House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon. J. Kerin, M.P.)

General Outline and Financial Impact

The Taxation Laws Amendment Bill (No. 3) will amend various taxing Acts (unless otherwise indicated all amendments refer to the Income Tax Assessment Act 1936) by making the following changes:

Fringe Benefits Tax - Living-Away-From-Home Allowances

(Fringe Benefits Tax Assessment Act 1986)

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Ensures that living-away-from-home-allowances paid to offshore oil and gas rig workers are treated as fringe benefits.

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Proposal announced : This proposal was announced by the Treasurer on 2 August 1991.

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Financial impact : The amendment will have a negligible effect upon the revenue.

Exemption of the pay and allowances of members of the Defence Force serving in Iraq and Kuwait

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Exempts from income tax the pay and allowances of members of the Australian Defence Forces allotted for duty in Iraq and Kuwait in response to Iraq's invasion of Kuwait.

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Proposal announced : 14 August 1990 by Minister for Defence, Science and Personnel.

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Financial impact : The estimated cost will be $850,000 per month with a total cost of $8.75 million in the financial year 1990-91.

Pensions, Benefits and Allowances

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Amends the tax legislation to bring it in line with amendments to the social security and veterans' entitlements legislation.

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Proposal announced : Not previously announced. Consequential amendments due to changes made to the Social Security Act 1991 and Veterans' Entitlements Act 1986.

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Financial impact : No impact on revenue.

Investment-related Lottery Winnings

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Assesses on their winnings the winners of certain investment-related lotteries which are drawn or decided on or after the day on which this Bill receives Royal Assent.

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The amendment will only apply if the lottery is a return on an investment. For instance, it could be a benefit of depositing money with a financial institution.

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Prizes won in ordinary lotteries such as lotto are not affected.

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The amendment does not apply if either the prize won or the right to participate in the investment-related lottery is already taxable.

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Proposal announced : 1991-92 Budget.

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Financial impact : The amendment has no direct impact on Revenue, but will prevent a revenue loss through the substitution of lottery prizes for investment returns.

Deduction for Petroleum Resource Rent Tax Payments

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Allows Petroleum Resource Rent Tax (PRRT) instalments to be deductible in the year in which the instalment payments are made.

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Ensures that refunds or credits of instalments of PRRT, for which a deduction has been allowed, or is allowable, are assessable income in the year in which the amount is received, credited, paid or applied.

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Proposal announced : By the Treasurer on 9 May 1991.

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Financial impact : The cost of the amendment is estimated to be $125m in 1991-92 and $205m in 1992-93.

Extension of the Research and Development Activities Concession

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Extends the research and development tax concession at a maximum rate of deduction of 125% beyond 30 June 1995 indefinitely.

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Proposal announced : March 1991 Industry Statement.

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Financial impact : The estimated cost is $180m p.a. in the first year of impact 1996/97 rising to $280m p.a. by the year 2000/01.

Gifts to Gift Funds of Cultural Organisations

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Introduces new arrangements for gifts to gift funds of cultural organisations.

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As a consequence, removes seven cultural organisations which are presently listed in the income tax gift provisions.

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Proposal announced : By the Treasurer and the Minister for the Arts, Tourism and Territories in a Press Release on 24 March 1991.

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Financial impact : The cost of the proposal cannot be quantified, but is unlikely to have a substantial impact on revenue.

Environmental Impact Studies

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Allows a deduction for expenditure incurred on environmental impact studies on or after 12 March 1991.

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Writes off the cost over the lesser of 10 years or the life of the project to which the study relates.

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Excludes the cost of plant or articles used in the studies from the deduction, but they will be eligible for deduction under the ordinary depreciation provisions.

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Proposal announced : March 1991 Industry Statement.

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Financial impact : The cost of this measure will rise from nil in 1990-91 to an estimated cost of $45 million per year after ten years.

Life Insurance Protection Levy

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Creates a legislative framework for the taxation treatment of various payments associated with the measure to assist policyholders of Occidental Life Insurance Company of Australia Limited and Regal Life Insurance Limited.

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Proposal announced : 1991-92 Budget.

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Financial impact : The estimated cost to revenue is $25 million (1991/92 prices). It is expected that the measure will not have an impact until 1993/94 financial year. However, the actual timing and amount will be dependent on the judicial management of Occidental Life and Regal Life.

General Mining Exploration and Prospecting Expenditure

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Removes the requirement that mineral exploration or prospecting expenditure need be incurred on a mining tenement for such expenditure to qualify for immediate deductibility.

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Puts all exploration or prospecting expenditure on the same footing, whether it relates to quarrying, to petroleum operations or to other mining operations.

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Applies to exploration or prospecting expenditure incurred on or after 1 July 1991.

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Proposal announced : 1991-92 Budget.

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Financial impact : This amendment will have a small but unquantifiable cost to the Revenue.

Timing of Franking Credits

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Changes the basis on which companies receive franking credits from the assessment of company tax to the payment of company tax.

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Applies where notices of assessments, amended assessments and determinations that are served or deemed to be served after 20 August 1991.

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Proposal announced : 1991-92 Budget.

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Financial impact : There will be revenue savings from eliminating the existing scope for compounding the revenue losses that can occur under the imputation system if company tax is not paid. However, these revenue savings cannot be quantified.

Capital Gains Tax Cost Base

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Allows costs such as interest, repairs and rates and land taxes to be deducted from a capital gain made on the disposal of most assets, where those costs are not otherwise allowable as a tax deduction.

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Applies to assets acquired on or after 21 August 1991.

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Proposal announced : 1991-1992 Budget.

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Financial impact : The cost of these amendments is not expected to be significant.

Provisional Tax Amendments

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Resolves an inequity that arose as a result of an unintended effect of the calculation of provisional tax on salary or wages income. This will be achieved by modifying the method of calculation of provisional tax on salary or wages income.

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The new method of calculation is based on a split of the provisional tax credit into two components:

(a)

provisional tax on income other than salary or wages; and

(b)

provisional tax on salary or wages income.

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Also makes technical amendments to the Act to give added certainty to the operation of the provisional tax variation provisions.

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Proposal announced : Not previously announced.

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

Tax File Number Withholding Tax

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Introduces new rules for withholding tax from income accrued from certain deferred interest investments made on or after 1 February 1992 where an investor has not quoted a tax file number (TFN).

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Proposal announced : 18 April 1991 (second reading speech of Taxation Laws Amendment Act (No. 2) 1991).

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Financial impact : this change will have no impact on revenue.

Exemption from Medicare Levy: Blind Pensioners and Sickness Beneficiaries

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Amends the Income Tax Assessment Act 1936 to make that Act reflect the Government's initial intention to limit exemption from the levy on account of holding a health card to blind pensioners and sickness beneficiaries.

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Proposal announced : 9 July 1991.

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Financial impact : The amendment of the Act will avoid an additional unintended cost to revenue.

Medicare Levy Low Income Thresholds

Changes to the Threshold Levels

(Medicare Levy Amendment Act 1986)

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The Medicare Levy Amendment Bill 1991 will amend the Medicare Levy Act 1986 to vary the taxable income levels below which persons are exempt from tax as from 1 July 1991; the new levels compare with the old as follows:

	1990-91	1991-92
Individuals	$11,745	$11,745
Married couples and sole parents	$19,045	$19,674

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Proposal announced : 1991-92 Budget.

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Financial impact : The increase in the low income thresholds is estimated to cost nil in 1991-92 and $10 million in 1992-93.

The Taxation of Foreign Source Income

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Provides relief from the double taxation of profits that can occur when an Australian-controlled foreign company (CFC) changes its residence from an unlisted country to either a listed country or Australia. Where a CFC changes residence to Australia, a taxpayer will continue to be exempt from tax on distributions made by the CFC up to the amount of the CFC's income that was previously attributed to the taxpayer. Relief in relation to a change of residence to a listed country is provided by enabling a taxpayer to obtain foreign tax credits for foreign tax paid on certain gains arising to the CFC on the sale of the assets of the CFC after the change of residence.

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Ensures that taxpayers are not disadvantaged by the rules that provide for conversion of the foreign income losses from the pre 1990-91 classes of income to the new classes of income that operate from the 1990-91 income year. This will enable a taxpayer to treat a pre 1990-91 loss that is able to be carried forward to subsequent years as relating to the same class of income to which it would have belonged had it been a loss incurred in the 1990-91 income year.

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Prevents taxpayers from gaining an unintended advantage by changing the residence of a company from a listed country to an unlisted country and claiming foreign tax credits on dividends paid out of pre 1990-91 profits. The amendment will deny foreign tax credits in those circumstances.

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Enables certain resident trusts to obtain a tax exemption for distributions received from a CFC up to the amount of the CFC's income attributed to them under the accruals tax measures. The trusts affected are corporate unit trusts, public trading trusts and superannuation trusts that are taxed as separate taxpayers.

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Proposal announced : Treasurer's press release issued on 28 June 1991.

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Financial impact : The amendments to the foreign source income provisions of the Principal Act are unlikely to have any significant impact on the revenue.

Amendments Relating to Garnishee Notices

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Provides that, in relation to building society shares, only withdrawable shares (and not permanent or fixed shares) in the capital of a building society can be garnisheed from such a society.

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Proposal announced : Not previously announced.

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Financial impact : Insignificant.

Deferral of Initial Payment of Company Income Tax and Consequences for Dividend Imputation

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Defers the initial payment of income tax for the 1990-91 income year by companies, superannuation funds, approved deposit funds and pooled superannuation trusts (all referred to as companies) from the 28th day of the month following balance date to the 15th day of the third month following balance date.

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Proposal announced : Treasurer's press releases on 13 June 1991 and 9 September 1991.

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Financial impact : There will be no long term impact on revenue as the income tax collected under the deferral arrangements is the same as that which would have been collected under the existing law. However, the Revenue has lost use of the funds from initial payments of company tax for seven weeks.

Pay-As-You-Earn (PAYE) Amendments

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To restructure the definitions and correct a technical inconsistency in the pay-as-you-earn (PAYE) provisions.

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Proposal announced : These measures have not been announced previously.

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Financial impact : These amendments will not impact on revenue.

Direct lodgment of appeals and applications for review with the Federal Court and the Administrative Appeals Tribunal.

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Introduces new arrangements for taxpayers to lodge appeals against, or applications for review of, objection decisions directly with the Federal Court or the Administrative Appeals Tribunal.

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Repeals the objection and appeals provisions of various taxation laws administered by the Commissioner of Taxation and includes a set of generic objection and appeal provisions in the Taxation Administration Act 1953.

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Proposal announced : Not previously announced.

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Financial impact : These arrangements will have no impact on the revenue.

Occupational Superannuation Standards

Reasonable Benefit Limits Administrative Arrangements

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Corrects a technical deficiency whereby certain payers of eligible termination payments were not required to report such payments to the Insurance and Superannuation Commissioner.

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Gives the Insurance and Superannuation Commissioner the power to treat a superannuation fund as if it had satisfied the superannuation fund conditions for a particular year even though it had not complied with a request by the Insurance and Superannuation Commissioner to commute an excessive component of a pension.

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Proposal announced : Not previously announced.

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Financial impact : These changes will have no significant impact on revenue.

Pre - 1 July 1988 funding credits

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Removes from the Act the date by which an application for a pre- 1 July 1988 funding credit must be made. The relevant date will be prescribed in the Occupational Superannuation Standards Regulations.

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Proposal announced : Not previously announced.

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Financial impact : This change will have no impact on revenue.

Registered Organisations

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Registered organisations will be denied the right to franking credits and debits from 3 pm (Australian Capital Territory time) on 20 August 1991 and any franking surplus at that time will be cancelled.

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Proposal announced : 1991-92 Budget.

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Financial impact : The change will have no impact on the revenue.

Miscellaneous Minor Clarifying Amendments

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Amends the definition of "registered laboratory" in the Wool Tax (Administration) Act 1964 to provide it has the same meaning as that contained in the Australian Wool Corporation Act 1991.

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Proposal announced : Not previously announced.

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Financial impact : No impact on revenue.

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Clarifies the operation of certain deduction provisions which are expressed to be subject to the same limits on deductibility as is section 51.

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Proposal announced : The amendment (being only minor) has not been announced previously, as it does not change the effect of the law.

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Financial impact : This measure will not affect revenue.

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Makes two minor technical corrections to the legislation relating to the taxation of foreign employment income.

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Proposal announced : Not previously announced.

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Financial impact : No impact on revenue.

Chapter 1 FBT Assessment Act - Living Away From Home Allowance Benefits

[Clause: 5, 6, 7, 8]

Overview

Ensures that living-away-from-home-allowances paid to offshore oil and gas rig workers are treated as fringe benefits.

Summary of proposed amendments

1.1. The Bill will amend the fringe benefits tax law to ensure that living-away-from-home-allowances (LAFHAs) paid to offshore oil and gas rig workers are treated as fringe benefits.

Background to the legislation

1.2. When fringe benefits tax (FBT) was introduced in 1986, the Government's intention was that all LAFHAs would be subject to FBT. The need to amend the fringe benefits tax law arises because the wording of a LAFHA provision in an offshore oil industry award was not sufficiently clear to bring it within the LAFHA provision in the FBT law.

Explanation of proposed amendments

1.3. LAFHAs are defined in section 30 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) as being allowances paid to compensate an employee for additional expenses incurred by the employee or additional expenses incurred by the employee and other additional disadvantages that the employee is subject to while required to live away from his usual place of residence in order to perform his work duties.

1.4. Some LAFHAs paid to offshore oil and gas rig workers are paid solely to compensate the employee for additional disadvantages of living away from home. Because these allowances do not include a component for additional expenses incurred by the employee they do not fall within the definition of a LAFHA in section 30 of the FBTAA.

1.5. The proposed amendment will widen the definition of a LAFHA to include those allowances paid to offshore oil and gas rig workers where they are only paid for additional disadvantages of living away from home.

1.6. Section 30 of the FBTAA will therefore be amended by inserting new subsection 30(2) to ensure that a LAFHA paid by an employer to an employee after the date of introduction of this Bill will be treated as a fringe benefit if-

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the allowance is not already a fringe benefit under subsection 30(1);

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the employee's usual place of employment is on an oil or gas rig;

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the employee is provided with residential accommodation at or near the worksite; and

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it could be concluded that the whole or part of the allowance is paid to compensate the employee for additional disadvantages of having to live away from home. [Clause 6]

1.7. When these conditions are satisfied, the whole of the allowance will be treated as a LAFHA fringe benefit.

1.8. Section 31 of the FBTAA will be amended so that the taxable value of those allowances described in new subsection 30(2) is the amount of the allowance. [Clause 7]

1.9. Section 74 of the FBTAA allows a FBT assessment to be amended within 3 years of the original assessment date. The Commissioner may amend assessments made after the Bill's introduction date, which were made on the basis of the existing law to give effect to these amendments. [Clause 8]

Commencement date

1.10. The amendment will apply to those LAFHAs within the expanded definition which are paid after date of introduction of the Bill.

Clauses involved in the proposed amendments

Clause 5: will facilitate references to the Fringe Benefits Tax Assessment Act 1986 for the purposes of amendments to that Act made by this Bill.

Clause 6: will amend section 30 of the FBTAA by inserting new subsection 30(2). The new subsection expands the definition of LAFHA fringe benefits.

Clause 7: will amend section 31 of the FBTAA to enable the taxable value of the LAFHA fringe benefit to be determined.

Clause 8: allows for assessments made after the date of introduction of the Bill to be amended to give effect to the amendments being proposed.

Chapter 2 Exemption of the pay and allowances of members of the Defence Force serving in Iraq and Kuwait

[Clause: 10]

Overview

Exempts from income tax the pay and allowances of members of the Australian Defence Forces allotted for duty in Iraq and Kuwait in response to Iraq's invasion of Kuwait.

Summary of proposed amendments

2.1. The proposed amendments will exempt from income tax the pay and allowances of members of the Australian Defence Forces (ADF) allotted for duty in Iraq and Kuwait in response to Iraq's invasion of Kuwait.

2.2. The amendments will also cease the exemption after 9 June 1991.

Background to the legislation

2.3. The existing provisions exempt the pay of ADF personnel serving in specific areas of the Middle East (see subsection 23AC(6)) from 2 August 1990. The amendments extend this exemption from 23 February 1991 to ADF personnel serving in Iraq and Kuwait as a result of Iraq's invasion of Kuwait.

Explanation of the proposed amendments

Operational Area

2.4. The specific areas of the Middle East covered by the Section 23AC exemption are presently defined as "the operational area". The amendment proposed by paragraph (a) of clause 10 will change the term "the operation area" to "an operational area". This allows for the operational area to be extended to include the countries of Iraq and Kuwait. This is done by paragraph (f), which inserts a new operational area effective from 23 February 1991. [Subclause 10(a) and 10(f)]

2.5. Paragraph (g) includes the new operational area in the definition of "operational area" in subsection 23AC(7). [Subclause 10(g)]

Operational service

2.6. The amendment proposed by paragraph (b) is to ensure that the original requirements for eligibility for the Section 23AC exemption are also to apply to the new operational area. [Subclause 10(b)]

2.7. Paragraph (c) will insert a requirement that ADF members serving in the new operational area must have a written certificate from the Chief of the Defence Force. This certificate must state that the allotment for duty to the operational area was in response to Iraq's invasion of Kuwait. The purpose of this requirement is to exclude from the exemption ADF personnel who may be allotted for duty in the operational area for reasons unconnected with the invasion. [Subclause 10(c)]

Period of operational service

2.8. Paragraph (d) effectively ceases the exemption after the end of 9 June 1991. [Subclause 10(d)]

2.9. Paragraph (e) ensures that the existing delegation and review procedures apply to the new operational area. [Subclause 10(e)]

Commencement date

2.10. The amendments of s23AC apply to the 1990-91 year of income. The exemption ceases after 9 June 1991.

Clauses involved in the proposed amendments

Clause 10 : amends section 23AC to

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extend the operational area for the exemption to include Iraq and Kuwait.

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effectively cease the exemption after 9 June 1991.

Chapter 3 Pensions, Benefits and Allowances

[Clause: 2, 11, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 83, 85, 100,]

Overview

Amends the tax legislation to bring it in line with amendments to the social security and veterans' entitlements legislation.

Summary of proposed amendments

3.1. This Bill proposes to amend various provisions of the Income Tax Assessment Act 1936 (the Act), including Division 1AA, to bring it in line with amendments to the Social Security Act 1991 and the Veterans' Entitlements Act 1986. A technical amendment is also made to the Income Tax Rates Act 1986.

Background to the legislation

3.2. Division 1AA of the Act specifies which payments under the Social Security Act 1991, Veterans' Entitlements Act 1986 and similar payments are exempt from tax.

3.3. The Taxation Laws Amendment Act (No. 2) 1991 inserted Division 1AA in the Act to replace section 23AD. There were two reasons for these changes.

3.4. First, to make the provisions of the Act that exempt from tax certain pensions, benefits and allowances easier to understand. Under the then existing law it was often difficult and time consuming to determine if a particular payment was exempt or not exempt.

3.5. Second, the Social Security Act 1947 was completely rewritten with effect from 1 July 1991. Also Part III of the Veterans' Entitlement Act 1986 was rewritten (Part III deals with age service, invalidity service, partner service and carer service pensions). These rewrites made it necessary to amend the Act. However, it was not possible to include all the required consequential amendments to the Act in the Taxation Laws Amendment Act (No 2) 1991.

3.6. The present Bill covers these remaining consequential amendments. It also includes other amendments which arise from further changes to the social security and veterans' entitlements legislation.

Explanation of the proposed amendments

Disaster Relief Payments

3.7. The social security legislation allows a disaster relief payment of two weeks pension to be paid following a major disaster (e.g. an earthquake, a flood or fire).

3.8. As a result of an amendment contained in the Social Security (Rewrite) Amendment Act 1991, a disaster relief payment is payable under Part 2.24 of the Social Security Act 1991.

3.9. New Section 24ABDC exempts disaster relief payments from tax. [Clause 18]

Pharmaceutical Allowance and Advance Pharmaceutical Supplement

3.10. Pharmaceutical allowance and advance pharmaceutical supplement are payable under Part 2.22 and Part 2.23 respectively of the Social Security Act 1991. Part 2.22 and Part 2.23 were included in that Act by the Social Security (Rewrite) Amendment Act 1991.

3.11. New sections 24ABDA and 24ABDB exempt these two payments from tax. [Clause 18]

Carer Pension

3.12. A carer pension was previously paid only to people who provided constant care to a severely handicapped pensioner. Thus section 24ABF in Division 1AA refers to a severely handicapped pensioner.

