solely for the purpose of providing education in ethics in government schools in Australia as an alternative to religious instruction, where the ethics education to be provided is in accordance with State or Territory law.

Comparison of key features of new law and current law

Detailed explanation of new law

3.12 The new general DGR category for ethics education will allow taxpayers to claim an income tax deduction for certain gifts of money or property that they make to a public fund as long as the public fund:

•

meets certain eligibility requirements; and

•

is endorsed by the Commissioner as a DGR.

3.13 A public fund is eligible to be endorsed by the Commissioner as a DGR if it is set up solely to provide education in ethics in government schools in Australia as an alternative to religious instruction, and where the ethics education to be provided is in accordance with State or Territory law. [Schedule 3, item 1, item 2.1.9A in the table in subsection 30-25(1) of the ITAA 1997]

3.14 However, the public fund will only be eligible for endorsement where it is a registered charity under the Australian Charities and Not-for-profits Commission Act 2012 or it is operated by a charity that is registered under that Act. [Schedule 3, item 1, item 2.1.9A in the table in subsection 30-25(1) of the ITAA 1997]

3.15 In addition, the Commissioner requires that all entities or funds endorsed under these new categories must demonstrate that they:

•

meet the public fund requirements (explained at paragraph 3.31);

•

where applicable, meet the gift fund requirements (explained at paragraph 3.35); and

•

meet the special conditions that apply to DGRs (such as the 'in Australia' conditions).

Explanation of eligibility requirements

Meaning of public fund'

3.16 Public funds for DGR purposes fall under two types:

•

funds established and controlled by government or government authorities; and

•

funds to which the public are invited to contribute and in fact do contribute.

3.17 A public fund may be established as a separate entity, for example under an instrument of trust, or as part of a sponsoring organisation.

Meaning of established solely for the purpose of'

3.18 This new general category is intended to only extend to public funds that are established solely for the purpose of providing education in ethics. The word 'solely' is intended to take its ordinary meaning and requires that the public fund has been established exclusively or wholly to provide ethics education in government schools in Australia as an alternative to religious instruction where the ethics education to be provided is in accordance with State or Territory law.

Meaning of providing education in ethics in government schools in Australia'

3.19 Ethics, as it is understood through its ordinary meaning, includes 'a system of moral principles, by which human actions and proposals may be judged good or bad, or right or wrong'^[1].

3.20 The provision of education in ethics is then intended to cover developing curriculum and delivering classes in government schools that focus on giving students an understanding of ethics, helping them to form moral opinions and judgments, and enabling them to respond more thoughtfully to many of the problems and issues they will face in their lives. Inherently, this would include a focus on such things as goodness, right action, and moral responsibility.

3.21 However, this new general DGR category is intended to only extend to public funds that provide this ethics education in government schools in Australia. This means that it is restricted to ethics education provided in schools established by a law of a State or Territory government, and where the provision of ethics education is in accordance with State or Territory law.

Meaning of as an alternative to religious instruction in accordance with State or Territory law'

3.22 The new general DGR category will extend to the provision of ethics education, but only to the extent that it is provided as alternative to religious instruction under State or Territory law.

3.23 This would require the relevant State or Territory to have some legislation in place to allow the teaching of ethics classes in government schools as an alternative to religious instruction classes. However there is no requirement that religious instruction classes must be provided in a particular government school before ethics classes supported by this new general DGR category can be provided in that government school.

3.24 An example of this is section 33A of the Education Act 1990 (NSW) which allows for special education in ethics as a secular alternative to special religious education at government schools. The right to attend religious instruction is established under section 32 of the Education Act 1990 (NSW).

3.25 The provision of ethics education in a government school would be considered 'in accordance with State law or Territory law' where it is undertaken in a manner consistent with a law of the State or Territory government, including receiving authorisation from State or Territory regulators (where required).

3.26 Providing ethics education in accordance with State law or Territory law does not necessarily require a specific provision related to the provision of ethics education as exists in the NSW legislation; it need only be provided in manner consistent with general laws of a State or Territory regulating the provision of education in government schools.

Explanation of the public fund and gift fund requirements

3.27 Both the public fund and gift fund requirements may apply to public funds providing ethics education that are endorsed under the new general DGR category, depending on whether the public fund is the endorsed DGR itself or whether it is operated by an endorsed DGR.

3.28 Generally speaking, where the public fund is operated by an endorsed DGR, then it will need to comply with both the public fund requirements and the gift fund requirements.