3.13. The Social Security Act 1991 now includes payment of a carer pension to people who are carrying for other pensioners and beneficiaries, including those receiving service pensions under the Veterans' Entitlements Act 1986. This Bill amends section 24ABF so that the reference is now to a severely handicapped person in place of a severely handicapped pensioner. The amendment does not alter the tax treatment of a carer pension. [Paragraph 19(a)]

Bereavement Payment (where new single rate equals or exceeds the combined married rate)

3.14. Paragraph 66(3)(a) of the Social Security Act 1947 used to apply to situations where the new single rate of pension paid to the surviving member of a pensioner couple equalled or exceed the combined married rate of pension that would have been received if the deceased pensioner had not died.

3.15. In these circumstances, the effect of former paragraph 23AD(3)(j) (inserted by Taxation Laws Amendment Act 1991) was that the amount of the otherwise assessable payment received, on any one of the 7 pension paydays after the death, in excess of what the surviving person would have received if the deceased pensioner had not died, was exempt from tax.

3.16. A provision similar to paragraph 66(3)(a) was not included in the Social Security Act 1991 (as first enacted). Accordingly Division 1AA does not have a provision similar to the former paragraph 23AD(3)(j).

3.17. The situation is the same for veterans' entitlements legislation where a provision similar to paragraph 57A(3)(a) of the Veterans' Entitlements Act 1986 was not included in the original rewrite of Part III of that Act. Accordingly Division 1AA does not have a provision similar to the former paragraph 23AD(3)(t).

3.18. However, the Social Security Act 1991 has been amended to include provisions similar to paragraph 66(3)(a) of the Social Security Act 1947. These amendments are included in Schedule 2 to the Social Security (Rewrite) Amendment Act 1991. The Veterans' Entitlements Act 1986 has also been amended to include provisions similar to former paragraph 57A(3)(a). These amendments are included in Schedule 5 of the Veterans' Entitlements (Rewrite) Transition Act 1991.

3.19. This Bill will ensure that payments made to the surviving member of a pensioner couple are taxed in the same way as payments made under the previous social security and veterans' entitlements legislation.

3.20. The amendments apply where the new single rate of pension equals or exceeds the combined married rate of pension that would have been received if the deceased pensioner had not died. In these circumstances, the surviving pensioner receives the new single rate of pension and is not entitled to receive certain bereavement payments under various provisions of the Social Security Act 1991 and the Veterans' Entitlements Act 1986. These provisions are covered by the term "bereavement Subdivision" and a provision excluding the receipt of payments under a "bereavement Subdivision" is defined as an "exclusion provision". [Clause 5]

3.21. The otherwise assessable amount which exceeds what would have been assessable to the surviving pensioner if the person had not died, is to be exempt from tax for each of the 7 pension paydays after the death. The amendments treat as assessable that amount of the pension that would have been assessable if the spouse had not died.

3.22. The amendments involved are:

Example 1

3.23. A pensioner couple each received $100 age pension, all of which was assessable. Following the death of one of the couple, the surviving pensioner is entitled, as an unmarried person, to an age pension of $220 which would all be assessable income. However, $120 is exempt (i.e. $220-$100). The exemption applies only for the 7 pension paydays after the death. (Subsection 24ABC(5))

Example 2

3.24. A pensioner couple each received $100 assessable age pension plus $20 rent assistance (not subject to tax by virtue of paragraph 24ABC(1)(a)). Following the death of one of the couple, the surviving pensioner is entitled, as an unmarried person, to an assessable age pension of $230 plus $40 rent assistance.

3.25. $130 is exempt (i.e. $230-$100). The $40 rent assistance is also exempt. This means that for each of the 7 pension paydays after the death, the surviving pensioner receives $270, of which $170 is exempt and $100 is not exempt. (Paragraphs 24ABC(5)(d), 24ABC(5)(e) and 24ABC(5)(f))

Bereavement Payment (child-related)

3.26. These payments are exempt from tax. They are paid under various sections of the Social Security Act depending upon the type of pension, benefit or allowance and the circumstances in which the bereavement payment is made.

3.27. With effect from 1 July 1991, schedule 1 to the Social Security (Rewrite) Amendment Act 1991 extended the circumstances in which child-related bereavement payments are made to include:

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payments to the surviving member of a couple where the deceased partner would have received those payments if he or she had not died;

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payments where the deceased was not a member of a couple and the deceased would have received the child-related bereavement payments if he or she had not died.

3.28. Amendments contained in Schedule 1 to this Bill exempt from tax these additional child-related bereavement payments. [Subclause 83(1)]

Disability Reform Package

3.29. In the 1990-91 Budget the government announced a comprehensive reform of disability support. In general terms the reforms provide for the replacement of the invalid pension paid by the Department of Social Security with a disability support pension. They also provide for the replacement of sickness benefit with a sickness allowance.

3.30. Other related changes include abolishing the incentive allowance, rehabilitation allowance and sheltered employment allowance. The changes are to commence from 12 November 1991.

Invalid pension - disability support pension

3.31. Invalid pension is currently paid under Part 2.3 of the Social Security Act 1991. Part 2.3 is to be repealed and a new Part 2.3 will be inserted to cover disability support pension. This Bill proposes to amend Division 1AA so that the disability support pension would be tax exempt just as the invalid pension is currently exempt from tax. Bereavement payments made under proposed new Part 2.3 are also to be treated in the same way as the existing law. [Clause 17]

3.32. Likewise the special needs invalid pension is also to be replaced with a special needs disability support pension. A special needs disability support pension will be exempt in the same way as the special needs invalid pension is currently exempt from tax by section 24ABR. [Clause 25]

Rehabilitation allowance and sheltered employment allowance

3.33. At present, a rehabilitation allowance is paid under Part 2.10 of the Social Security Act 1991, and a sheltered employment allowance under Part 2.9 of that Act. Parts 2.9 and 2.10 are to be repealed with effect from 12 November 1991. Those people who would have received a rehabilitation allowance or sheltered employment allowance will in future receive the other social security payment to which they would be entitled. (Rehabilitation allowance and sheltered employment allowance are payments to persons whose primary social security entitlement would be to some other type of payment (sections 410 and 461 of the Social Security Act 1991)).

3.34. As a result of amendments included in the Social Security (Disability and Sickness Support) Amendment Act 1991, a disability support pension is to be paid from 12 November 1991 to any person in receipt of an invalid pension on 11 November 1991. Sheltered employment allowance recipients on 11 November 1991 will also be transferred to disability support pension on 12 November 1991. However, a person in receipt of a rehabilitation allowance on 11 November 1991 will continue to be paid that allowance until they complete or cease the rehabilitation program.

3.35. This Bill proposes to repeal section 24ABJ of Division 1AA. [Clause 21]

3.36. Section 24ABJ sets out the tax treatment of payments of sheltered employment allowance. As rehabilitation allowance will continue to be paid, no amendments are proposed to section 24ABK which sets out the tax treatment of payments of rehabilitation allowance.

Sickness allowance

3.37. As from 12 November 1991, Part 2.14 of the Social Security Act 1991 under which a sickness benefit is paid will be repealed and a new Part 2.14 - Sickness Allowance will be inserted in its place. This Bill will amend Division 1AA so that a sickness allowance is treated in the same way as a sickness benefit (section 24ABO). [Clause 23]

Job Search Allowance and Newstart Allowance

3.38. The social security unemployment benefits system was previously divided into two payments: a job search allowance and an unemployment benefit.

3.39. Job search allowance was covered by Part 2.12 of the Social Security Act 1991 and unemployment benefit was covered by Part 2.11 of that Act.

3.40. From 1 July 1991, a new job search allowance and newstart allowance were introduced. In very broad terms, the former job search allowance and unemployment benefit were abolished and replaced with:

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a job search allowance which is generally payable only to persons unemployed for less than 12 months (persons under 18 years of age could continue to receive the job search allowance until they turn 18); and

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a newstart allowance which is generally payable to persons unemployed for 12 months or more.

3.41. These changes were included in the Social Security (Job Search and Newstart) Amendment Act 1991. A job search allowance is now paid under new Part 2.11 and the newstart allowance is paid under new Part 2.12.

3.42. The new job search allowance and newstart allowance will be treated for tax purposes in the same way as unemployment benefits and the old job search allowance. Accordingly this Bill proposes to amend existing sections 24ABL and 24ABM to achieve this. [Clause 22]

Extension of Veterans' Entitlements to Male Spouses

3.43. An amendment to the Veterans' Entitlements Act 1986 extended certain benefits to dependants of eligible female veterans on the same basis as applies to dependants of male veterans with effect from 22 January 1991. For the period 22 January to 30 June 1991, a spouse's service pension was paid instead of the former wife's service pension. From 1 July 1991, the pension is called a partner service pension.

3.44. This Bill will ensure that the tax treatment of payments of a spouse's service pension and a partner service pension is the same as that applying to a wife's service pension. In particular, this Bill will amend former section 23AD of the Act with effect for the period 22 January 1991 to 30 June 1991 and section 24ACG of Division 1AA for payments made from 1 July 1991. [Clauses 11 and 29]

3.45. Both the spouse's service pension and partner service pension will be exempt from tax where the recipient of the pension and the veteran are both under the pension age and the veteran receives an invalidity service pension. In other circumstances, supplementary amounts are exempt from tax but the balance of the spouse's service pension and partner service pension is not exempt.

Other consequential amendments

3.46. Further consequential and technical amendments are required to the Act as a result of changes to the social security legislation and veterans' entitlements legislation and are contained in schedule 1 and 2 to the Bill. [Clause 83]

3.47. A technical amendment is also made to the Income Tax Rates Act 1986. [Clauses 100 and 101]

Commencement date

3.48. The amendments relating to disaster relief payments, pharmaceutical allowance, advanced pharmaceutical supplement, job search allowance, newstart allowance, carer pension and bereavement payments will take effect for payments from 1 July 1991. [Subclause 85(5)]

3.49. The amendments relating to the restructured Disability Reform Package are to apply for payments from 12 November 1991. [Subclause 85(6)]

3.50. The amendments relating to the extension of veterans' entitlements to male spouses of veterans will apply to payments from 22 January 1991. [Subclause 85(2)]

Clauses involved in the proposed amendments

Subclauses 85(2), 85(5) and 85(6): govern the commencement of the amendments to bring the tax legislation in line with changes to social security and veterans' entitlements legislations.

Clauses 11, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 83, 100, 101: make consequential amendments to the Act and the Income Tax Rates Act 1986 as a result of amendments to social security and veterans' entitlements legislation.

Chapter 4 Investment-related Lottery Winnings

[Clause: 31, 65, 70, 72, 73, 75, 85]

Overview

Assesses on their winnings the winners of certain investment-related lotteries which are drawn or decided on or after the day on which this Bill receives Royal Assent.

The amendment will only apply if the lottery is a return on an investment. For instance, it could be a benefit of depositing money with a financial institution.

Prizes won in ordinary lotteries, such as lotto, are not affected.

The amendment does not apply if either the prize won or the right to participate in investment-related lottery is already taxable.

Summary of the proposed amendments

4.1. The Income Tax Assessment Act 1936 will be amended to assess the winners of certain investment-related lotteries on their winnings, as announced in the Budget.

4.2. The amendment will only apply if the lottery is a return on an investment. That includes the depositing of money with a financial institution. Consequently, the amendment does not affect ordinary lotteries, caskets, art unions, raffles and so on.

4.3. Nor do the amendments apply if either the prize won or the right to participate in the lottery arrangement is already taxable. For example, if the lottery arrangement arises because of a person's employment, the value of the right to participate in the lottery would be assessable as a fringe benefit under the Fringe Benefits Tax Assessment Act 1986. If the lottery arises because of some business relationship between the provider of the prize and the recipient, an amount would be assessable under the non-cash business benefits provision, section 21A of the Act.

4.4. The amendments will apply to prizes drawn or decided after the date of Royal Assent of this Bill.

Background to the legislation

4.5. Generally, wins from gambling or lotteries are not treated as assessable income. However, certain financial institutions have sought to provide such wins in addition to, or as a substitute for, assessable interest income. In effect, a taxable receipt is replaced by a non-taxable receipt.

4.6. For instance, a financial institution might offer the chance to win a prize in a lottery instead of paying interest on deposits made to certain accounts. Yet the amount of the prize might reflect the total interest that it would have had to pay on deposited funds. Alternatively, the prize might be offered in addition to a fairly low rate of interest already payable on the accounts.

4.7. The windfall gain is to be treated as part of the return on a person's investment and given the same treatment as other returns on investments. The value of the prize will be included in assessable income, provided that neither the value of the right to participate in the investment-related lottery nor the prize won in the investment-related lottery is otherwise taxable.

Explanation of the proposed amendment

4.8. The proposed section 26AJ will bring to tax the value of any prize which is provided under an investment-related lottery. [Clause 31]

4.9. The provision categorises the winnings that might arise from an investment-related lottery into three classes of prizes:

•

cash;

•

loan benefits; and

•

other property or services.

4.10. There are separate valuation rules for each class of prize. [Paragraphs 26AJ(1)(a) and (h) to (j)]

Note : All references to a prize in this chapter should be read as a reference to any one of these classes.

What is an investment-related lottery?

4.11. There are three elements which determine whether an arrangement is an investment-related lottery:

•

the prize must be won in a lottery or similar arrangement;

•

the chance to win the prize (called the "betting chance") must arise because the taxpayer holds an investment with an investment body such as a bank; and

•

the betting chance must not otherwise be taxable. [Paragraphs 26AJ(1)(b) to (g)]

The prize must arise from a lottery

4.12. The prize must arise as a matter of chance. The concept of chance is very broad and includes not only lotteries but also betting, pool betting and any other form of gambling as well as any game with prizes. It is similar to that contained in subsection 160ZB(2), which exempts lottery and betting winnings from capital gains tax.

4.13. For example, a game with prizes might include a simple questionnaire which is given to participants in relation to their investment. A prize would be taxable when, for example, it is awarded to the first ten correct answers to the question, "What is the interest rate on our term deposits?"; so would a prize given to a winner picked from a hat, or with the best football tipping record. [Paragraph 26AJ(1)(b)]

4.14. Section 26AJ will not apply to loans provided by Starr-Bowkett building societies, which use a ballot system to determine when the members are entitled to receive the loans. Each member of a Starr-Bowkett building society has an entitlement to receive a loan, which is usually applied to buying or constructing a home. Only the time when the loan is granted is determined by ballot. The loan itself is not won in a lottery. [Subsection 26AJ(10)]

The chance to win the prize must be a return on an investment

4.15. The chance to participate in the lottery is referred to as the betting chance . The betting chance must be provided at least partly in connection with an investment of the taxpayer with another person, called the investment body . The connection between the betting chance and the investment may only be partial. [Paragraph 26AJ(1)(c)]

4.16. An investment is defined as "any mode of application of money for the purpose of gaining a return". Return is itself defined to include interest, income or profit. A deposit of funds with a financial institution to gain interest income would be an investment. The definition of return includes a return by way of profit so that an application of funds to gain a profit through capital growth would also be an investment as defined. [Subsection 26AJ(11)]

4.17. To ensure that a deposit of funds at nil interest is treated as an investment, the following test is applied: if the taxpayer had received a cash payment instead of the chance to participate in the lottery, and that cash payment would have been an investment return, then the taxpayer will be treated as having an investment. [Subsection 26AJ(9)]

The betting chance is not otherwise taxable

4.18. To some extent, this element is closely related to the investment nature of the lottery. It ensures that an amount is not taxable if either the value of the betting chance or the prize itself is already taxable. [Paragraphs 26AJ(1)(f) and (g)]

Taxing the prize

4.19. The taxpayer will be assessable on the value of the prize even though it may in fact be provided to an associate of the taxpayer, or to another person under an arrangement to which the taxpayer or associate is a party. The definition of associate used for this section is the same as subsection 26AAB(14) of the Act. Both person and arrangement are defined in very broad terms. [Paragraphs 26AJ(1)(a) and (e), subsection 26AJ(11)]

4.20. The time when the prize is taxed and the value at which it will be taxed depend on whether the prize is in the form of cash, other property or services, or a loan. [Paragraphs 26AJ(1)(a) and (h) to (j)]

If the prize is in cash

4.21. If the taxpayer, associate or other person is paid or credited with cash, the amount paid or credited is to be included in the taxpayer's assessable income in the income year in which the payment or crediting occurs. [Paragraph 26AJ(1)(i)]

If the prize is property or services

4.22. If the taxpayer, associate or other person is provided with property or services, the amount which is to be assessed is the arm's length value of the property or service provided in the income year less any contribution given by the recipient to acquire the property or service. The amount to be included in assessable income may be reduced if, had the taxpayer paid for the property or services, a deduction would have been allowable in respect of the expenditure. This is called the "otherwise deductible rule". [Paragraph 26AJ(1)(j), subsection 26AJ(3)]

4.23. The otherwise deductible rule allows a taxpayer to reduce the amount to be included in assessable income only if the cost of the prize would have been deductible on a once only basis if the taxpayer had to spend money to acquire it. That is, the deduction that would otherwise be allowable must not be partly allowable in one year and partly allowable in other years. [Subsection 26AJ(3)]

4.24. For example, suppose that Sandra wins a car which she uses only in her employment as a travelling salesperson. The cost of the car would have been deductible to her as depreciation. But as this deduction is not a "once only" deduction, Sandra would not be able to reduce the amount to be included in her assessable income. [See the definition of 'once only deduction', subsection 26AJ(11)]

4.25. In section 26AJ, property is meant to convey its ordinary meaning, for example cars, shares and so on. Services is defined in very broad terms similar to those used in the non-cash business benefits provision, section 21A. [Subsection 26AJ(11)]

4.26. That definition would cover the case, for example, where the prize is a waiver of interest which the recipient owes to the investment body on a loan taken out with the investment body. [See the definition of 'services' in subsection 26AJ(11)]

4.27. Services and property can be provided in a number of ways. Property is provided to a person when it is disposed of to that person. Property is deemed to have been provided to the recipient if the provider creates the property in the recipient. The property is deemed to be provided to the recipient when the property comes into existence. This means that in circumstances such as where the provider allots shares as a prize, property is taken to be provided and its value can be taxed. As regards services, "provide" extends to such things as allow, confer, give, grant or perform. [Subsections 26AJ(11) and (8)]

4.28. The amount to be included in assessable income is determined by reference to the arm's length value of the property or services. The arm's length value of property or services means the amount that the recipient could reasonably be expected to pay another party to obtain the property or services where both parties are acting independently. [Subsection 26AJ(11)]

4.29. As mentioned, any recipient's contribution is deducted from the value of the property or services. The recipient's contribution is defined as the amount of any consideration which the recipient paid to the provider for the property or service reduced by any reimbursement of that consideration paid to the recipient. A recipient's contribution will not arise where a person chooses to deposit funds in a bank account which pays no interest. Neither the deposit of funds with the investment body nor the forgoing of interest to gain an entitlement to participate in the investment-related lottery is a recipient's contribution. [Subsection 26AJ(11)]

If the prize is a loan benefit

4.30. The value of a loan benefit is to be included in the assessable income of the taxpayer in each year of income in which the loan benefit arises. An otherwise deductible rule similar in principle to the one described above can again apply to reduce the amount to be included in assessable income. [Paragraph 26AJ(1)(h), subsection 26AJ(2)]

4.31. Loan is defined in very broad terms to encompass any transaction - including an advance of money, the provision of credit and the creation of other debt obligations - which in substance is a loan. [(Subsection 26AJ(11)]

4.32. A loan benefit arises where a person (the provider) makes a loan to another person (who, for the purposes of this provision, will be either the taxpayer, an associate of the taxpayer or another person under an agreement to which the taxpayer or associate is a party and who will be called the recipient). The loan benefit will be taken to have been given in each income year where the recipient is under any obligations to repay any part of the loan. A technical measure here ensures that an obligation to repay part of the loan is deemed to exist while the loan is outstanding even though no amount is currently due for payment or repayment. [Subsections 26AJ(4) and (7)]

4.33. A loan benefit may also arise on a deferred interest loan. A deferred interest loan is one where the interest payable on the loan accrues at intervals of greater than six months. A separate loan benefit is deemed to arise where the interest is payable on a loan at intervals of more than six months. The amount of any unpaid interest that accrues on the principal loan during each six month period is taken to be a separate loan made by the lender to the borrower free of interest. This additional loan extends from the end of the six month period until the interest is repaid. As this loan benefit is also defined by reference to an obligation to repay the loan, the technical measure discussed in the previous paragraph also applies here. [Subsections 26AJ(5), (11) and (7)]

4.34. The amount to be included as assessable income for a loan benefit is the amount by which a benchmark amount of interest, as defined, exceeds the amount of interest that has accrued on the loan for the current year of income. That amount may be reduced if the otherwise deductible rule applies. [Paragraph 26AJ(1)(h), subsection 26AJ(2)]

4.35. The benchmark amount of interest means the amount of simple interest that will accrue on the loan for the particular year of income if the interest is calculated on the daily balance of the loan at the benchmark interest rate for the year. The benchmark interest rate is the predominant interest rate for the month of June immediately preceding the relevant income year for new variable interest rate owner-occupier housing loans to individuals, as published by the Reserve Bank of Australia in the Statistical Directory of its monthly Bulletin. The benchmark interest rate for loan benefits provided in the 1991-92 income year is 13% per annum. [Subsection 26AJ(11)]

4.36. The otherwise deductible rule applied to loan benefits operates in much the same way as the otherwise deductible rule used for calculating the taxable value of loan fringe benefits under the Fringe Benefits Tax Assessment Act 1986.

4.37. In effect, the otherwise deductible rule apportions the amount which is to be included in assessable income under paragraph 26AJ(1)(h) according to the percentage of the loan which is applied for income producing purposes. So, if a recipient of a loan uses all of the loan moneys to acquire an income producing asset, no amount will be included in assessable income. If only half of the loan is used to produce assessable income, the amount to be included in assessable income is halved. The following paragraphs explain how this result is achieved. [Subsection 26AJ(2)]

4.38. The basic component in the calculation is the amount that would be included in assessable income if not for the operation of the otherwise deductible rule: basically, the benchmark amount of interest minus actual interest accrued on the loan. That amount is referred to as the gross assessable amount . [Paragraph 26AJ(2)(a)]

4.39. There is then a need to ascertain whether the taxpayer would have been entitled to a once-only deduction (as explained above) if the taxpayer had paid interest on the loan equal to the benchmark amount of interest. This is called the gross deduction . [Paragraph 26AJ(2)(b)]

4.40. The next step in the calculation depends on whether interest accrues on the loan. In a simple case where no interest accrues on the loan, the gross deduction is deducted from the basic component, the gross assessable amount, to determine the amount of the loan benefit that is to be included in the taxpayer's assessable income. [Paragraph 26AJ(2)(c)]

Example 1

4.41. Robyn wins an interest free loan of $50,000 in an investment-related lottery. She uses half of the loan to buy a share portfolio and the other half to finance renovations to her home.

Step 1 Calculate the gross assessable amount. (The benchmark interest rate is assumed to be 15%.)

Gross assessable amount = Benchmark amount of interest - Interest accrued on the loan
= $50,000*15% - nil
= $7,500


Step 2 As only 50% of the loan is used for income producing purposes, the amount that would have been deductible if Robyn had paid the benchmark amount of interest (the gross deduction) is $3,750 (i.e. 50% of $7,500).

Step 3 The amount to be included in assessable income is the gross assessable amount ($7,500) minus the gross deduction ($3,750), that is, $3,750.

4.42. In a case where interest does accrue on the loan, steps one and two of the calculation are the same, but the third step of the calculation is slightly different. Then, the gross deduction is reduced by the amount that would be allowable as a once-only deduction on the interest that has accrued during the year. This is called the reducing amount . [Paragraph 26AJ(2)(d)]

Example 2

4.43. Robert wins a low interest loan of $50,000 in an investment-related lottery. Interest is payable at 5%. He uses 80% of his loan to buy an investment property and 20% to pay for an overseas holiday.

Step 1 Calculate the gross assessable amount. (The benchmark interest rate is assumed to be 15%.)

Gross assessable amount = Benchmark amount of interest - Interest accrued on the loan
= $50,000*15% - $50,000*5%
= $5,000


Step 2 As 80% of the loan is used for income producing purposes the amount that would have been deductible if Robert had paid the benchmark amount of interest is $6,000 (i.e. 80% of $7,500). The amount that would be deductible on the actual interest accrued on the loan (the reducing amount) is $2,000 (i.e. 80% of $2,500).

Step 3 The amount to be included in assessable income is the gross assessable amount ($5,000) minus the difference between the gross deduction ($6,000) and the reducing amount ($2,000), that is, $5,000 - $4,000 = $1,000.

Consequential amendments

Provisional Tax

4.44. Three consequential changes amend Division 3 of Part VI of the Act to ensure that the inclusion of an investment-related lottery prize in a taxpayer's assessable income in one year does not create a provisional tax liability in respect of the income of the following year. [Subsections 221YA(1C) and 221YDA(1AA), paragraph 221YCAA(2)(ka)]

Tax File Number

4.45. The tax file number provisions are being amended so that an amount of tax may be withheld from the payment of a cash investment-related lottery prize to the taxpayer, if the taxpayer has chosen not to provide a tax file number to the investment body. In effect, the investment on which the prize arises will be treated as an investment for the purposes of Part VA (the tax file number provisions of the Act) and Division 3B of Part VI (the tax file number withholding tax provisions). The amount of cash paid or credited to the taxpayer will be classified as income for the purposes of the tax file number withholding tax provisions. [Subsections 202D(8), 221YHZA(4)]

Commencement date

4.46. Only prizes in investment-related lotteries which are drawn or decided on or after the date of Royal Assent of this Bill will be liable to taxation. Accordingly, a prize won before that date, such as an interest free loan which is repayable over 10 years, will not be assessable even though benefits from the prize continue after the commencement of section 26AJ. The crucial date is the time when the prize is drawn or decided. If a recipient is entitled to choose between several prizes, the liability to tax depends on the time the entitlement arises, not when the recipient makes the choice. [Subclause 2(i) and 85(7)]

Clauses involved in the proposed amendments

Clause 31: Inserts new section 26AJ which will assess taxpayers on the value of prizes won under investment-related lotteries.

Clause 65: Amends section 202D to make a cash prize payable on an investment-related lottery subject to the tax file number provisions.

Clause 70: Inserts new subsection 221YA(1C) which ensures that an amount included in a taxpayer's assessable income under new section 26AJ is excluded for the purposes of calculating the taxpayer's provisional tax liability in relation to the next year.

Clause 72: Inserts new paragraph 221YCAA(2)(ka) which ensures that an amount included in a taxpayer's assessable income under new section 26AJ is excluded from the uplifted provisional tax amount calculation.

Clause 73: Amends subsection 221YDA(1AA) which allows a taxpayer to have provisional tax or an instalment of provisional tax recalculated on the basis of the taxpayer's own estimate of taxable income for the current year of income. The amendment will mean that estimates should not take into account an amount included in assessable income for the previous year under section 26AJ.

Clause 75: Amends section 221YHZA to allow an amount to be withheld from a cash prize paid to a taxpayer where the taxpayer has chosen not to quote a tax file number in respect of an investment-related lottery.

Clause 85: Provides that new section 26AJ will apply to prizes drawn on or after the date of Royal Assent of the Bill.

Chapter 5 Deduction for Petroleum Resource Rent Tax Payments

[Clause: 34, 85]

Overview

Allows Petroleum Resource Rent Tax (PRRT) instalments to be deductible in the year in which the instalment payments are made.

Ensures that refunds or credits of instalments of PRRT, for which a deduction has been allowed, or is allowable, are assessable income in the year in which the amount is received, credited, paid or applied.

Summary of proposed amendments

5.1. This Bill deals with income tax deductions which are currently allowable under Section 72A for Petroleum Resource Rent Tax (PRRT) payments.

5.2. The proposed changes have two important aspects. They are:

•

to allow instalments of PRRT to be deductible in the year in which the payments are made; and

•

to include refunds or credits of PRRT instalments, for which a deduction has been allowed, or is allowable, in assessable income in the year in which the amount is received, credited, paid or applied.

5.3. Basically, the new provisions will ensure that deductions for PRRT instalments are consistent with general income tax principles. The amendment will apply to all PRRT instalments made on or after 1 July 1991.

Background to the legislation

Current law applying to PRRT payments - Section 72A

5.4. Section 72A of the Act provides a deduction for Petroleum Resource Rent Tax (PRRT) paid by a taxpayer in the year the payment is made (Subsections 72A(1) and (2))

5.5. Sub-section 72A(5) defines "petroleum resource rent tax" to mean the tax imposed by the Petroleum Resource Rent Tax Act 1987 as assessed under the Petroleum resource Rent Tax Assessment Act 1987. This only covers tax which has been assessed but does not cover amounts paid by way of instalments.

5.6. Therefore, PRRT instalments paid under the existing provisions are not deductible until a later financial year, when an assessment of PRRT is made.

5.7. The current provisions ensure that a refund of PRRT, for which a deduction has been allowed, or is allowable, is included as assessable income in the year the amount is received, paid or applied (Subsections 72A(3) and (4)). They do not cover refunds of PRRT instalments.

5.8. No provision is made under the existing law for the assessability of a PRRT credit when an overpayment of tax is applied against a taxpayer's other outstanding liabilities arising under an Act administered by the Commissioner of Taxation.

Explanation of the proposed amendments

How will the deduction for PRRT instalments operate?

5.9. PRRT instalments are not presently deductible in the year of payment. This amendment will allow a deduction for payments of PRRT instalments made on or after 1 July 1991. The instalment payments will be deductible in the year in which they are made. [Clause 34]

How will the deduction for PRRT assessed operate?

5.10. Where PRRT assessed by the Petroleum Resource Rent Tax Assessment Act 1987 is greater than the instalments paid, the balance of PRRT assessed will be an allowable deduction in the year of payment.

5.11. The amendments will prevent any double deductions from occurring. This is because PRRT payments referred to in subsections 72A(1) and (2) take into account any application of payments of PRRT instalments under section 99 of the Petroleum Resource Rent Tax Assessment Act 1987 (Subsection 72A (2A)). See the examples for application.

Will refunds of PRRT instalments be included as assessable income?

5.12. Yes. A refund of PRRT instalments resulting from an overpayment of tax, for which a deduction has been allowed, or is allowable, is assessable income in the year that it is received, credited, paid or applied (Subsections 72A(3) and (4)). Where a taxpayer has paid PRRT instalments in excess of the liability assessed by the Petroleum Resource Rent Tax Assessment Act 1987, the Commissioner will -

•

firstly credit the excess against any outstanding liability arising under an Act administered by the Commissioner of Taxation; and

•

then refund any remaining amount to the taxpayer.

Examples of the application of the amendments

Example 1

5.13. The following example illustrates the manner in which payments of PRRT and instalments of PRRT are deductible in the year in which they are made.

5.14. Assume that three instalments, of $20m each, are paid in the year ended 30 June 1992. PRRT assessed for the 1991-92 year is $70m.

•

A notice of assessment issues in July 1992 for the following amount:

Assessment for 1991-92	$70m
less Instalments paid ($20mx3)	$60m
PRRT Payable	$10m

•

Assume that $10m is paid in August 1992.

•

In accordance with subsections 72A(1) and (2), the three instalments ($60m) will be deductible in the year in which they are paid (1991-92).

•

The payment of the balance of the PRRT liability ($10m) in August 1992 will be deductible in the 1992-93 year i.e. the year in which it is paid (subsections 72A(1) and (2)).

Example 2

5.15. The following example illustrates the manner in which refunds of PRRT are assessable income in the year in which they are received, credited, paid or applied.

5.16. Assume that three instalments, of $20m each, are paid in the year ended 30 June 1992. PRRT assessed for the 1991-92 financial year is $50m. Taxpayer has an outstanding income tax liability of $4m.

•

A notice of assessment issues in July 1992 for the following amount:

Assessment for 1991-92	$50m
less Instalments paid ($20mx3)	$60m
Credit available	$10m
less Income Tax liability	$ 4m
Refund of PRRT	$ 6m

•

In accordance with subsections 72A(1) and (2), the three instalments ($60m) will be deductible in the year in which they are paid (1991-92).

•

Credit of $4m applied against the income tax liability will be assessable income in the 1992-93 year (Paragraph 72A(3)(aa)).

•

Refund of PRRT ($6m) paid to the taxpayer will be assessable income in the 1992-93 year (Paragraph 72A(3)(a)).

Commencement Date

5.17. PRRT instalments paid on or after 1 July 1991 will be an allowable deduction in the year in which the payments are made.

5.18. Refunds or credits relating to PRRT instalments paid after 1 July 1991, for which a deduction has been allowed, or is allowable, will be assessable income in the year in which the amount is received, credited, paid or applied. [Subclause 85(4)]

Clauses involved in the proposed amendments

Clause 34: Amends section 72A to allow a deduction for PRRT instalments in the year in which the payments are made. It also specifically ensures that refunds or credits of instalment payments, for which a deduction has been allowed, or is allowable, are assessable income.

Subclause 85(4) : Contains the application provisions.

Chapter 6 Extension of the Research and Development Activities Concession

[Clause: 35, 36]

Overview

Extends the research and development tax concession at a maximum rate of deduction of 125% beyond 30 June 1995 indefinitely.

Summary of proposed amendments

6.1. The Bill will amend the Income Tax Assessment Act so as to extend the research and development tax concession beyond 30 June 1995.

Background to the legislation

6.2. The concession is currently available to an eligible company for expenditure incurred on or after 1 July 1985 on qualifying research and development activities in Australia.

6.3. The present concession is in the form of a deduction against assessable income of up to 150 per cent of expenditure incurred prior to 1 July 1993 reducing to 125 per cent from that date until 30 June 1995.

6.4. There are also special transitional arrangements for qualifying plant that is used prior to 1 July 1995 and written off after that date.

6.5. The concession was enacted by Parliament in order to promote research and development activities by industry in Australia.

6.6. The amendment proposed by this Bill will extend the concession beyond 30 June 1995.

Explanation of the proposed amendments

6.7. A deduction for research and development expenditure is currently allowable for expenditure incurred from 1 July 1985 to 30 June 1995. The period during which the deduction is allowable is referred to as the deduction period in sections 73B and 73C.

6.8. These amendments will remove the reference to the deduction period in sections 73B and 73C. This will have the effect of allowing a deduction beyond 30 June 1995 of up to 125% of expenditure incurred. [Clauses 35 and 36]

Commencement date

6.9. The amendments will apply from the date that the Bill receives the Royal Assent.

Clauses involved in the proposed amendments

Clause 35 : removes the reference to deduction periods and the transitional arrangements for qualifying plant written off after 1 July 1995 in section 73B of the Act.

Clause 36 : removes the reference to deduction period in section 73C of the Act so as the concession only has a starting date.

Chapter 7 Gifts to Gift Funds of Cultural Organisations

[Clause: 37, 38]

Overview

Introduces new arrangements for gifts to gift funds of cultural organisations.

As a consequence, removes seven cultural organisations which are presently listed in the income tax gift provisions.

Summary of the proposed amendments

7.1. This Bill will amend the income tax gift provisions by allowing deductions for gifts made directly to a gift fund of a cultural organisation admitted to the Register of Cultural Organisations.

7.2. As a consequence, the Bill will remove the names of seven cultural organisations that are presently listed in the gift provisions.

7.3. The amendment will allow gift funds of cultural organisations to receive tax deductible donations by entry on the Register. To be listed on the Register, a fund must be approved by the Treasurer and the Minister responsible for the Arts (the Arts Minister).

7.4. The amendment will take effect from 25 March 1991. This is the date from which the first seventeen organisations, which were announced in the Press Release of 24 March 1991, became eligible to be included on the Register and therefore receive tax deductible donations.

Background to the legislation

7.5. There are seven cultural organisations listed in the existing gift provisions (section 78) that are allowed to receive tax deductible donations. These organisations are:

•

the Australian Elizabethan Theatre Trust;

•

the Sydney Opera House Appeal Fund;

•

the Sidney Myer Music Bowl Trust;

•

the Art Gallery Society of New South Wales;

•

the Victorian Arts Centre Trust;

•

the Queensland Cultural Centre Trust; and

•

the Australian National Gallery Foundation.

7.6. Other cultural organisations have had access to tax deductible donations indirectly through the Australian Elizabethan Theatre Trust. The Trust itself is a listed organisation under subparagraph 78(1)(a)(xiii).

7.7. Under the proposal a gift fund administered by a cultural organisation that has been approved by the Treasurer and the Arts Minister will be listed on a register known as the Register of Cultural Organisations. Donations of $2 or more of money or of certain property to a fund listed on the Register will be tax deductible. [Subclause 37(b) - new subparagraph 78(1)(a)(cvii)] To be included on the Register, an organisation and its fund need to satisfy certain eligibility criteria. [Clause 38 - new section 78AA]

7.8. The Register is to be administered by the Department of the Arts, Sport, the Environment, Tourism and Territories (DASETT). [Clause 38 - new subsection 78AA(2)]

Explanation of the proposed amendments

What is the effect of the amendments?

7.9. Section 78 of the income tax law operates to allow tax deductible gifts to cultural organisations that are presently listed in the gift provisions. Under the proposal, the names of these organisations will be removed from the legislation and included on the Register of Cultural Organisations.

7.10. Donations to gift funds administered by cultural organisations which are listed on the Register of Cultural Organisations will be tax deductible [Subclause 37(b) - new subparagraph 78(1)(a)(cvii)] . Donors will be able to make donations to gift funds directly and it will no longer be necessary for such funds to seek assistance through the Australian Elizabethan Theatre Trust.

What is a gift fund?

7.11. A gift fund is a public fund to which donations of money or property are made. Money from interest on donations, income derived from the property and money from realisation of the property are to be deposited into the fund. The fund needs to be kept separate from other funds. [Paragraph (c) of the definition of 'cultural organisation' in subsection 78AA(1)]

How does a gift fund become eligible to receive tax deductible donations?

7.12. To satisfy the eligibility criteria a gift fund needs to:

(a)

be established and maintained exclusively for cultural purposes. 'Cultural purposes' is defined in new subsection 78AA(1);

(b)

be administered by an organisation that has been certified by the Arts Minister to be a cultural organisation. [Clause 38 - new subsection 78AA(3)] 'Cultural organisation' is defined in new subsection 78AA(1);

(c)

be included by DASETT on the Register of Cultural Organisations on the direction of the Treasurer and the Arts Minister. [Clause 38 - new subsection 78AA(4)] Gifts to the fund will be deductible from the date specified in the direction. A fund cannot be included on the Register retrospectively.

7.13. In exercising their discretion whether to give a direction to DASETT, the Treasurer and the Arts Minister need to take into account the policies and budgetary priorities of the Australian Government. [Clause 38 - new subsection 78AA(5)]

Can a gift fund be removed from the Register?

7.14. A gift fund may be removed from the Register on the direction of the Treasurer and the Arts Minister. [Clause 38 - new subsection 78AA(8)] Gifts made to that fund would cease to be deductible from the date specified in the direction. A fund cannot be removed retrospectively.

Transitional arrangements

7.15. Transitional provisions [Clause 38 - new subsections 78AA(6) and (7)] are included for cultural organisations and their gift funds which were approved for admission to the Register of Cultural Organisations between 24 March 1991 and the date this Bill receives Royal Assent.

7.16. These provisions take into account that four Press Releases have been issued either by the Arts Minister or DASETT or the Treasurer and the Arts Minister. These Press Releases announced that 172 organisations and their gift funds qualify for admission to the Register. On 24 March 1991, 17 organisations were announced to be eligible to be admitted to the Register of Cultural Organisations. They were followed by:

•

42 organisations and their funds on 14 May 1991;

•

56 organisations and their funds on 26 June 1991; and

•

57 organisations and their funds on 5 September 1991.

For the purposes of deduction, gifts to a nominated organisation and its fund will be deductible from either 25 March 1991 or the date of the Press Release which announced that organisation's and fund's eligibility for admission to the Register [Clause 38 - new subsection 78AA(6)] . The amendment gives effect to whatever date each of the relevant Press Releases indicated was the date from which donations to the specified organisations and funds were tax deductible. [Clause 38 - new paragraph 78AA(6)(e)]

7.17. This also applies to the seventeen organisations which were announced on 24 March 1991 even though some of them, at that time, may not have been cultural organisations (as now defined in subsection 78AA(1)) provided they satisfy the definition by the time this Bill commences. [Clause 38 - new paragraph 78AA(6)(b)]

7.18. However, if at the time this Bill commences an organisation is not a cultural organisation as defined, then gifts to that organisation will be deductible from 25 March 1991 to the date of Royal Assent. [Clause 38 - new subsection 78AA(7)] The organisation will then be removed from the Register on the date of Royal Assent. [Clause 38 - new Paragraph 78AA(7)(e)]

Commencement date

7.19. The amendments to remove the seven organisations presently listed in paragraph 78(1)(a) apply from the date that this Bill receives Royal Assent.

7.20. The amendments to include the Register of Cultural Organisations apply to gifts made after 24 March 1991.

Clauses involved in the proposed amendments

Subclause 37(a) : Repeals subparagraphs 78(1)(a)(xiii), (xxviii), (xxix), (xxxiv), (lxiv), (lxix) and (xcii).

Subclause 37(b) : inserts new subparagraphs 78(1)(a)(cvii) which will allow deductions for gifts made to gift funds which are listed on the Register of Cultural Organisations.

Clause 38: Inserts section 78AA which sets out transitional arrangements and the eligibility criteria for gift funds.