3.29 However, if the public fund is the endorsed DGR itself, only receives gifts or deductible contributions, and has the appropriate winding-up rules in its governing rules, then the public fund itself may be the gift fund (in this case there would be no need for a separate gift fund).

3.30 The public fund and gift fund requirements are explained in the Australian Taxation Office's (ATO's) GiftPack - Guide for deductible gift recipients and donors publication.

Public fund requirements

3.31 The basic requirements for public funds are laid out in the Commissioner's Taxation Ruling TR 95/27.

3.32 Approximately half of the general DGR categories require that a public fund be established. The public fund requirement ensures that there are administrative and legal frameworks in place which will help safeguard property and moneys donated to the fund, authority or institution, and help ensure that tax deductible donations are used for the purpose for which endorsement was given.

3.33 The basic requirements for public funds include that:

•

the fund must be managed by members of a Committee, a majority of whom have a degree of responsibility to the general community (this requirement does not apply to funds established and controlled by a governmental or quasi-governmental authority);

•

the objects of the fund must be clearly set out and reflect the purpose of the fund;

•

gifts to the fund must be kept separate from any other funds of the sponsoring organisation;

•

a separate bank account and clear accounting procedures are required to explain all transactions relevant to the DGR status of the fund;

•

receipts must be issued in the name of the fund. Receipts must state the name of the fund to which the gift has been made; the fund's Australian Business Number (ABN) and the fact that the receipt is for a gift;

•

the public must be invited to contribute to the fund;

•

the fund must operate on a not-for-profit basis (that is, moneys must not be distributed to members of the managing committee or trustees of the fund except as reimbursement for out-of-pocket expenses incurred on behalf of the fund or proper remuneration for administrative services);

•

should the fund be wound-up, any surplus money or other assets must be transferred to some other qualifying fund; and

•

the Commissioner is to be notified of any changes to the fund's constitution or other founding documents.

3.34 While a public fund is required to be controlled by an executive committee made up of a majority of responsible persons, the day-to-day running of the organisation need not be carried out by those persons. The fund must, however, be set up in such a way that it is not possible for public control to lapse for any period.

Gift fund requirements

3.35 The gift fund requirements are found in section 30-130 of the ITAA 1997.

3.36 A gift fund is a fund, maintained for the principle purpose of the DGR fund, authority or institution. All gifts, and deductible contributions, of money or property for that purpose are made to it and credited to it.

3.37 A gift fund cannot receive any other money or property, and the fund is only to be used for the principal purpose of the fund, authority or institution.

3.38 The DGR fund, authority or institution must be required (by law, its constituent documents or governing rules) to transfer any surplus assets of the gift fund to another similar DGR fund, authority or institution when the fund, authority or institution is wound-up or the DGR endorsement is revoked, whichever occurs first.

Ancillary funds

3.39 It remains an option under existing arrangements in the tax law for non-government organisations wishing to support a public fund providing ethics education that is endorsed under the new general DGR category to establish an ancillary fund (a fund established and maintained under will or instrument of trust for the purpose of providing money, property or benefits to DGRs or for their establishment), to collect tax deductible donations in its own right and to give to public funds established to provide ethics education.

Enforcement

3.40 The Commissioner has a wide range of enforcement powers, including powers to obtain information and revoke DGR status. DGR funds are subject to the ATO's regular compliance program.

What is a gift?

3.41 Gifts of $2 or more of money or property to DGRs are tax deductible to donors, provided that the gift complies with all relevant conditions.

3.42 The donation must be a gift and voluntary. A transaction which is mandatory or where the giver receives a benefit or advantage in return is not a gift. Further information on what is a gift can be found in the Commissioner's Taxation Ruling 2005/13.

Application of measure

3.43 This measure will apply from the day this Bill receives Royal Assent and will apply to gifts made on or after that day. [Schedule 3, item 3]

Consequential amendments

3.44 The index to Division 30 of the ITAA 1997 is updated to include the new general DGR category for ethics education. [Schedule 3, item 2, section 30-315]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Extending gift deductibility to ethics education

3.45 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

3.46 This Schedule adds a new general deductible gift recipient (DGR) category into the Income Tax Assessment Act 1997.

3.47 This measure extends tax deductibility to donations to public funds established solely for providing education in ethics in government schools in Australia as an alternative to religious instruction, where the ethics education to be provided is in accordance with State or Territory law.

Human rights implications

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

Conclusion

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

Assistant Treasurer, the Hon David Bradbury

Index

Schedule 1: Strengthening scrip for scrip roll-over, small business entity and other concessions

Schedule 2: Ex-gratia payments for natural disasters

Schedule 3: Deductible gift categories