Chapter 8 Deduction of Environmental Impact Studies Expenditure

[Clause: 32, 39]

Overview

Allows a deduction for expenditure incurred on environmental impact studies on or after 12 March 1991.

The cost will be written off over the lesser of 10 years or the life of the project to which the study relates.

The cost of plant or articles in the studies will not qualify for the deduction, but will be eligible for deduction under the ordinary depreciation provisions.

Summary of proposed amendments

8.1. Under the existing law the cost of studies undertaken to determine the impact a project may have on the environment may not qualify for deduction. This Bill will amend the income tax law to allow a deduction for the cost of such studies where the cost is incurred on or after 12 March 1991.

8.2. In most cases the cost of the environmental impact study will be deducted over 10 years. However, if the study relates to a project which has a life of less than 10 years, then the cost of the study will be deducted over that lesser period.

8.3. This deduction will not apply to expenditure on environmental impact studies that is deductible under some other provision of the Act.

8.4. The cost of any plant used in environmental impact studies will be depreciable, like other plant, rather than deductible on the same basis as other environmental impact study expenditure.

Background to the legislation

8.5. Expenditure on environmental impact studies is generally incurred prior to the start of the income earning activities studied or is otherwise capital in nature. The expenditure is therefore not deductible under subsection 51(1). Occasionally, the cost of an environmental impact study is deductible under other specific deduction provisions (such as Divisions 10 or 10AA, the mining and quarrying provisions) but generally the cost of such a study will not be deductible at all.

8.6. In many cases, the law requires that an environment impact study be undertaken for any new project. Even if it is not required by law, many businesses will undertaken such a study to ensure that any possible community concerns are addressed. As the projects would generally not go ahead without this assessment, the expenditure can be regarded as a necessary business expense.

8.7. The amendments proposed by this Bill will ensure that environmental impact study expenses are taken into account in determining taxable income.

Explanation of the proposed amendments

8.8. A new Subdivision will be inserted in Division 3 of the Income Tax Assessment Act 1936 to allow a deduction for expenditure undertaken on certain environmental impact activities. [Clause 39]

8.9. The deduction will be allowed against income from any source and may be carried forward indefinitely in the normal way. However, the deduction cannot be transferred to another taxpayer if the project to which the study relates is sold or ceases. The deduction remains with the taxpayer who incurs the expense.

8.10. If the expenditure is incurred in more than one income year, the proposed Subdivision will apply to each year's expenditure separately. The deductions are not deferred until all environmental impact activities are completed.

8.11. The Subdivision also ensure that the cost of plant or articles used for environmental impact activities will be depreciated like other plant.

Definitions: What expenditure qualifies for the deduction?

8.12. Allowable environmental impact expenditure qualifies for the deduction. Very simply, that expenditure includes any current or capital expenditure incurred on or after 12 March 1991 on eligible environmental impact activities in relation to an income producing project of the taxpayer. [New Subsections 82BB(1) and 82BC(1)]

8.13. Several points in the definition of allowable environmental impact expenditure require further clarification.

8.14. Eligible environmental impact activities include any acts undertaken for the sole or dominant purpose of evaluating or reporting on the impact of an income producing project on the environment. This includes both acts undertaken in the study itself and acts done in documenting the results of the study. Such activities will often examine only some aspects of a project's environmental impact. There is no implied requirement that all aspects of a project's impact be studied before any studies will count. The expensive definition of the environment means that few projects will have every aspect of the impact studied. [New Section 82BD]

8.15. The sole or dominant purpose test is used here to ensure that the expenditure is primarily directed to evaluating the impact of the project on the environment. For instance, if a study is directed primarily to the economic feasibility of the project, the cost of the study will not qualify for the deduction. Projects may commonly be the subject of studies of economic feasibility, and studies of environmental impact. Only studies that are predominantly on environmental impact will qualify.

8.16. This purpose test may also affect the deductibility of expenditure on items such as housing or welfare facilities set up for the benefit of the people undertaking the study. If those facilities will be a part of the income producing project which is being studied, the cost of erecting the facilities would be unlikely to qualify for the deduction. An example would be accommodation for people undertaking environmental impact work that is intended to be used as accommodation for those people who subsequently work in the project itself. [New Section 82BD]

8.17. Environment is defined in very broad terms similar to those used in the Environmental Protection (Impact of Proposals) Act 1974. The definition is not limited to the natural environment, but also includes all aspects of the environment including the demographics of a community. [New Section 82BA]

8.18. An income producing project in relation to a taxpayer is one which is carried out to produce assessable income, other than a capital gain, of the taxpayer. The income producing purpose may be only one of several purposes and project includes a proposed project. But, if the taxpayer's intention is only to derive a capital gain, the expenditure will not qualify for the deduction.

8.19. A project may last longer than the time for which the taxpayer expects to derive assessable income from it. This would occur when the taxpayer expects to sell the project to another taxpayer. [New Section 82BA]

Examples of income producing project

8.20. The following examples will help to identify the income producing project of a taxpayer.

Example 1: Where the study relates to the impact of an income producing asset on the environment

8.21. Offices Incorporated, which derives its income from letting office space in the buildings it owns, intends to develop a new office block near a suburban shopping centre. Offices Inc. undertakes a study to determine the impact the building will have on the local community. For example, it may need to study the impact of increased traffic flows, disturbance to existing homes, effects on public transport and so on.

8.22. The income producing project of Offices Inc. is the construction of the building and the subsequent leasing of floor space. Therefore the cost of the study into the impact of the building would be in relation to an income producing project of the taxpayer.

8.23. It is important to note that Offices Inc. has only one income producing project in this example. It doesn't have separate projects of constructing the block and letting it, or for that matter, letting of particular rooms or suites.

Example 2: Where the study relates to the impact of the construction of an income producing asset of another

8.24. This example is an important variation on the first.

8.25 . Offices Incorporated derives its assessable income from the leasing of floor space but it generally has its buildings constructed by others. It has contracted with Constructor Company to build its new suburban office block.

8.26. Offices Inc. undertakes a study to determine the impact of the building on the local community. Once again, this study would relate to an income producing project, that project being the leasing of floor space in the building.

8.27. But suppose that the local government authority is very concerned about the impact of the actual construction of the building on the local area. Large vehicles will be using small suburban streets, cranes will overhang nearby houses, and some streets may need to be closed to local traffic. The Authority requires Constructor Co. to undertake a study to determine the impact of the construction of the building on the local community before final approval of the building is given or before work on the site can be started.

8.28 . In this case, the cost of undertaking the study may not normally be deductible to Constructor Co. because it is incurred prior to the commencement of its new income earning activity, that is, the construction of the building. But Constructor Co. does have an income producing project in relation to which the study is undertaken. Its income producing project is the construction of the building for which it will be paid by Offices Inc.

Example 3: A study undertaken by a concerned citizen or business into the impact of Constructor Co's building project

8.29. Bryan Provost, an ardent petitioner against change in the local community, is very suspicious of the study undertaken by Constructor Co. He believes that the building will permanently reduce the value of his home and is very concerned about the dangers posed by overhanging cranes which are known to drop heavy objects on occasions, and the many large vehicles which will be using his street. Mr Provost undertakes his own study into the environmental impact of the building and its construction.

8.30. Mr Provost will not be able to deduct the cost of this study under this proposed Subdivision. He has no income producing project to which the study relates.

8.31. The same result applies for the local restaurateurs who undertake a study to determine the impact of the construction. They are concerned that a number of their frequent diners may take their patronage elsewhere because parking and access to the restaurants will be reduced by the building works.

8.32. Although the restaurateurs could argue a relationship exists between their income producing activities and the study, the study itself does not related to an income producing project of their own. Therefore, they are not entitled to claim a deduction for the cost of the study.

Example 4: Where the study relates to the impact of an item of plant or a process used in a business

8.33. Manufacturer Pty Ltd undertakes a study to determine the impact of introducing a new item of processing plant or a new process on the environment. The plant will discharge certain pollutants into the atmosphere.

8.34. An item of plant, or a process, is not an income producing project. A separate income earning activity is a project. Therefore, the project to which a study of new plant or new processes relates is the income earning activity for which the new plant or process is contemplated.

8.35. Sometimes that will be a new project. For instance, Manufacturer may be considering a new area of production. On other occasions the project will already exist. For instance Manufacturer may be improving one of its existing income producing activities.

Procedure: How is the deduction calculated?

8.36. Environmental impact expenditure will be deductible over 10 years or the life of the relevant project if that is shorter. [New Subsection 82BB(1)]

8.37. The amount deducted each year depends upon the life of the relevant income producing project. At the end of the income year in which allowable environmental impact expenditure is incurred, the life of the project is to be estimated. It is measured from the year in which the expenditure is incurred, that year being called the current year of income , to the year in which it is estimated that the project will end, that year being called the final year of income . [New Subsection 82BB(1)]

8.38. In most cases, the allowable environmental impact expenditure will be deductible over 10 income years because the life of an income producing project is generally expected to exceed 10 years. Ten per cent of the expenditure will be allowable as a deduction in the income year in which the expenditure is incurred and each of the succeeding 9 income years. [New Paragraph 82BB(1)(e)]

* 8.39. The allowable environmental impact expenditure will also be deductible over 10 years if the project is abandoned in the year in which the expenditure is incurred, or if it is not practicable at the end of that year to estimate when the project will end. [New Paragraphs 82BB(1)(a) and (c) respectively]*

* Amendment - Paragraph 82BB(1)(a) - to allow deduction of all expenditure in first year. (Introduced during passage through Parliament - See Hansard Debates)*

8.40. However, there are two situations where allowable environmental impact expenditure will be deductible over a period shorter than 10 years.

8.41. If, at the end of the year in which the expenditure is incurred, it is estimated that the project will end within one of the nine income years subsequent to the year in which the expenditure is incurred, the taxpayer is entitled to write off the allowable environmental impact expenditure over that shorter period. The expenditure is divided into equal parts and is deducted in the year the expenditure is incurred, the year in which it is estimated that the project will end and each of the intervening years. [New Paragraph 82BB(1)(d)]

8.42. If the income producing project actually ends before the end of the year in which the expenditure is incurred, the full amount of the allowable environmental impact expenditure is deductible in that year. In effect, this is simply a special example of a situation where the life of the project is less than 10 years. It is a separate provision because no estimate of the year in which the project will end is needed at the end of the year in which the expenditure is incurred. [New Paragraph 82BB(1)(b)]

8.43. The following examples will help to identify when an income producing project ends.

Examples of the life of income producing projects

Example 1: Offices Incorporated develops a new office block for use in its business

8.44. Remember that the income producing project was identified as the construction and subsequent leasing of the building for income producing purposes. Offices Inc. expects the building to produce rental income for at least the next fifty years, but it is unlikely to retain the building itself for so long. Even though Offices Inc. may expect to realise its investment in the building in 8 years, the life of the income producing project is the fifty years for which the office block is expected to produce rental income. The cost of the environmental impact study will therefore be deductible over 10 years.

8.45. The reason is that, even though an income producing project is identified by reference to a project which produces assessable income of the taxpayer, the life of the project itself is not. An activity may be an income producing project of a particular taxpayer even though it may only produce assessable income for that taxpayer in one income year.

8.46. The life of an income producing project is determined by estimating the time the project will produce income, irrespective of who will derive that income. Thus, the life of Offices Inc's office block is the fifty years for which the office block is expected to derive rental income.

8.47. Note that in this example, the construction of the building is not a separate income producing project of Offices Inc. That is because Offices Inc. does not derive any income from constructing the building.

Example 2: Constructor Company contracts with Offices Inc. to build an office block

8.48. Instead of handling the construction if its latest building itself, Offices Inc. contracts with Contractor Company to build the office block. The local government authority requires Constructor Co. to undertake a study into the impact of the construction project on the local community.

8.49. Remember that the building of the block is Constructor Co's income producing project. At the end of the current year of income, Constructor Co estimates that the building project will take a further 18 months. The allowable environmental impact expenditure (which relates only to the construction project) will therefore be deductible in equal portions over 3 income years, the current, the final and the intervening year of income.

8.50. Constructor Co. will not be able to claim deductions under the proposed Subdivision for environmental impact studies relating to the operation of the completed building. Those studies wouldn't relate to its income-producing project. (After all, the letting of the completed building will generate no income for Constructor.) But Constructor Co. may have to carry out such studies under its contract with Offices Inc. Then Constructor Co. should be entitled to deduct its expenditure immediately under subsection 51(1) of the Act.

Example 3: Manufacturer Pty Ltd studies the impact of a new item of plant or a new process

8.51. Manufacturer Pty Ltd undertakes a study to determine the impact of new processing technology or plant on the environment. The plant or process will be used in a new income earning activity, in which a new product will be manufactured.

8.52. Manufacturer expects to be able to market the new product for at least the next fifteen years. The life of the project will be the period for which the new income earning activity is expected to last. The life of the project is not determined by the life of the plant used to manufacture the product, or necessarily the use of a particular process to manufacture the product. The fact that the item of plant used to make the new product will last only eight years before it is replaced is irrelevant. The expenditure incurred on the study will be deductible over 10 years.

8.53. Remember that if the study relates to plant or a process which are to be used in the existing income earning activities rather than any new income producing activities, the relevant project is the existing activity. Again, the life of the project will be the period for which it is estimated that that activity will produce assessable income. The effective life of the particular plant is irrelevant.

8.54. For instance, suppose Manufacturer's plant discharges a pollutant at a level which complies with current environmental regulations. However, that plant is nearing the end of its effective life and Manufacturer knows that in five years' time the regulations are to be changed to reduce the level of pollutant which can be discharged. Despite this, Manufacturer decides, for economic reasons, to adopt a new kind of plant that will reduce the level of pollutant, but not enough to comply with the new regulations. Manufacturer spends money on an environmental impact study of the stopgap plant, and seeks to write off that expenditure.

8.55. Even though the plant will only have an effective life of five years, the life of Manufacturer's project will be the period Manufacturer expects to continue the income earning activity. As it expects to continue on indefinitely past the tightening of the regulations, the cost of the study will be deductible over 10 years.

Limits on the Deduction for Allowable Environmental Impact Expenditure

Provision of Last Resort

8.56. The deduction that is to be allowed under this new Subdivision is a provision of last resort. If the cost of an environmental impact study is allowable under any other provision of the Act, that other provision will take precedence over this Subdivision. For example, mining and quarrying companies can claim an outright deduction for many environmental impact studies under the exploration or prospecting provisions of Division 10 and 10AA. [New Subsection 82BC(2)]

Expenditure on plant or articles

8.57. The cost of plant or articles used in undertaking an environmental impact study will be excluded from allowable environmental impact expenditure. A deduction will be allowed for depreciation of such plant or articles in accordance with the general depreciation provisions. [New Subsection 82BC(3)]

8.58. The deduction for depreciation will be allowed because the use of property for eligible environmental impact activities will be treated as a use for the purpose of producing assessable income. [New Subsection 82BG(1)]

Provisions which limit deductibility

8.59. Where a provision of the Act limits the operation of section 51, the provision will also apply to limit the operation of proposed Subdivision C. For example, where allowable environmental impact expenditure is also entertainment expenditure within section 51AE of the Act, it will not qualify for deduction because subsection 51AE(4) will also operate to limit the deductions allowed under this new Subdivision. [New Subsection 82BB(2)]

8.60. Similarly, where a provision of the Act states that a particular use of property is not an income producing use, the provision will also apply to limit the operation of proposed Subdivision C. For example, where an item of plant or equipment is used for environmental impact activities but is also a leisure facility under section 51AB, it will only qualify for depreciation if it is an excepted facility under section 51AB. [New Subsection 82BG(2)]

A recoupment may affect the amount of the deduction

8.61. The amount of allowable environmental impact expenditure available for deduction will be reduced by any grant the taxpayer receives for the environmental impact study or any recoupment the taxpayer receives for the expenses incurred in the study, so far as the grant or recoupment is not included in the taxpayer's assessable income. The reduction will also be made if the taxpayer becomes entitled to such a grant or recoupment. [New Subsection 82BE(1)]

8.62. In this regard, the test as to the extent to which a payment constitutes a recoupment or grant in respect of an environmental impact study is an objective test. [New Subsection 82BE(2)]

8.63. An amendment can be made at any time to disallow a deduction previously allowed to the taxpayer where a grant or recoupment is made. [New Subsection 82BE(3)]

Non-arm's length transactions

8.64. Where a deduction under new Subdivision C arises from a transaction under which the taxpayer and another party are not dealing at arm's length, and the amount of the expenditure incurred is not reasonable, the deduction is limited to the amount which would have been incurred had the parties been dealing at arm's length.

8.65. For example, if a manufacturing company engages a related company to undertake eligible environmental impact activities, the deduction that the company may claim is limited to the amount which would be reasonable had the parties been trading at arm's length. [New Section 82BF]

Commencement date

8.66. Any allowable environmental impact expenditure incurred on or after 12 March 1991 will qualify for deduction.

Consequential amendments

8.67. An amendment will be made to section 50G (part of the current year loss provisions) to treat the deductions allowed for environmental impact expenditure as divisible deductions. [Clause 32]

8.68. The current year loss provisions are anti-avoidance measures which were introduced into the Act in 1978 to discourage trading in companies which were in tax loss-making positions. In simple terms, they are triggered on a substantial change in the ownership or control of a company. Such a change is referred to as a disqualifying event.

8.69. If the current year loss provisions apply to a company, one part of the method used to calculate the taxable income of the company for the income year divides the income derived and the deductions allowed to the company into what are referred to as full year and divisible amounts. Therefore, it is necessary to specify whether the amounts for environmental impact activities are full year or divisible deductions.

8.70. Divisible deductions are essentially those deductions which are spread over the whole of an income year. They are not attributed to a particular part of the income year. Examples include depreciation (section 54) and capital expenditure on mains electricity connections (section 70A).

8.71. The deductions allowable under the proposed Subdivision C are to be treated as divisible deductions. [Subclause 32(a)]

8.72. Under the current year loss provisions the income year is divided into the periods before and after the disqualifying event. These periods are called relevant periods. A notional taxable income is then calculated for each relevant period by reference to the amounts of divisible income and divisible deductions.

8.73. This calculation of the notional income requires a mechanism that apportions the divisible deduction between the relevant periods. A mechanism for apportioning deductions for environmental impact expenditure is to be inserted by this Bill. [Subclause 32(b)]

8.74. In the year in which allowable environmental impact expenditure is incurred, the deduction will be apportioned according to a formula. This formula apportions the amount of the deduction by taking into account the time when the expenditure is actually incurred. It compares the number of days in the relevant period which occur after the day the expenditure is incurred with the number of days in the income year after the expenditure is incurred. [New paragraph 50G(2)(jb)]

8.75. For all subsequent income years the amount of the deduction for allowable environmental impact activities is also apportioned according to a formula. This formula simply apportions the deduction by comparing the number of days in the relevant period with the number days in the income year. [New paragraph 50G(2)(jc)]

Clauses involved in the proposed amendments

Clause 32: Consequential amendment of section 50G

Clause 39: Insertion of new Subdivision C in Division 3

Chapter 9 Life Insurance Protection Levy

[Clause: 40, 42]

Overview

Creates a legislative framework for the taxation treatment of various payments associated with the measure to assist policyholders of Occidental Life Insurance Company of Australia Limited and Regal Life Insurance Limited.

LIFE INSURANCE PROTECTION LEVY

Summary of proposed amendments

9.1. The proposed amendments establish the taxation treatment of various payments associated with the legislative framework introduced to enable the imposition of one-off levy arrangements on registered life insurance companies. These arrangements will provide a measure of financial protection for policyholders of Occidental Life Insurance Company of Australia Limited (Occidental Life) and Regal Life Insurance Limited (Regal Life).

9.2. The protection levy payments will be tax deductible to life insurance companies, and will be taken to relate exclusively to non-fund assessable income. Grants paid from the Life Insurance Policy Holders' Protection Fund (Protection Fund) to Occidental Life and Regal Life will be exempt from income tax.

9.3. Any winding-up advance payments or final winding-up payments from the Protection Fund to life insurance companies will be treated as non-fund assessable income. If there is a remission or a refund of an overpayment of protection levy, then an assessment may be amended to reflect the proper liability of a company with no time limit impediment.

9.4. If one life insurance company transfers or amalgamates with another in accordance with the Life Insurance Act 1945, then any consideration paid or given by the transferee for the transferor's equity in the Protection Fund will be deductible when incurred. The deduction will relate exclusively to the non-fund assessable income of the transferee. The amount or value of the consideration received by the transferor will be non-fund assessable income of the transferor in the same year as the transferee is allowed a deduction.

Background to legislation

9.5. On 21 January 1991 the Government announced that it would introduce legislation to provide for one-off levy arrangements to be applied to registered life offices. These arrangements are to assist in meeting the obligations of Occidental Life and Regal Life to their policyholders. The Life Insurance Policy Holders' Protection Levies Bill 1991 and the Life Insurance Policy Holders' Protection Levies Collection Bill 1991 (the Collection Bill), introduced into Parliament on 6 June 1991, give effect to the announced arrangements. The amendments to Division 8 contained in this Bill need to be read together with that legislation.

Brief overview of the taxation of life insurance companies

9.6. Life insurance companies are subject to the special tax regime set out in Division 8 of Part III and the general provisions of the Principal Act. Division 8 assesses income of a life company to tax on the basis of the class to which it relates. The following is an overview of the taxation treatment of life insurance companies so far as is relevant to the present amendments.

9.7. The legislative framework requires a life insurance company's business to be divided into five classes:

(i)

non-complying superannuation class (taxable at 47%);

(ii)

complying superannuation and rollover annuity class (taxable at 15%);

(iii)

non-fund class (taxable at 39%);

(iv)

accident, disability and residual life assurance class (taxable at 39%); and

(v)

exempt class (not taxable).

9.8. For the purposes of determining the components of taxable income, the assessable income of a life insurance company is allocated to the four classes ((i) to (iv) above) of assessable income. Where assessable income cannot be directly related to a particular class it is allocated between classes of fund assessable income. That allocation is calculated by reference to the ratio that the liabilities for the class in question bears to the total liabilities of the fund of which that class forms part.

9.9. Broadly an allowable deduction to a life company is either allocated to a particular class of assessable income or apportioned between the various classes of income. Where an outlay does not relate exclusively to a particular class of assessable income it is apportioned.

Explanation of the proposed amendments

9.10. New Subdivision B of Division 8 sets out the legislative framework for dealing with the taxation treatment of protection levy and other payments made by or to life insurance companies under the Collection Bill. [Clause 42]

Who Pays The Protection Levy and Why?

9.11. The protection levy is payable by life insurance companies registered under the Life Insurance Act 1945. The purpose of the levy is to provide a measure of financial protection to policyholders of Occidental Life and Regal Life. The timing and amount of the protection levy will be dependent on the judicial management of Occidental Life and Regal Life.

Is The Protection Levy Tax Deductible?

9.12. Yes. The protection levy is an allowable deduction in the year in which the levy is incurred [new section 116DB] . The levy is due and payable not later than the 28th day after the day it is imposed (clause 10 of the Collection Bill).

9.13 . The deductible protection levy payment will relate exclusively to the non-fund class of assessable income (taxable at the 39% rate). [New section 116DC]

9.14. The implications of new section 116DC are:

•

Section 111C of the Principal Act does not apply. Section 111C requires that a deduction allowable other than under section 51 or 113 of the Principal Act and that does not relate exclusively to the assessable income of a company is reduced to take account of exempt income derived by the company. As new section 116DC provides that the allowable deduction relates exclusively to the non-fund class of assessable income, the test in subsection 111C(1) which triggers the application of the section is not satisfied; and

•

As new section 116DC deems the deduction to relate exclusively to the non-fund class of assessable income, subsection 116CF(1) of the Principal Act applies. Section 116CF operates to allocate deductions to the various classes of assessable income. In particular, subsection 116CF(1) provides that deductions that relate exclusively to a particular class of assessable income are allocated to that class of income.

9.15. If there is a deficit in the non-fund class, the income tax law will operate in the normal fashion. A deficit in the non-fund class will be offset against surpluses in other classes in the order set out in section 116CG of the Principal Act. That is, if there is a deficit in the non-fund class, then that deficit will be applied in reducing current surpluses of the other classes in the following order:

•

accident, disability and residual life assurance class;

•

complying superannuation and rollover annuity class; and

•

non complying superannuation class.

How Are Winding-Up Payments From The Protection Fund To Life Insurance Companies Treated?

9.16. Winding-up advances may be paid from the Protection Fund to a life insurance company provided:

•

they have a credit balance in their separate notional account; and

•

it is unlikely that further grants are to be paid for a considerable period (clause 20 of the Collection Bill).

9.17. Where the Protection Fund is to be wound up, final winding-up payments may be made to life insurance companies where the company has a credit balance in their separate notional account (clause 21 of the Collection Bill).

9.18. Where surplus moneys are repaid under clause 20 or 21 of the Collection Bill, those amounts are assessable income of the taxpayer in the year of income in which the credit balance in the separate notional account is payable by the Commonwealth. [New section 116DD]

9.19. Winding-up advances and final winding-up payments will be treated as non-fund assessable income of the taxpayer (new section 116DE). This has the effect that subsection 116CE(2) of the Principal Act captures any such payments and includes them in the non-fund class. Under section 116CE, the assessable income of a life insurance company is allocated to the four classes of assessable income, for purposes of determining the components of taxable income under section 116CJ of the Principal Act.

9.20. New section 116DE is not to be taken as widening the scope of the meaning of 'fund assessable income' when used in Subdivision A, Division 8. Section 116DE has been enacted for the avoidance of doubt. [New section 116DJ]

What Is The Tax Treatment Where There Is A Transfer Of Equity In The Protection Fund?

9.21. A scheme confirmed by the Court under Division 9 of Part III of the Life Insurance Act 1945 may make provision for the transfer of the whole or a part of the separate notional account of a company and the entitlements of a company under clause 20 or 21 of the Collection Bill (clause 19 of the Collection Bill).

9.22. If the transferee pays or gives consideration to the transferor for the transfer, then the amount or value of the consideration will be deductible to the transferee in the year in which it is incurred (new paragraph 116DF(e)). The deduction will relate exclusively to the non-fund assessable income of the transferee. [New paragraph 116DF(f)]

9.23. Similarly, the amount or value of the consideration will be assessable income to the transferor in the year of income the transferee is allowed a deduction [new paragraph 116DF(c)]. The amount included in a transferor's assessable income will be non-fund assessable income of the transferor [new paragraph 116DF(d)] . New paragraph 116DF(d) is not to be taken as widening the scope of the meaning of 'fund assessable income' when used in Subdivision A, Division 8. Paragraph 116DF(d) has been enacted for the avoidance of doubt. [New section 116DJ]

9.24. No capital gains tax consequences will arise as a result of a scheme covered by clause 19 of the Collection Bill (see comments on new section 116DK which treats this Subdivision as a primary code in respect of certain events).

What Is The Taxation Treatment Of Grants By The Protection Fund To Occidental Life and Regal Life?

9.25. Grants may be made to Occidental Life and Regal Life from the Protection Fund (Part 4 of the Collection Bill). These grants will be exempt from income tax (new section 116DG). This amendment avoids the necessity to increase the gross amount of levy payments required to meet the shortfall were such payments assessable. Similarly any repayments from Occidental Life and Regal Life to the Commonwealth (in accordance with Part 5 of the Collection Bill) are not deductible to Occidental Life and Regal Life under the existing law - subsection 51(1) and section 113 of the Principal Act.

What Is The Taxation Treatment Of Remissions, Overpayments and Underpayments of The Protection Levy?

Remissions of the protection levy

9.26. There may be cases where the whole or a part of the protection levy is remitted. In these cases, the amount remitted is taken never to have been incurred [new subsection 116DH(3)] . This means that the amount correctly deductible under section 116DB is the amount of the protection levy that has not been remitted.

Example

9.27. If the amount of protection levy originally calculated was $1 million and subsequently $150 000 of that amount is remitted, then the amount correctly deductible under section 116DB is $850 000.

9.28. The remission of protection levy incurred in a year of income may occur after the life insurance company has lodged its tax return for that year.

9.29. Section 170 of the Principal Act allows the Commissioner of Taxation to amend an assessment within certain time limits by making such alterations or additions that the Commissioner considers necessary, even though tax under that assessment has been paid. The time limit specified in section 170 is overridden by new section 116DH which will allow an assessment to be amended at any time so that the correct amount of protection levy is deductible.

Overpayments and underpayments of the protection levy

9.30. The amount of the protection levy payable by a life insurance company is determined by a formula (clause 7 of the Life Insurance Policy Holders' Protection Levies Bill 1991). The formula requires the application of a specified rate to the Australian proportion of the value of the assets in the statutory funds of each life insurance company.

9.31. Where an overpayment or underpayment of protection levy occurs, the amount that is properly incurred is deductible under new section 116DB. An overpayment or underpayment may arise, for example, where the amount of the protection levy has been incorrectly calculated.

9.32. When an overpayment or underpayment of the protection levy is subsequently recognised, the relevant assessment may be amended with no time limit impediment [new section 116DH] to ensure that the correct amount only is deductible under section 116DB.

How Does New Subdivision B Interact With Other Provisions Of The Principal Act?

9.33 . New section 116DK provides that Subdivision B is the primary code for the tax treatment of matters relating to the protection levy.

9.34. Where any of the prescribed events happen [new paragraphs 116DK(a) to (f)] the event is ignored in relation to any taxation consequences that may arise under another provision of the Principal Act.

9.35. However new section 116DK has no effect on late payment penalties which are covered by clause 11 of the Collection Bill. That is a liability distinct from the protection levy and continues to be covered by subsection 51(4) of the Principal Act which denies a deduction under subsection 51(1) for penalties or fines imposed as a result of breaches of the law.

9.36. Two important examples of the consequence of new section 116DK are:

•

the capital gains tax provisions of Part IIIA of the Principal Act will not apply in relation to the specified events;

•

subsection 72(2) of the Principal Act will not apply to assess refunds of the protection levy.

Commencement date

9.37. New Subdivision B of Division 8 commences or is deemed to have commenced on the day on which the Collection Bill receives the Royal Assent. [Subclause 2(3)]

Clauses involved in the proposed amendments

Clause 40: Renames the existing Division 8 of Part III of the Principal Act as Subdivision A - General Provisions.

Clause 42: Inserts new Subdivision B which deals with the tax treatment of matters relating to life insurance policyholders' protection levies.

Chapter 10 General Mining Exploration and Prospecting Expenditure

[Clause: 43, 85]

Overview

The general mining exploration or prospecting provision will be amended to remove the requirement that mineral exploration or prospecting expenditure need be incurred on a mining tenement for such expenditure to qualify for immediate deductibility.

The amendment will put all exploration or prospecting expenditure on the same footing, whether it relates to quarrying, to petroleum operations or to other mining operations.

It will apply to exploration or prospecting expenditure incurred on or after 1 July 1991.

Summary of proposed amendments

10.1. The general mining exploration or prospecting provision will be amended to remove the requirement that mineral exploration or prospecting expenditure need be incurred on a mining tenement to qualify for immediate deductibility.

10.2. This will allow expenditure incurred in exploring broad areas not covered by a mining tenement to be deductible.

10.3. The amendment is to take effect from 1 July 1991.

Background to the legislation

Expenditure on exploration before acquiring a mining tenement

10.4. The "grass roots" stage of exploration programs often involves what may be called regional exploration. In this stage expenditure is incurred on exploration and prospecting on very large areas. This occurs before any mining tenements are acquired and does not require the consent of the holders of any mining tenements within those areas.

10.5. Subsection 122J(1) allows an outright deduction for expenditure on exploration or prospecting for minerals obtainable by prescribed mining operations. Under the present wording, the expenditure is only deductible if the exploration or prospecting is on a mining tenement. Prescribed mining operations do not extent to quarry materials or to petroleum and gas.

10.6. Regional exploration is not deductible under the present wording of subsection 122J(1), because it is not on a mining tenement.

10.7. This contrasts with the position of exploration or prospecting for quarrying materials and petroleum and gas. The provisions which allow an outright deduction for exploration or prospecting for quarry materials or petroleum and gas do not require the expenditure to be incurred on a mining tenement.

What is a mining tenement?

10.8. A mining tenement has generally been taken to mean a prospecting licence, exploration licence, mining lease, general purpose lease or a miscellaneous licence granted or acquired under a Commonwealth Act, a State Act or a law of a territory of the Commonwealth and includes the specified piece of land in respect of which the mining tenement is so granted or acquired.

10.9. It has not been essential for a bona fide prospector or mining company to hold or own a tenement for the purpose of exploration or prospecting on that tenement. An authority to enter and explore a tenement has been sufficient. But, if no tenement exists, regional exploration is not deductible.

Explanation of proposed amendments

Deductibility of regional exploration expenditure

10.10. The words "on any mining tenements" will be deleted from subsection 122J(1) and subparagraph 122J(4D)(b)(i). This will allow an immediate deduction for exploration and prospecting expenditure incurred on areas where no tenement has been acquired or where no access has otherwise been given. The amendment will put all exploration and prospecting expenditure on the same footing, whether it relates to quarry materials, to petroleum or to other minerals. [Clause 43]

Commencement date

10.11. The amendment will apply to expenditure incurred on or after 1 July 1991.

Clauses involved in the proposed amendments

Clause 43: Amendment of section 122J.

Clause 85: Date of effect.

Chapter 11 Timing of franking credits

[Clause: 45, 46, 48, 49, 50, 51, 54, 55, 56, 57, 59, 60, 61, 62, 63, 66, 86, 89, 90, 91, 92, 94, 95, 96, 97]

Overview

Changes the basis on which companies receive franking credits from the assessment of company tax to the payment of company tax.

Summary of proposed amendments

11.1. The Bill will amend the Income Tax Assessment Act 1936 (the Act) to change the basis on which companies receive franking credits. The basis will change from the assessment of company tax to the payment of company tax.

11.2. The new payment basis of receiving franking credits will apply to payments of tax that relate to:

•

notices of assessments and amended assessments increasing tax;

•

notices of determination of foreign tax credit allowed; and

•

notices of determination of offsets allowed for franking deficit tax paid;

that are served or are deemed to be served after 20 August 1991.

Background to the legislation

11.3. Under the present law a company's capacity to pay franked dividends is determined on the basis of its company tax liability. The company tax assessed is the primary source of all franking credits under the present imputation system. Although franking credits arise for initial and any subsequent payments of tax made before the notice of assessment is served or deemed to be served, these entries in the franking account are reversed when the assessment is made.

11.4. The purpose of franking credits is to remove the second tier of tax on company income. They do this by allowing a rebate to shareholders who receive dividends paid from income that has already been taxed. Shareholders are entitled to a franking rebate for the franked dividends they receive even if the company paying the dividends has not paid, or will never pay, the company tax owing under the assessments that generated the franking credits. This last situation can happen if a company that has paid franked dividends becomes insolvent.

11.5. The imputation system was introduced before the change to self-assessment, when the Commissioner assessed company tax and served notices of assessment in all cases. Under self-assessment most companies self-assess their tax liabilities by lodging a return setting out the taxable income and the amount of any income tax payable. A notice of assessment is not served. The link between the assessment of company tax and the payment of that tax is greater under self-assessment.

11.6. The proposed change to the basis on which companies derive franking credits from assessment to payment is consistent with the closer relationship between the assessment and collection of company tax under self-assessment.

Explanation of the proposed amendments

Present law

11.7. Under the present law franking credits arise when a company makes an initial payment of tax (section 160APMA) or a subsequent payment of tax before the final payment is due (section 160APMB). When the company tax assessment is made the initial and any subsequent payments are credited against the amount of company tax assessed. The company then pays the difference as a final payment of tax. A franking credit arises (under section 160APN or 160APNA) when the assessment is served or deemed to be served and, at the same time, franking debits arise (under sections 160APYA and 160APYAA) for the application of the initial and subsequent payments.

Treatment of life assurance companies

11.8. Non-mutual life assurance companies receive franking credits and use franking debits on the same basis as other companies with shareholders. However, these franking credits and franking debits are reduced to take into account the tax liability on income that cannot be distributed to shareholders. Reducing franking debits and credits are determined by a formula that calculates the reduction on the basis that 80 per cent of the company tax liability is attributable to statutory fund income and cannot be distributed to shareholders. The tax on statutory fund income is the difference between tax on taxable income and tax on the non-fund component of taxable income.

11.9. The same principles will be applied in reducing the franking credits and franking debits that arise to life assurance companies on the basis of tax payments as were applied in an assessment based system. New formulae will therefore be provided to calculate the reducing franking debits and franking credits that relate to the new provisions. The implications for life assurance companies of new franking credits and franking debits because of the change to a payment based imputation system will be addressed under the particular franking credit or debit.

Changing to a payment basis for franking credits

11.10. The change to a tax payment based imputation system requires the repeal of sections under which franking credits and franking debits that are unrelated to a payment of company tax arise. Existing provisions that provide for franking credits to arise on the payment of company tax and those providing for franking debits to arise on the refund of certain payments will be supplemented by new sections to provide franking credits for final and other payments of company tax.

Effect on assessment of tax liability

11.11. The effect of the amendments proposed by the Bill is that for assessments are served or deemed to be served and amendments served after 20 August 1991 no franking credit will arise when:

•

the Commissioner serves or is deemed to have served a notice of assessment after 20 August 1991 (sections 160APN or 160APNA); [Clause 51 and subclause 86(5)]

•

the Commissioner serves a notice of amended assessment increasing tax liability after 20 August 1991 (section 160APR); [Clause 55 and subclause 86(5)]

•

an offset to which a company is entitled is reduced and the notice is served after 20 August 1991 (section 160APS); [Clause 55 and subclause 86(9)] and

•

the amount of foreign tax credit is reduced and the notice is served after 20 August 1991 (section 160APT). [Clause 55 and subclause 86(9)]

11.12. Similarly, franking debits will no longer arise when:

•

an initial or subsequent payment of tax is applied in an assessment that is served or deemed to be served after 20 August 1991 (sections 160APYA and 160APYAA); [Clause 59 and subclause 86(6)]

•

an offset determination notice for franking deficit tax paid is served or deemed to be served after 20 August 1991 (section 160AQ); [Clause 61 and subclause 86(12)] and

•

a notice of determination of foreign tax credit allowable, or of an increase in the amount allowable, that is served or deemed to be served after 20 August 1991 (section 160AQA). [Clause 61]

11.13 . Consistent with the repeal of the above provisions, reducing franking credits and franking debits that arise to life assurance companies in respect of those provisions will also be repealed. Where the notice of assessment, amended assessment or determination of foreign tax credit was served or deemed to be served after 20 August 1991:

•

franking debits will not arise when the notice is served (or deemed to be served) to a life assurance company (sections 160AQCF, 160AQCG and 160AQCH); [Clause 62 and subclauses 86(5) and (9)] ; and

•

franking credits will not arise when an initial or subsequent payment of tax is applied in an assessment of a life assurance company (sections 160APVA and 160APVB). [Clause 56 and subclause 86(6)]

11.14. Where a notice of determination allowing a foreign tax credit (or increasing the amount allowed) was served before 21 August 1991, a transitional provision will extend the application of sections 160AQA (and 160APVE in the case of life assurance companies) to ensure that a franking debit (and reducing franking credit for life assurance companies) arises. The franking debit (and, if required, the reducing franking credit) will also arise where the determination notice issues after 20 August 1991 but the assessment for the relevant year of income issued before 21 August 1991. [Clause 92]

11.15. The proposed amendments to subparagraphs (a)(ii) and (aa)(i) and (ii) of the definition of "applicable general company tax rate" (section 160APA) relate to the proposed repeal of provisions generating franking credits or franking debits on the determination or variation of a company's tax liability. [Paragraphs 46(e), (f) and (g)]

Final payment of tax

11.16. Where a company makes a final payment of tax under section 221AZD after 20 August 1991 and the assessment for the relevant year of income is made after that date, a franking credit will arise. [Clause 50 - new section 160APMC and subclause 86(3)]

11.17. Where the final payment of tax (section 221AZD) was made before 21 August 1991 but the assessment to which the payment relates was served or deemed to be served after 20 August 1991, the final payment will be deemed to have been made on the day the assessment was served or deemed to be served, and a franking credit will arise under section 160APMC. [Clause 94]

11.18. Where the company making the final payment of tax that entitles it to a franking credit under section 160APMC is a life assurance company, a franking debit will also arise. The amount of the franking debit will be calculated using the formula provided. [Clause 62 - new section 160AQCJ]

11.19. The applicable general company tax rate to be used to calculate the franking credit under section 160APMC (and the reducing franking debit under section 160AQCJ for a life assurance company) on making a final payment of tax is set out in proposed new subparagraph (a)(iba) and amended subparagraph (aa)(ii) of the definition in section 160APA. [Paragraphs 46((c) and (g)]

Other payments of tax

11.20. A franking credit will arise when a company pays a tax liability that was notified in a notice of assessment or amended assessment increasing tax served by the Commissioner after 20 August 1991. [Clause 50 - new section 160APMD]

11.21. Where the company making the payment of tax that entitles it to a franking credit under section 160APMD is a life assurance company, a franking debit will also arise. The amount of the franking debit will be calculated using the formula provided. [Clause 62 - new section 160AQCK]

11.22. Certain provisions in the Principal Act deem a payment of tax to have been made when the Commissioner deducts an amount of a credit to which the taxpayer is entitled from the tax owing. Payments in this category include those deemed to be made by subsection 221YHG(5) (prescribed payments) and subsection 221YHZL(6) (amount deducted for failure to quote a tax file number). When a company is deemed to have made a payment of tax under one of these provisions the payments comes within the definition of "paid" for imputation purposes (section 160APA) and a franking credit will arise under new section 160APMD.

11.23. However, a credit to which a company is entitled because of a foreign tax credit will not be a payment of tax for imputation purposes. (See the notes below on "foreign tax credits".)

11.24. If a company has made a payment of tax before 21 August 1991 in anticipation of receiving an assessment or amended assessment, and the assessment or amended assessment in respect of which the payment was made was served after 20 August 1991, the payment will be treated as having been made on the day the assessment was served and a franking credit will arise under section 160APMD. [Clause 95]

11.25. The applicable general company tax rate to be used to calculate the franking credit under section 160APMD on making a final payment of tax is set out in proposed new subparagraph (a)(ibb) of the definition in section 160APA. [Paragraph 46((c)]

Offsets

11.26. Under the present assessment based imputation system a franking debit arises where an offset is allowed in the company tax assessment for franking deficit tax paid or the amount of offset previously allowed is increased (section 160AQ). This adjustment is necessary because tax equal to the amount of the franking deficit tax offset has already been used to frank dividends. In the same say, a franking credit arises where an offset previously allowed is reduced (section 160APS). An entitlement to an offset or variations to that entitlement will not generate a franking credit or franking debit where the notice issues after 20 August 1991. (Sections 160APS and 160AQ will be repealed.) [Clauses 55 and 61]

11.27. If an offset allowed to a company is later found to be excessive the Commissioner may recover the amount of the excess as if it was company tax due and payable (section 160AQR). When a company makes a payment of company tax that became due because the amount of the franking deficit offset to which the company was entitled has been reduced, and the notice of determination was served after 20 August 1991, a franking credit will arise. [Clause 54 - new section 160APQA and subclause 86(10)]

11.28. If a company has made a payment of tax before 21 August 1991 in anticipation of receiving a notice of determination reducing an offset entitlement, and the notice reducing the offset was served after 20 August 1991, the payment will be treated as having been made on the day the notice was served and a franking credit will arise under section 160APQA. [Clause 96]

11.29. The tax rate to be used to calculate the franking credit under section 160APQA is that specified in subparagraph 160APA(b)(ii) of the definition of "applicable general company tax rate".

Refunds of company tax

11.30. Where a company receives a refund of a payment of company tax that when made gave rise to a franking credit, or the amount is not refunded but is applied to pay other amounts owing, a franking debit will arise. [Clause 60 - new section 160APYBA]

11.31. When a refund is made of an initial payment the effect for Division 1B purposes is that the refund reduces the amount of the initial payment. However, an amendment to section 221AZA (to apply to the 1990-91 and later years of income) will prevent any such refund from having that effect for imputation purposes. This amendment will ensure that the franking credit that arises (under section 160APMA) on the making of an initial payment will not be affected if the initial payment is later refunded. The reduction in a company's franking capacity as a result of any refund of an initial payment will be reflected by the franking debit under new section 160APYBA. [Clause 66 and subclause 85(13)]

11.32. The franking debit will arise for a refund of company tax paid even if the amount is applied to pay company tax owing, either under an assessment, amended assessment, or to recover company tax owing because the amount of foreign tax credit or an offset allowed was excessive (subsection 160AN(5) or section 160AQR). The application of the amount to pay company tax will itself give rise to a franking credit.

11.33. Where company tax paid is refunded or applied to discharge a Commonwealth liability and a franking debit arises (under section 160APYBA), if the company is a life assurance company a franking credit will also arise. The amount of the franking debit will be calculated using the formula provided. [Clause 56 - new section 160APVBA]

11.34. The applicable general company tax rate to be used to calculate the franking debit under section 160APYBA (and the reducing franking credit under section 160APVBA for a life assurance company) when company tax is refunded, or applied to pay a Commonwealth liability, is set out in proposed new subparagraphs (a)(id) and (aa)(i) of the definition in section 160APA. [Paragraphs 46(d) and (f)]

Foreign tax credits

11.35. Foreign tax paid on foreign income cannot give rise to a franking credit even if the credit for the foreign tax paid has been allowed against the Australian tax payable on the income. This outcome is achieved under the present assessment based system by a franking debit arising for the amount of the foreign tax credit allowable or any increase in the amount allowable (section 160AQA). Similarly, where the amount of foreign tax credit is reduced a franking credit arises because of the increase in the company's tax liability (section 160APT).

11.36. Where a notice of determination of the foreign tax credit allowable is served after 20 August 1991 no franking credit or franking debit will arise for a foreign tax credit entitlement or any variation to that entitlement. [Clauses 55 and 61]

11.37. A foreign tax credit to which a company is entitled (section 160AF) is a debt due and payable to the company by the Commissioner (subsection 160AN(1)). This credit may then be applied against any tax liability the company may have to the Commonwealth (subsection 160AN(2)). Where the foreign tax credit is applied to discharge a tax liability, the company is deemed to have paid the amount applied (subsection 160AN(3)).

11.38. However, for the purposes of franking credits and debits arising under Division 2 of Part IIIAA (dividend imputation), any foreign tax credit applied to discharge a company tax liability will not be deemed to be company tax paid. [Clause 45 - new subsection 160AN(3A)]

11.39. A similar amendment to the definition of "paid" (section 160APA) will specifically exclude the discharge of a company tax liability by an application of a foreign tax credit from being a payment of company tax for imputation purposes. [Clause 46(h)]

11.40. If the amount of foreign tax credit allowed to a company is later found to be greater than the amount to which the company was entitled, the Commissioner can recover the amount of the excess as if it was Australian tax payable (subsection 160APN(5)). When a company makes a further payment of company tax because the amount of the foreign tax credit has been reduced and the notice is served after 20 August 1991, a franking credit will arise when the further payment is made. [Clause 54 - new section 160APQB and subclause 86(11)]

11.41. Where, as a result of making a payment of tax that became due because of a reduction in amount of foreign tax credit allowable, a life assurance company receives a franking credit under section 160APQB, a franking debit will also arise. The amount of the franking debit will be calculated using the formula provided. [Clause 62 - new section 160AQCL]

11.42. If a company has made a payment of tax before 21 August 1991 in anticipation of receiving a notice of determination reducing the amount of foreign tax credit allowable, and the notice reducing the foreign tax credit was served after 20 August 1991, the payment will be treated as having been made on the day the notice was serviced and a franking credit will arise (new section 160APQB). [Clause 97]

11.43. The tax rate to be used to calculate the franking credit under section 160APQB is that specified in paragraph 160APA(a)(iii) of the definition of "applicable general company tax rate". The rate for calculating the reducing franking debit under section 160AQCL will be as set out in amended subparagraph (aa)(ii) of the definition. [Paragraph 46(g)]

Refunds of foreign tax credit

11.44. Where a company receives a refund of company tax because an amount of foreign tax credit has been allowed, or the amount is not refunded but is applied to pay other amounts owing, a franking debit arises. [Clause 60 - new section 160APYBB]

11.45. However, unlike proposed section 160APYBA, a franking debit will not arise when the foreign tax credit is applied to discharge a liability for:

•

company tax owing under an assessment or an amended assessment;

•

an initial, subsequent or final payment of tax due under Division 1B of Part VI (collection of tax on companies and trustees of certain funds);

•

company tax owing because an excess amount of foreign tax credit was allowed (subsection 160AN(5)); or

•

company tax owing because an excess amount has been allowed as an offset (section 160AQR).

11.46. The franking debit for an application of a foreign tax credit arises even if the amount is applied to pay company tax owing, either under an assessment, amended assessment, or because the amount allowed as a foreign tax credit or an offset is excessive (subsection 160AN(5) or 160AQR). Where the credit is applied against these liabilities no franking credit arises for the deemed payment.

11.47. Where the amount of foreign tax credit refundable has been applied to reduce company tax owing in the above circumstances, the application of the excess will not be a payment of company tax for imputation purposes (section 160APA). (See earlier notes under "foreign tax credits")

11.48. The effect of no franking debit arising where the refund is applied for the purposes specified in paragraphs 160APYBB(b)(i), (ii), (iii) and (iv) is the same as if the application was deemed to be a payment of company tax for imputation purposes and generated a franking credit.

11.49. Where the foreign tax credit is refunded or applied to discharge a Commonwealth liability and the franking debit arises (under section 160APYBB) to a life assurance company, a franking credit will also arise. The amount of the franking credit will be calculated using the formula provided. [Clause 56 - new section 160APVBB]

11.50. The applicable general company tax rate to be used to calculate the franking debit (under section 160APYBB (and the reducing franking credit under section 160APVBB for a life assurance company) on making a final payment of tax is set out in proposed new subparagraphs (a)(ie) and (aa)(i) of the definition in section 160APA. [Paragraphs 46(d) and (f)]

Estimated debit determinations

11.51. A company is required to frank a dividend to the extent of the surplus in the franking account on the day the dividend is paid. If a company has taken some action that is likely to result in a reduced tax liability, such as lodging an objection against an assessment that is expected to be allowed in full, the franking debit likely to arise can be reflected in the franking account by way of an estimated debit determination. The present law allows a company to apply for an estimated debit determination if it has taken "liability reduction action" (a term defined in section 160APA) or has made an initial payment of tax.

11.52. The ability to apply for an estimated debit determination when an initial payment of tax has been made allows companies who estimate that their tax liability will be less than the initial payment to take that into account in determining the extent to which dividend should be franked. The ability to apply for an estimated debit determination where an initial payment has been made is to be changed.

11.53. The definition of "estimated debit determination" will be amended to restrict its application in relation to initial payments to those cases in which the company is seeking a refund of an initial payment of tax under subsections 221AQ(3), 221AR(6) or 221AU(4). [Paragraph 63(c) - new subsection 160AQD(1A)]

11.54. A company is entitled to a refund under subsection 221AQ(3) where it has made its initial payment on the basis of its notional tax and the estimated tax payable is less than the notional tax. A refund is available under subsection 221AR(6) where a company makes a revised estimated of its tax payable and the revised estimate is less than the original estimate. A company that elects to make a single payment of tax after it has made its initial payment is entitled to a refund of the initial payment under 221AU(4).

Termination time

11.55. Estimated debit determinations terminate when the action giving rise to the estimated debit determination is finalised. This is also the time at which a franking credit equal to the estimated debit arises (section 160APU). In the case of action taken by the company to reduce its tax liability, such as referring the matter to a court or tribunal or lodging an objection, the termination time is the time the matter is resolved and the company's tax liability is reduced or it receives notice of the unfavourable decision.

11.56. The definition of "termination time" in relation to an estimated debit determination for an initial payment of tax will be amended by replacing existing paragraph (b). The termination time will be the time at which the company receives the refund to which it is entitled. However, if the company has not received the refund by the time the company makes its final payment of tax (section 221AZD), the estimated debit determination will terminate when the payment is made. If no final payment is required the termination time will be the time the final payment would have been due if it had been required. [Paragraph 46(i)]

Liability reduction action

11.57. Liability reduction action is action taken by a company to reduce its tax liability and allows a company to apply for an estimated debit determination. In its present form the definition of "liability reduction action" includes action taken to claim an entitlement or increased entitlement for a foreign tax credit or franking deficit tax offset. Since franking debits will no longer arise on the basis of a company's tax liability or increased entitlement to an offset or a foreign tax credit (sections 160AQ and 160AQA are to be repealed), a new definition will be provided in section 160APA for liability reduction action. The broader definition of the term will cover claims for refunds on account of an offset of franking deficit tax paid or foreign tax credit. [Paragraph 46(k)]

Instalments

11.58. The instalment system of collection company tax does not apply for the 1989-90 or any subsequent year of income. Since companies are no longer paying company tax by instalments, provisions in Part IIIAA relating to the imputation effects of paying tax by instalments are no longer operative.

11.59. Sections 160APM and 160APY which provide a franking credit and a franking debit, respectively, on the payment or application of a company tax instalment will be repealed. Also, amendments to section 160APA relating to subparagraph (a)(i) of the definition of "applicable company tax rate", the definition of "company tax instalments" and paragraph (b) of the definition of "termination time", will remove references to the payment of tax by instalments. [Paragraphs 46(a), (i) and (j)]

11.60. Where an instalment of company tax is refunded, and the assessment for the year of income to which the instalment relates was served after 20 August 1991, a franking debit will arise under new section 160APYBA because the application of that section will be extended to cover instalments paid. [Clause 89]

Commencement date

11.61. The provisions effecting the amendments to the Income Tax Assessment Act 1936 to change the basis on which companies receive franking credits will commence on 21 August 1991. [Subclause 2(4)]

Clauses involved in the proposed amendments

Clause 45: amends section 160AN to exclude credits applied to discharge tax liabilities from being payments of tax for imputation purposes

Clause 46: amends section 160APA which contains definitions of terms used in the dividend imputation provisions (Part IIIAA)

Clause 48: repeals section 160APM which relates to the instalment system of paying company tax

Clause 49: makes a minor amendment to section 160APMB

Clause 50: inserts new sections 160APMC and 160APMD which provide franking credits on the making of a final and later payments of tax

Clause 51: repeals sections 160APN and 160APNA which provide a franking credit when an assessment is served or deemed to be served

Clause 54: inserts new sections 160APQA and 160APQB which will provide franking credits for the payment of company tax due because the franking deficit tax offset and foreign tax credit is reduced, respectively

Clause 55: repeals sections 160APR, 160APS and 160APT which provide franking credits for an amended company tax assessment increasing tax, a reduction of an offset entitlement and a reduction of foreign tax credit allowable, respectively

Clause 56:

•

repeals sections 160APVA and 160APVB which provide franking credits to life assurance companies to reduce the franking debits when an initial or subsequent payment of tax is applied in an assessment; and

•

inserts sections 160APVBA and 160APVBB which will provide franking credits to reduce the franking debit arising to a life assurance company when company tax or foreign tax credit is refunded or applied to discharge Commonwealth liabilities

Clause 57: repeals section 160APVE which provides a franking credit to a life assurance company to reduce the franking credit for the allowance of a foreign tax credit

Clause 59: repeals section 160APY, 160APYA and 160APYAA which provide franking debits on the application of a company tax instalment, an initial and subsequent payment of tax, respectively

Clause 60: inserts new sections 160APYBA and 160APYBB which will provide franking debits when tax paid or a foreign tax credit is refunded or applied to discharge other Commonwealth liabilities

Clause 61: repeals sections 160AQ and 160AQA which provide a franking debit for an offset and foreign tax credit allowed, respectively

Clause 62:

•

repeals section 160AQCF, 160AQCG and 160AQCH which provide franking debits to life assurance companies to reduce the franking credits that arise when an assessment or an amended assessment increasing tax is made, or foreign tax credit is reduced; and

•

inserts new sections 160AQCJ, 160AQCK and 160AQCL which will provide franking debits to life assurance companies to reduce the franking credits that arise when the company makes a final payment, later payment or a payment in relation to a foreign tax credit

Clause 63: amends section 160AQD to delete references to company tax instalments and to modify the circumstances under which an estimated debit determination is available when an initial payment is made

Clause 66: amends section 221AZA to prevent its application for imputation purposes

Clause 86: contains the application provisions for the amendments that relate to changing to a payment basis for franking credits

Clause 89: is a transitional provision to extend the scope of section 160APYBA to cover refunds of company tax instalments in certain circumstances

Clause 90: is a transitional provision to provide the company tax rate to be used to calculate franking debits and credits for life assurance companies when a repealed provision is operating transitionally

Clause 91: is a transitional provision for estimated debit determinations relating to an entitlement of an offset or a foreign tax credit

Clause 92: is a transitional provision relating to franking credits and debits under sections 160APVE and 160AQA for foreign tax credits

Clause 94: is a transitional provision extending the application of section 160APMC for final payments of tax

Clause 95: is a transitional provision extending the application of section 160APMD for later payments of tax

Clause 96: is a transitional provision extending the application of section 160APQA for payments of excess offsets

Clause 97: is a transitional provision extending the application of section 160APQB for payments of excess foreign tax credit allowed

(Editorial note: *Amendment - Non-Mutual Life Assurance Companies*

* Inclusion of provisions to deal with specific matters which effect non-mutual life assurance companies only (introduced during passage through Parliament, refer pages 6-9 of Supplementary EM).*)

Chapter 12 Capital Gains Tax Cost Base

[Clause: 64, 85]

Overview

Allows costs such as interest, repairs and rates and land taxes to be deducted from a capital gain made on the disposal of most assets, where those costs are not otherwise allowable as a tax deduction.

The change applies to assets acquired on or after 21 August 1991.

Summary of proposed amendments

12.1. The Bill will amend the CGT cost base provisions to allow costs such as interest, rates and land taxes, repairs and insurance premiums to be taken into account in working out the taxable capital gain made on disposal of an asset.

Background to the legislation

12.2. The taxable capital gain or allowable capital loss made on the disposal of an asset is calculated by reference to the asset's cost base. In working out a capital gain on an asset owned for more than 12 months, the cost base is "indexed" to account for inflation. A capital loss is determined by reference to the asset's reduced cost base, ie. the amount of the cost base, less any part of the cost base allowed as a deduction.

12.3. Broadly speaking, the types of expenses that can be included in an asset's cost base are capital costs of acquiring, maintaining title to or improving the asset. They also include non-deductible incidental costs of acquisition or disposal of the asset. Other expenses of a non-capital or "revenue" nature (eg. interest on money borrowed to purchase an asset) cannot be included in the asset's cost base under the present law.

Explanation of the proposed amendments

What costs can now be included in the cost base?

12.4. The amendments will enable other non-capital costs of ownership of an asset to be added to its costs base in certain circumstances. Examples of such costs include interest on money borrowed to purchase the asset, repairs and maintenance, insurance premiums and, in the case of land, rates and land taxes. [Clause 64]

12.5. These costs can only be added to the cost base of the asset if they are not otherwise deductible under another provision of the income tax law. They will not be taken into account in working out a capital loss nor will they be eligible for indexation.

12.6. The unindexed amount of the non-capital and non-deductible costs of ownership of the asset will be included in working out the cost base or indexed cost base of an asset. However, no additional amounts will be added to an asset's reduced cost base nor will the costs be taken into account in working out the cost base or indexed cost base of a personal-use asset.

What types of assets are affected by the changes?

12.7. All types of assets except personal-use assets could be affect by the changes. Personal-use assets are assets used primarily for a person's private use and enjoyment and include things like household furniture, televisions, stereos, jewellery, works of art and antiques.

How do the changes affect investments?

12.8. If an asset is used for income producing purposes (eg. a rental property) you can claim a tax deduction for non-capital ownership costs such as interest, rates, land taxes and repairs. You cannot add any expense to an asset's cost base if you have already claimed a tax deduction for it.

12.9. In practice, only non-income producing assets are likely to be affected. Examples of such assets including holiday homes (except to the extent used to produce income) and vacant land.

Do the changes apply to all costs incurred on or after 21 August 1991?

12.10. No. The changes only apply to costs on assets acquired on or after 21 August 1991. If you bought an asset before that date, you cannot add your non-capital expenses to its costs base, even where the expenses were incurred on or after 21 August 1991.

Commencement date

12.11. The amendments apply to an asset acquired on or after 21 August 1991.

Clauses involved in the proposed amendments

Clause 64 : amends subsections 160ZH(1) and (2) and inserts new subsections 160ZH(6A) and (6B).

Subclause 85(12) : contains the application provisions

(Editorial note: *Amendment - Inclusion of provision to enable shareholders in companies in liquidation to realise capital losses on valueless shares (Introduced during passage through Parliament - refer page 10 of Supplementary EM)*)

Chapter 13 Provisional Tax Amendments

[Clause: 71, 73, 85]

Overview

Splits the provisional tax credit into two components:

(a)

provisional tax on income other than salary or wages; and

(b)

provisional tax on salary or wages income.

Also makes technical amendments to the Act to clarify the operation of the provisional tax variation provisions.

13.1 . The Taxation Laws Amendment Bill (No 3) 1991, (the Bill) will make certain technical corrections to the provisions affecting the calculation of provisional tax.

Note: The Income Tax Assessment Act 1936 will be referred to as the "Act" throughout this chapter.

Summary of proposed amendments

13.2. For 1990-91 and subsequent years, taxpayers would be liable to provisional tax on salary or wages if they satisfy both parts of a simple test. The two conditions are that:

•

their balance to pay on assessment was $3,000 or more; and

•

the Pay-As-You-Earn (PAYE) deductions made from that salary or wages income were under-deducted by $3,000 or more.

13.3. When calculating the balance to pay on assessment, the whole of the previous year's provisional tax amount is currently allowed as a credit. The inclusion of this credit may result in a taxpayer having a balance to pay on assessment of less than $3,000, even though the taxpayer has a shortfall in PAYE deduction of $3,000 or more. In this situation a taxpayer would fail the test and provisional tax would not be raised on the salary or wages income. This gives rise to an inequity where some members of a class of taxpayers liable to provisional tax will escape the liability simply because provisional tax was raised in the previous year.

13.4. To resolve this inequity the Bill will split the provisional tax credit into two components:

(a)

provisional tax on income other than salary or wages; and

(b)

provisional tax on salary or wages income.

13.5. Only the provisional tax on income other than salary or wages will be allowed as a credit when calculating the balance to pay on assessment. This splitting will only occur for the purposes of determining whether or not the balance to pay on assessment is $3,000 or more. This split of the credit will not reduce any taxpayer's entitlement to have that provisional tax credit available to offset other income tax liabilities.

13.6. The Bill will also make technical amendments to the Act to clarify the operation of the provisional tax variation provisions.

Background to the legislation

Provisional tax raised on salary or wages income

13.7. Section 221YAB provides that certain taxpayers who receive salary and wage income may be liable to provisional tax on that income. Section 221YAB was designed to prevent certain taxpayers from receiving an income tax deferral. The section extended the liability for provisional tax under Subdivision A of Division 3 of Part VI of the Act for 1990-91 and subsequent years.

13.8. The method of calculating provisional tax on certain salary or wages income (section 221YAB) was inserted into the Act by Act No 87 of 1990.

13.9. As a result of the enactment of section 221YAB, provisional tax became payable on salary or wages income for a year of income where both parts of a two stage test are satisfied. Section 221YAB of the Act provides for the following tests:

(a)

the taxpayer has a balance to pay on assessment for the preceding year of $3,000 or more; and

(b)

the shortfall of Pay-As-You-Earn (PAYE) deductions from the salary or wages income of the preceding year is $3,000 or more.

13.10. Currently, when calculating the balance to pay on assessment, for the first test referred to in paragraph (a) above, the whole of the previous year's provisional tax credits are applied to reduce that balance.

13.11. This means that where a taxpayer paid provisional tax for 1990-91 (because there was insufficient PAYE deductions made from the taxpayer's 1989-90 salary or wages) the amount of the provisional tax reduces the taxpayer's liability to tax for the 1990-91 year.

13.12. The unintended effect of the inclusion of this credit in the calculation of the taxpayer's liability to tax could result in a taxpayer having a balance to pay of less than $3,000 on his or her assessment (the test referred to earlier in paragraph (a)), although the taxpayer may still have a shortfall of PAYE deductions of $3,000 or more (the test referred to earlier in paragraph (b)).

13.13. In this case, provisional tax for the 1991-92 year of income would not be raised because the test referred to earlier in paragraph (a) would not have been satisfied. This would recreate the deferral advantage in 1991-92 that section 221YAB of the Act was designed to overcome.

Amendments to the provisional tax variation provisions

13.14. A taxpayer would generally recalculate provisional tax where he or she expects his or her current year's income to be lower than that of the previous year. The current provisional tax variation provisions (section 221YDA of the Act) do not however specify all the rebates and credits that may be included in a taxpayer's recalculation of provisional tax.

13.15. The Bill will clarify which rebates and credits may be taken into account when a taxpayer varies his or her provisional tax.

Explanation of the proposed amendments

Provisional tax raised on salary or wages income

13.16. The test referred to earlier in paragraph (a) is proposed to be amended to reduce the amount of provisional tax paid in the preceding year which will be allowed as a credit for the purposes of the test, by the extent to which the provisional tax was attributable to salary or wage income. This will remove any potential for deferral.

13.17. The amended test operates by splitting the provisional tax credit into two components. The first component being provisional tax raised on income other than salary or wages. This component will be allowed as a credit in determining whether a taxpayer has a balance to pay on assessment of $3,000 or more (the first test referred to earlier in paragraph (a)).

* 13.18. The second component of the credit will be provisional tax raised on salary or wages income of the preceding year as a result of a shortfall in PAYE deductions. To resolve the inequity cause by the deferral advantage, subparagraph 221YAB(a)(vi) will be amended to excluded the provisional tax referrable to salary or wages income from the calculation of the first test in paragraph 221YAB(a). [Clause 71]*

(Editorial note: *Amended during passage through Parliament, refer Supplementary EM*)

Amendments to the provisional tax variation provisions

13.19. To clarify the operation of the provisional tax variation provisions section 221YDA of the Act is amended to include the following amounts, if applicable, in the calculation of a taxpayer's varied provisional tax:

(a)

the amount of tax that has been deducted from investment income by virtue of a taxpayer's failure to quote his or her Tax File Number (TFN) to an investment body (section 221YHZK);

(b)

foreign tax credits (section 160AF);

(c)

rebates on certain life insurance bonuses (section 160AAB); and

(d)

Commonwealth loan interest rebates (section 160AB).

[Paragraphs 73(a), (b), (d) and (e)]

Commencement date

13.20. The amendments will apply to the calculation of provisional tax (including instalments) payable in respect of income of the 1991-92 year of income and of all subsequent years of income.

13.21 . The amendments will apply to provisional tax for 1991-92 which is based on the income of the 1990-91 year of income. This is so because the first test in paragraph 221YAB(a) applies to income of the preceding year (1990-91). [Subclause 85(14)]

Clauses involved in the proposed amendments

Subclause 85(14) : provides that the amendments to the Act made by clause 71 and paragraphs 73(a), (b), (d) and (e) of the Bill will apply to provisional tax payable for 1991-92 and subsequent years.

Clause 71: amends section 221YAB of the Act to split the provisional tax credit into two components for the purposes of the first test in paragraph 221YAB(a).

Paragraphs 73(a), (b), (d) and (e) : amends section 221YDA of the Act to include certain rebates and credits in the calculation of a taxpayer's varied provisional tax.

Chapter 14 Tax File Number Withholding Tax

[Clause: Taxation Laws Amendment Bill (No. 3) 1991 2, 9, 74, 75, 76, 77, 85, Income Tax (Deferred Interest Securities) (Tax File Number Withholding Tax) Bill 1991 1, 2, 3, 4]

Overview

Introduces new rules for withholding tax from income accrued from certain deferred interest investments where an investor has not quoted a tax file number (TFN).

Summary of Proposed Changes

Who will pay the Tax File Number Withholding Tax?

14.1. The Taxation Laws Amendment Bill (No. 3) 1991 (the Bill) will amend the Income Tax Assessment Act 1936 (the Act) to support the existing tax file number (TFN) arrangements. The Bill will provide for the assessment and collection of a TFN withholding tax where an investor has not quoted a TFN for certain deferred interest investments. A separate bill, the Income Tax (Deferred Interest Securities) (Tax File Number Withholding Tax) Bill 1991, will impose the TFN withholding tax.

14.2. Where an investor does not quote a TFN for certain deferred interest investments, a TFN withholding tax will be payable jointly and severally by the investor and the investment body. The investment body will be able, where necessary, to recover from the investor amounts of TFN withholding tax which it paid. This will mean that investment bodies are not disadvantaged by the new tax.

What investments will attract the new tax?

14.3. A deferred interest investment is basically a security with a term of more than one year. More precisely, it is a "qualifying security" within the meaning of Division 16E of Part III of the Act.

14.4. The TFN withholding tax will apply only to deferred interest investments which are issued on or after 1 February 1992 which are:

•

interest bearing accounts or deposits with a financial institution; or

•

non-transferable loans to government bodies or bodies corporate.

14.5. Limiting the types of investments dealt with by the new arrangements will clarify the identification of investments subject to the new rules and the calculation of the withholding tax that is to be paid.

Background to the Legislation

Tax file number arrangements for investments

14.6. In 1988, the Government introduced expanded tax file number (TFN) arrangements. Phase 2 of those arrangements (which became effective from 1 July 1991) provided for the quotation of TFNs by investors on certain investments.

14.7. Subsection 202D(1) of the Income Tax Assessment Act 1936 (the Act) sets out in tabular form the types of investments which are included in the TFN arrangements. These investments are:

(i)

Interest-bearing accounts with a financial institution, where the investor is the person in whose name the account is held.

(ii)

Interest-bearing deposits with a financial institution (other than a deposit to the credit of an account), where the investor is the person in whose name the deposit is held.

(iii)

Loans of money to a government body or to a body corporate (other than an interest-bearing account or deposit with a financial institution or a loan made in the ordinary course of business by a person in the business of lending money), where the investor is the person in whose name the money is lent.

(iv)

Deposits with a solicitor which the solicitor will invest, or is lent under an agreement to be arranged by or on behalf of the solicitor, where the investor is the person for whose benefit the money is to be invested or lent.

(v)

Units in a unit trust, where the investor is the person in whose name the units are held.

(vi)

Shares in a public company where the investor is the shareholder.

14.8. If a TFN is not quoted on these investments, the relevant investment body is required to deduct tax at the top marginal rate plus medicare levy (currently 48.25%) on any income earned from the investment. The deducted amount is then paid to the Commissioner and can be applied as a credit against any tax which the investor must pay.

Taxation of deferred interest investments

14.9. Division 16E of Part III of the Act assesses income earned on deferred interest securities on an accruals basis. Income on these securities is assessed as it accrues rather than when the security matures or is redeemed (sections 159GQ and paragraph 159GR(2)(c)). Broadly speaking, a deferred interest security is a security with a term of more than one year (e.g. deferred interest debentures under which all interest is paid at maturity).

Old TFN rules for deferred interest investments

14.10. Former subsection 221YHZA(2B) of the Act (omitted by the Taxation Laws Amendment Act (No. 2) 1991) imposed deduction obligations on investment bodies in relation to deferred interest investments. Subsection 221YHZA(2B) applied when a person became obliged under section 159GQ of Division 16E to include in his or her assessable income an amount for an investment covered by the TFN provisions. The subsection provided that such an amount was to be taken as income paid to a person from the investment when the person became obliged to include the amount as assessable income.

14.11. If an investor had chosen not to quote a TFN for a deferred interest investment under the former rule, then the investment body was required to remit amounts to the Commissioner for notionally accrued interest at a time when no interest had actually been paid to the investor.

Why change the law?

14.12. Subsection 221YHZA (2B) was found to be technically defective as it did not say whether the amount to be remitted should come from the principal of the investment or whether it should be funded by the investment bodies themselves. This led to uncertainty among investment bodies. Accordingly, the Government has decided to introduce a new system for the application of the TFN arrangements to deferred interest investments. The new rules will provide certainty as to the obligations of investment bodies in relation to deferred interest investments where a TFN has not been quoted by the investor.

Why a TFN withholding tax for deferred interest investments?

14.13. Had investment bodies been required to fund TFN deductions from deferred interest investments using the old TFN arrangements, a question could have been raised as to the constitutionality of that legislation. It was possible that it was constitutionally invalid to require an investment body to pay to the Commissioner money that was owing or accruing to an investor, but had not yet been paid.

14.14. The imposition of a new tax on investors and investment bodies by the Income Tax (Deferred Interest Securities) (Tax File Number Withholding Tax) Bill 1991 for deferred interest investments which have not had a TFN quoted prevents any constitutional objection being raised.

14.15. TFN withholding tax will not be a new source of revenue. Rather, the tax will be a mechanism for collecting the amount that would have been deducted if no TFN was quoted and the amount of income accrued to the investor under Division 16E had actually been paid.

Explanation of the proposed amendments

How will the new rules operate?

14.16. The Parliament has levied tax by two separate statutes. One provides for the assessment and collection of tax; the other provides for the imposition of tax.

14.17. This legislation scheme has been adopted because of section 55 of the Constitution which provides that "laws imposing taxation shall deal only with the imposition of taxation, and any provision therein dealing with any other matter shall be of no effect".

14.18. For this reason, an Act to impose the TFN withholding tax is proposed by the Income Tax (Deferred Interest Securities) (Tax File Number Withholding Tax) Bill 1991. The amendments to the Income Tax Assessment Act 1936 (the Act) made by the Bill will provide for the assessment and collection of TFN withholding tax.

What investments will be subject to the new rules?

14.19. The new rules will apply to qualifying securities (as defined in Division 16E of the Act) which fall within one of the following categories:

•

interest-bearing account with a financial institution (item 1 of the table in subsection 202D(1) of the Act);

•

interest-bearing deposit with a financial institution (item 2 of the table); and

•

loan of money to a government body or body corporate (item 3 of the table) but only where the security is non-transferable.

14. 20. A "qualifying security" is, broadly, a security (excluding some annuities):

•

that is issued after 16 December 1984;

•

that is not a seasonal security or Commonwealth security that does not bear interest (refer to section 26C of the Act);

•

the term of which exceeds one year.

14.21. These securities will be known as "eligible deferred interest investments" for TFN withholding tax purposes. [Subclause 75(a) - new subsection 221YHZA(1)]

14.22. In addition, the new rules will only apply to those eligible deferred interest investments issued on or after 1 February 1992 [Subclause 85(15)] . Agreements of deposit made after the new rules commence will, therefore, be able to take account of the TFN withholding tax rules.

14.23. However, the Income Tax Regulations will be amended to require investment bodies to report on accrued income earned on existing and new eligible deferred interest investments. Deferred interest securities issued before 1 February 1992 will remain subject to the existing TFN rules. Accordingly, if a TFN has not been quoted for the investment when the term of the investment ends and income is paid to the investor, 48.25% will be deducted from the income paid.

How will the new arrangements fit in with the existing TFN rules?

14.24. The TFN withholding tax rules are designed to work together with the existing TFN arrangements which currently require 48.25% to be deducted from income paid on investments where a TFN is not quoted or an exemption claimed.

14.25. The new TFN withholding tax rules will apply, broadly, to accrued income earned on an eligible deferred interest investment during a year of income where there is no actual payment (i.e. years other than the final year of the term). [Clause 77 - new subsection 221YHZQ(1)]

14.26. As a consequence, the existing TFN rules apply to payments of periodic interest (such as monthly interest) paid on an eligible deferred interest investment (see below) and the amount of income accrued under Division 16E in the year of income in which the term of such an investment ends. [Clause 75 - new subsection 221YHZA(2B)]

14.27. The amount of the deferred interest payment made to the investor at the end of the term of an eligible deferred interest investment which is subject to normal TFN rules is equal to the income included in the investor's assessable income under Division 16E in the final year of income of the investment.

How will TFN withholding tax be calculated?

14.28. The amount of TFN withholding tax to be paid is equal to the amount that would have been deducted by an investment body if the income on the eligible deferred interest investment had been paid. It is calculated in two steps as follows: [Clause 77 - new subsection 221YHZQ(1)]

Step 1: Calculate the accrued amount to be included in the assessable income of the investor for the eligible deferred interest investment for a year of income (in accordance with the provisions of Division 16E). The Bill described this as the "deemed payment amount".

Step 2: Calculate the amount that would have been deducted for non-quotation of a TFN if the deemed payment amount had been paid to the investor as money. This will be the TFN withholding tax payable jointly and severally by the investor and investment body for the eligible deferred interest investment. It is described in the Bill as the "undeducted TFN amount".

14.29. When the income from an eligible deferred interest investment is actually paid at the end of the term of the investment, no deductions are required for failure to quote a TFN other than the amount that is included as assessable income under Division 16E for the final year and any periodic interest payment.

What about Substituted Accounting Periods?

14.30. A taxpayer may be given leave to adopt an accounting period for tax purposes, in place of the normal year of income (i.e. 1 July to 30 June).

14.31. In calculating the deemed payment amount (step 1) any substituted accounting period that may apply to the investor is ignored. [Clause 77 - new subsection 221YHZQ(2)]

An example of how TFN withholding tax is calculated

14.32. Kate invests in debentures with X Bank to the value of $1,000 for a term of two years commencing on 1 July 1992 and ending on 30 June 1994. Interest will be paid on the debentures at 6% per 6 months compound when the term ends on 30 June 1994.

14.33. This investment is an eligible deferred interest investment and will thus be subject to TFN withholding tax if a TFN is not quoted.

(Editorial note: *Corrected Page*)

14.34. The investment pays assessable income as follows.

14.35. "Notional accrual amount" is the amount of accrued interest which must be included in Kate's assessable income under Division 16E.

14.36. Kate fails to quote her TFN to X Bank. The TFN withholding tax rules are therefore applicable.

14.37. For the year of income ending 30 June 1993, Kate is assessed on the accrued income earned on the debentures. The amount of income included in her assessment under section 159GQ of Division 16E for that year is $123.60 (i.e. $60.00 + $63.60). Assuming a top tax rate plus medicare levy of 48.25%, the TFN withholding tax payable on the investment for 1992/93 is $59.35 (taking account of the rounding off provision in subsection 221YHZC(1C)).

14.38. The normal TFN rules apply to the first $138.87 ($67.42 + $71.45) of the final payment to the investor since that is the amount of accrued interest earned in the 1993/94 income year (i.e. the year in which the term ends).

(Editorial note: *Corrected Page*)

What happens if an investor gets periodic interest as well as deferred interest?

14.39. Some deferred interest investments pay income in two ways: by periodic interest and deferred interest:

•

Periodic interest is payments of interest (usually by coupon) paid to the investor at intervals of 12 months or less;

•

Deferred interest accrues over the term of the investment and is paid when the term ends.

14.40. Payments of periodic interest are not caught by the TFN withholding tax rules. These payments are subject to the normal TFN arrangements. That is, if a TFN is not quoted by the investor, 48.25% of the period interest must be deducted and remitted to the Commissioner. The balance can be paid to the investor. [Clause 75 - new subsection 221YHZA(2B)]

14.41. If a TFN is not quoted on the investment, the deferred interest for years other than the final year of the term is subject to TFN withholding tax.

Example

14.42. Andrew deposits $1,000 with Z Bank for a four year term commencing on 1 July 1992 and ending on 30 June 1996. The investment earns income by way of:

•

periodic payments of interest of $40 every 6 months; and

•

accruing interest paid at the end of the term at 4% per 6 months compound.

14.43. Andrew's yield to redemption on his investment is 7.53% compound per 6 months.

14.44. This investment is an eligible deferred interest investment and will thus be subject to TFN withholding tax if a TFN is not quoted.

(Editorial note: *Corrected Page*)

14.45. The investment pays assessable income as follows:

14.46. "Cash flow" is the payments of periodic interest and the payment on 30/06/96 which represents $40.00 periodic interest and $1,368.57 accrued interest plus capital.

14.47. "Notional accrual amount" is the amount of accrued interest which must be included in Andrew's assessable income under Division 16E.

14.48. Andrew fails to quote his TFN to Z Bank. The TFN withholding tax rules are therefore applicable to the accrued interest for the 1992/93 to 1994/95 income years while the normal TFN rules apply to the periodic interest and the accrued interest for the 1995/96 income year.

(Editorial note: *Corrected Page*)

Periodic interest

14.49. Assuming a top rate of tax plus medicare levy of 48.25%, Z Bank is required to deduct $19.30 under the normal TFN rules from each payment of periodic interest when it is paid.

Accrued interest for 1992/93 income year

14.50. For the year of income ending 30 June 1993, Andrew is assessed on the accrued income earned on the term deposit. The amount of income included in his assessment under Division 16E for that year is $73.15 (i.e. $35.25 + $37.90) Assuming a top rate of tax plus medicare levy of 48.25%, the TFN withholding tax payable on the investment for 1992/93 is $35.20 (taking account of the rounding off provision in subsection 221YHZC(1C)).

Who has to pay the TFN withholding tax?

14.51. This will depend on whether the investment body is an untaxable Commonwealth entity. Untaxable Commonwealth entities are defined in the Bill to be the Commonwealth or a Commonwealth authority that cannot, by a law of the Commonwealth, be made liable to pay Commonwealth tax [Clause 77 - new section 221YHZP] . An example of an untaxable Commonwealth entity is the Reserve Bank of Australia. An example of an investment body which is not an untaxable Commonwealth entity is a bank or building society.

14.52. Where the investment body is not an untaxable Commonwealth entity, the investor and investment body are jointly and severally liable to pay TFN withholding tax. [Clause 77 - new paragraph 221YHZT(b)]

14.53. Where the investment body is an untaxable Commonwealth entity, the investor is solely liable to pay TFN withholding tax [Clause 77 - new paragraph 221YHZT(a)] . In this case, the investor will be taken to have authorised the investment body to pay the tax on behalf of the investor.

(Editorial note: *Corrected Page*)

Can investment bodies recover tax they pay for an investor?

14.54. When an investment body pays TFN withholding tax on an eligible deferred interest investment, the investor will be liable to pay the investment body an amount equal to the TFN withholding tax paid by the investment body for that investment. The investment body will be able to recover that amount from the investor as a debt owing to it. [Clause 77 - new subsection 221YHZV(1)]

14.55. When an investment body has paid TFN withholding tax on an eligible deferred interest investment, and there is either an amount accruing to that investment or the investment has a credit balance, then the investment body may recover the amount of TFN withholding tax paid on that investment by:

(a)

reducing an amount accruing to that investment or the balance of that investment by the amount of TFN withholding tax the investment body has paid; or

(b)

deducting or otherwise setting off the amount of TFN withholding tax the investment body has paid from the amount accruing to the investment or the balance of the investment.

14.56. Investment bodies will be authorised to recover amounts of TFN withholding tax paid on an investment irrespective of the particular wording of the investment contract. [Clause 77 - new subsection 221YHZV(2)]

14.57. Nothing in the Bill will prevent the investor and investment body making their own arrangements or agreements allowing the investment body to recover TFN withholding tax paid by the investment body on an eligible deferred interest investment made by the investor. [Clause 77 - new subsection 221YHZV(3)]

When is TFN withholding tax payable?

14.58. For the purposes of these new rules, TFN withholding tax is calculated on the amount of income accrued on an eligible deferred interest investment during a year of income which is taken to end on 30 June. The TFN withholding tax imposed by these new rules for a year of income will be due and payable:

(a)

21 days after the end of that year; [Clause 77 - new paragraph 221YHZW(a)] or

(b)

at a later date which is allowed by the Commissioner of Taxation, if special circumstances exist. [Clause 77 - new paragraph 221YHZW(b)]

Example

14.59. Kate did not quote her TFN for an eligible deferred interest investment she had during the year ended 30 June 1992. As a result TFN withholding tax was imposed on the income that accrued during the year ended 30 June 1992. The TFN withholding tax will become due and payable on 21 July 1992.

What happens if TFN withholding tax is not paid by the due date?

14.60. Late payment penalties may be applied if TFN withholding tax is not paid by the due date. This occurs in exactly the same way as subsection 221YHZD(2) imposes late payment penalties where amounts deducted from income payments under the normal TFN rules are not paid by the due date.

14.61. Broadly, a late payment penalty of 20% of the amount that should have been paid will be imposed (except for Government bodies). In addition, an interest penalty, currently at 20% per annum, may be imposed for the period by which the amount is late. In appropriate circumstances, the Commissioner of Taxation may remit the late payment penalties. [Clause 77 - new subsection 221YHZX(1)]

14.62. Existing subsection 221YHZD(3) will apply to TFN withholding tax in the same way as it applies to amounts payable because an amount was deducted from a payment of income under the existing TFN rules. [Clause 77 - new subsection 221YHZX(2)]

How do investors get credit in their income tax returns for TFN withholding tax paid?

14.63. A person will be entitled to a credit in their income tax return for amounts of TFN withholding tax paid for not quoting a TFN on an eligible deferred interest investment. This will apply in a similar way as under the existing TFN arrangements. However, because the new TFN withholding tax provisions ignore substituted accounting periods when calculating the amount from which TFN withholding tax is to be withheld, the year of income to which the credit will relate will depend on whether the investor had a substituted accounting period.

Investors who have a year of income ending on 30 June

14.64. For investors with a normal year of income, the credit for the amount of TFN withholding tax paid for a year of income because the investor did not quote a TFN for an eligible deferred interest investment will be treated as if the amount paid was actually an amount deducted during that year of income under the existing TFN rules.

14.65. Accordingly, where TFN withholding tax is paid for a particular year of income (say a payment for the year ended 30 June 1992 made in July 1992) credit for that payment will be allowed in the year of income to which the payment relates, not the year of income it is actually paid. [Clause 77 - new paragraph 221YHZX(3)(a)]

Example

14.66. Ian has an eligible deferred interest investment with Y Bank and does not have a substituted accounting period. He did not quote a TFN for the investment.

14.67. In the year ended 30 June 1992 his investment accrued $1,000. On 21 July 1992 Y Bank paid $482.50 TFN withholding tax to the Commissioner of Taxation for that investment.

14.68. Ian will be required $1,000 accrued income to include in his assessable income for the year ended 30 June 1992 (under Division 16E of the Act) and will be entitled to $482.50 credit, in that year, for the amount paid by the investment body in relation to the year of income ended 30 June 1992.

14.69. Ian and Y Bank will make their own arrangements on how Y Bank will recover the $482.50 paid to the Commissioner.

Investors who DO HAVE substituted accounting periods

14.70. Investors who have substituted accounting periods will be allowed credit for TFN withholding tax relating to an eligible deferred interest investment for which a TFN was not quoted in the year of income (substituted accounting period) in which the TFN withholding tax became due and payable.

14.71. The credit for the TFN withholding tax will not be apportioned over more than one financial year or accounting period.

14.72. In some cases this means that the credit for TFN withholding tax arising because an investor does not quote a TFN will be allowed in a financial year later than the year the accrued income is return as income. This result can be avoided, however, if the investor quotes its TFN to the investment body. [Clause 77 - new paragraph 221YHZX(3)(b)]

Example

14.73. Company Ltd has an eligible deferred interest investment with Y Bank and has a substituted accounting period which ends on 31 May each year. Company Ltd did not quote a TFN for the investment.

14.74. In the year ended 30 June 1992 the investment accrued $1,000. On 21 July 1992 Y Bank paid $482.50 TFN withholding tax to the Commissioner of Taxation for that investment. The TFN withholding tax became due and payable on 21 July 1992.

14.75. Company Ltd will be required to include $1,000 accrued income in its assessable income for the year ended 31 May 1992 (under Division 16E of the Act). Because, however, the TFN withholding tax was due and payable in the next year of income - because of the substituted accounting period - Company Ltd will be able to claim $482.50 credit for the amount paid by the investment body in its year of income ended 31 May 1993.

14.76. Company Ltd and Y Bank may make their own arrangements for the recovery of the $482.50 paid to the Commissioner.

What refund provisions will apply for TFN withholding tax?

14.77. Similar refund rules to those used for the existing TFN rules will apply for TFN withholding tax. The Commissioner will be able, if fair and reasonable, to remit TFN withholding tax where an investor did not claim an exemption from the TFN system that he or she was entitled to. [Clause 77 - new section 221YZH]

14.78. In addition, the Commissioner will be able to refund an amount of TFN withholding tax overpaid, whether as a result of a remission or otherwise. Where an amount is refunded, the investor will not be entitled to a credit against income tax assessed for the amount of the refund. This will prevent credits arising for TFN withholding tax not actually paid. [Clause 77 - new section 221YHZZ]

Is the TFN withholding tax a valid income tax deduction?

14.79. Not for investors. Since investors are entitled to credit for TFN withholding tax in their income tax returns, an income tax deduction will not be allowed to an investor for any payment in respect of TFN withholding tax. As a result, TFN withholding tax paid by an investor to the Commissioner of Taxation or to the investor's investment body as compensation for paying the TFN withholding tax for the investor will not be deductible. [Clause 77 - new section 221YHZZA]

14.80. Investment bodies will be normally entitled to an income tax deduction for the amount of TFN withholding tax they pay for an investor as a normal expense of carrying on their business operations. The timing of this deduction will be determined using ordinary concepts of income tax deductibility. Amounts recovered by the investment body from an investor will be assessable income to the investment body.

What anti-avoidance rules will operate?

14.81. Section 8WC of the Taxation Administration Act 1953 (the Administration Act) currently makes it an offence for a person to structure their investments to avoid the application of the TFN arrangements. That offence provision has been recast (by replacing subparagraph 8WC(1)(b)(iii) of the Administration Act with a new subparagraph) to ensure that the offence provisions will apply to prevent a person from structuring their investments to avoid the TFN withholding tax provisions.

14.82. Broadly, such restructuring of investments will be an offence if it could be reasonably concluded that it was done with the sole or dominant purpose of ensuring or attempting to ensure that although a TFN has not been quoted for those investments:

(a)

amounts are not deducted under the existing TFN arrangements (Division 3B of Part VI of the Income Tax Assessment Act 1936); and

(b)

amounts would not be paid to the Commissioner under subsection 221YHZD(1B) when income is paid on an investment subject to the TFN arrangements other than in money; and

(c)

TFN withholding tax would not be payable on an eligible deferred interest investment. [Clause 107 - new paragraph 8WC(1)(b)(iii) of the Administration Act]

Will other laws exempt a person from TFN withholding tax?

14.83. No. As a safeguard, any law or provision of a law passed before the date of the Royal Assent for the Taxation Laws Amendment Bill (No. 3) 1991 that purports to exempt a person from paying TFN withholding tax will be ineffective.

14.84. In addition, any law or provision of a law that is passed after the date the Royal Assent is given to the Taxation Laws Amendment Bill (No. 3) 1991 will not exempt a person from the new TFN withholding tax unless it expressly states its intention to exempt the person from paying the TFN withholding tax. [Clause 77 - new section 221YHZZB]

Will the TFN withholding tax rules bind the Crown?

14.85. Yes. The new TFN withholding tax arrangements proposed by the Taxation Laws Amendment Bill (No. 3) 1991 will place obligations on the Crown. Accordingly, the TFN withholding tax provisions contained in new Subdivision C of Division 3B of Part VI of the Act will bind the Crown in right of the Commonwealth, each of the States, the Australian Capital Territory, the Northern Territory and Norfolk Island. [Clause 77 - new section 221YHZZC]

Commencement date

14.86. The TFN withholding tax amendments will apply from the date the Royal Assent is given to the Taxation Laws Amendment Bill (No. 3) 1991. [Clause 2]

14.87. As described above, TFN withholding tax will apply to eligible deferred interest investments whose term commences on or after 1 February 1992. [Subclause 85(15)]

Clauses involved in the proposed amendments

Taxation Laws Amendment Bill (No. 3) 1991

Clause 2: provides that the Act proposed by the Bill will commence on the date it is given the Royal Assent.

Clause 9: facilitates references to the Income Tax Assessment Act 1936 for the purposes of amendments to that Act made by the Bill.

Clause 74: inserts, before section 221YHZA of the Act, a new subdivision heading "Subdivision A - Interpretation". The new heading is to assist the readability of the legislation.

Clause 75: defines the types of deferred interest investments which will be subject to the proposed changes. The clause also makes it clear that any periodic interest payments, or deferred interest payments for the last year, will be subject to the existing TFN arrangements.

Clause 76: inserts, before section 221YHZO of the Act, a new subdivision heading "Subdivision C - Collection of TFN withholding tax payable on the non-quotation of tax file numbers in respect of eligible deferred interest securities". The new heading is to assist the readability of the legislation.

Clause 77: provides for the assessment and collection of a TFN withholding tax where an investor has not quoted a TFN for an eligible deferred interest investment. The TFN withholding tax will be imposed by the Income Tax (Deferred Interest Securities) (Tax File Number Withholding Tax) Act 1991.

Subclause 85(15): ensures that the new TFN withholding tax arrangements will only apply to investments made on or after 1 February 1992.

Clause 106: facilitates references to the Taxation Administration Act 1953 for the purposes of amendments to that Act made by the Bill.

Clause 107: extends the operation of section 8WC so that it will apply where a person structures their investments to avoid the operation of the new TFN withholding tax arrangements.

Income Tax (Deferred Interest Securities) (Tax File Number Withholding Tax) Bill 1991

Clause 1: provides that the Act may be cited as the Income Tax (Deferred Interest Securities) (Tax File Number Withholding Tax) Act 1991.

Clause 2: provides that the Act commences when new section 221YHZR of the Income Tax Assessment Act 1936 takes effect on the date of Royal Assent of the Taxation Laws Amendment Bill (No. 3) 1991.

Clause 3: provides that the Act binds the Crown.

Clause 4: imposes the tax known as TFN withholding tax.

Chapter 15 Medicare Levy Exemption

[Clause: 78, 85]

Overview

Makes amendments to reflect the Government's initial intention to limit exemption from the levy on account of holding a health card to blind pensioners and sickness beneficiaries.

Summary of proposed amendments

15.1. This Bill proposes to amend the Income Tax Assessment Act 1936 (the ITAA) to reflect the Government's initial intention in 1983 of limiting exemption from the levy on account of holding a health card to:

* blind pensioners; and

* sickness beneficiaries.

Background to the legislation

Current Legislation

15.2. Part VIIB of the ITAA contains the provisions governing the Medicare levy. Separate provisions detailing the rate and thresholds are contained in the Medicare Levy Act 1986.

15.3. Paragraph 251T(a) of the Income Tax Assessment Act 1936 provides that the Medicare levy is not payable by a person who is a "prescribed person" during the whole of the year of income. Section 9 of the Medicare Levy Act reduces the levy where a person is a prescribed person during only part of the year. Subsection 251U(1) of the Act sets out six categories of taxpayers who satisfy the requirements for a prescribed person.

15.4. One of these categories of taxpayers is covered by paragraph 251U(1)(c) of the Act. This paragraph provides that taxpayers who

•

are holders of cards issued by the Commonwealth and known as Health Care Cards or Health Benefit Cards; and

•

whose eligibility for the cards was determined without having regard for the amount of income they or their spouses derived;

are prescribed persons. The Government initially intended this provision to exempt only

•

blind pensioners; and

•

sickness beneficiaries

from the Medicare levy.

15.5. At the time the provision was passed, these persons were issued with cards without income-testing. In the legislation, the reference to the holding of cards without income-testing was a convenient means of identifying blind pensioners and sickness beneficiaries. However, since that time, the range of persons to whom these cards are issued without income-testing has increased considerably. The result has been that many people have been unintentionally exempted from the Medicare levy.

Why change the law?

15.6. The amendments reflect the Government's initial intention that the particular group of taxpayers referred to by existing paragraph 251U(1)(c) is limited to:

•

blind pensioners, and

•

sickness beneficiaries.

Explanation of the proposed amendments

15.7. The amendments propose the removal of the existing paragraph 251U(1)(c). This existing provision is too broad to meet the Government's initial intention that it qualify only

•

blind pensioners, and

•

sickness beneficiaries

for exemption from the levy.

15.8. The amendments [subclause 78(1)] , with effect from 1 July 1991, will replace existing paragraph 251U(1)(c) with three paragraphs which identify the persons to be included as prescribed persons. The benefits, allowances and pensions to which the new paragraphs refer are set out in Table 1 on page 170. It is necessary to identify

•

blind pensioners, and

•

sickness beneficiaries

separately in the amendments.

15.9. Blind pensioners are provided for under the Social Security Act 1991 (SSA) where they are social security pensioners and under the Veterans' Entitlements Act 1986 (VEA) where they are service pensioners. Sickness beneficiaries are provided for under the SSA. The ITAA amendments will refer to the SSA and VEA to identify blind pensioners and the SSA to identify sickness beneficiaries.

15.10. The proposed ITAA amendments take account of the fact that the SSA is being amended by the Social Security (Disability and Sickness Support) Amendment Act 1991. This Act has been passed in both Houses of Parliament and is awaiting Royal Assent. The amendments of the SSA provisions for blind pensioners and sickness beneficiaries will take effect from 12 November 1991.

15.11. Subclause 78(2) proposes to reflect these amendments to the SSA by:

•

amending two of the new paragraphs inserted by subclause 78(1); and

•

inserting a fourth new paragraph in subsection 251U(1).

15.12. Similar amendments have not been made to the VEA.

15.13. Prescribed persons in terms of the amendments to the ITAA in the Bill are:

•

blind pensioners and sickness beneficiaries between 1 July 1991 and 11 November 1991, and

•

blind pensioners and recipients of sickness allowance from 12 November 1991.

15.14. The following two tables set out the areas of the SSA and VEA to which new paragraphs 251U(1)(c), (ca), (caa) and (cb) refer to identify the persons to qualify as prescribed persons.

Table 1 *Corrected Table*

•

where rate of pension was calculated under section 1065 of SSA

•*

where rate of pension was calculated under subsection 43(1) of VEA

#

proposed new paragraphs/subparagraphs in subsection 251U(1) of the ITAA.

Table 2 *Corrected Table*

•

where rate of pension was calculated under section 1066B of SSA

•*

where rate of pension was calculated under subsection 43(1) of VEA

•**

where rate of pension was calculated under section 1065 of SSA

#

proposed new paragraphs/subparagraphs in subsection 251U(1) of the ITAA

Commencement date

15.15. The amendment of Section 251U to limit the provisions of existing paragraph 251U(1)(c) to

•

blind pensioners, and

•

sickness beneficiaries

will take effect from 1 July 1991.

15.16. The amendments consequent on amendment of the Social Security Act will take effect as from 12 November 1991.

Clauses involved in the proposed amendments

Subclause 78(1) : repeals existing paragraph 251U(1)(c) of the ITAA and replaces it with new paragraphs (c), (ca) and (cb):

•

Paragraph (c) proposes that a recipient of a sickness benefit under Part 2.14 of the Social Security Act will be a prescribed person.

•

Paragraph (ca) proposes that a person who was blind and received an age pension or an invalid pension under Parts 2.2 and 2.3 respectively of the Social Security Act will be a prescribed person.

•

Paragraph (cb) proposes that a person who was blind and received an age or invalid pension under the Veterans' Entitlements Act will be a prescribed person.

These provisions will qualify persons for exemption from the Medicare levy during the period they were recipients of the pensions or benefits.

Subclause 78(2) : mends new paragraphs (c) and (ca) of subsection 251U (1) inserted by subclause 78(1) and inserts new paragraph (caa) to make changes consequential to amendments of the Social Security Act. The changes, to take effect from 12 November 1991, are:

•

Paragraph (c) will be amended to take account of the replacement in that Act of the sickness benefit by the sickness allowance.

•

Subparagraph (ca)(ii) will be amended to take account of the replacement in that Act of the invalid pension by the disability support pension for blind pensioners aged 21 years or over but under age pension age.

•

New paragraph (caa) takes account of the new provision in that Act whereby a person aged under 21 years who receives a disability support pension because of blindness is to be identified as a person whose level of pension is set under section 1066B of that Act.

Clause 85: (of the amending Act) provides the timing of application of the amendments to the Act:

•

Subclause(6A) will provide that the amendments proposed in subclause 78(1) apply in relation to periods commencing on or after 1 July 1991.

•

Subclause (6B) will provide that the amendments proposed in subclause 78(2) apply in relation to periods commencing on or after 12 November 1991.

Chapter 16 Medicare Levy Low Income Thresholds

[Clause: Medicare Levy Amendment Bill 1991 : 1, 2, 5, 6]

Overview

Varies the taxable income levels below which persons are exempt from Medicare levy as from 1 July 1991.

Summary of proposed amendments

16.1. Persons receiving taxable income below the Medicare levy low income thresholds are not required to pay the levy. This Bill proposes to amend section 8 of the Medicare Levy Act 1986 to raise the low income threshold for married couples and sole parents.

Background to the legislation

16.2. For the income year 1990-91 the following table indicates when levy is or is not payable or is reduced:

#

Consists of combined taxable income of taxpayer and spouse.

##

The figures for married taxpayers also applied to taxpayers entitled to a sole parent, child/housekeeper or housekeeper rebate.

•

Where there were five or more dependent children or students, add $2,100 for each extra child or student.

•*

Where there were five or more dependent children or students, add $2,240 for each extra child or student.

16.3. For 1990-91 an individual whose taxable income was $12,528 or less (column 3 of the table) but more than $11,745 the levy was 20 per cent of the excess above $11,745. These two thresholds were set in section 7 of the Medicare Levy Act.

16.4. Where the sum of the couple's taxable income was more than $19,045 and up to $20,315 (column 3), the reduced levy could be calculated in accordance with section 8 of the Medicare Levy Act.

16.5. Applying the formula in subsection 8(2) of the Medicare Levy Act ensured that the levy payable was no more than 20 percent of the excess above $19,045. The lower of these thresholds was set in Section 8 of the Act and the higher was derived from the formula in subsection 8(2) of the Act.

16.6. These thresholds and provisions applied also in regard to taxable income for taxpayers entitled to a housekeeper, child-housekeeper or sole parent rebate.

16.7. The low income thresholds are usually amended each year and the amended thresholds are announced in the Budget papers.

Explanation of the proposed amendments

General

16.8. It is not proposed to change the thresholds for individuals for 1991-92.

16.9. For 1991-92 no levy will be payable by:

(a)

an individual whose taxable income does not exceed $11,745;

(b)

a married (including de facto) couple where the sum of the couple's taxable incomes does not exceed $19,674; or

(c)

a taxpayer entitled to a housekeeper, child-housekeeper or sole parent rebate where his or her taxable income does not exceed $19,674.

16.10. For each dependent child or student maintained by a taxpayer in (b) or (c) above the threshold for payment of the levy will continue to be increased by $2,100.

Levy in Cases of Individuals with Small Incomes

16.11. It is not proposed to amend section 7 in regard to the income year 1991-92. Section 7 of the Principal Act exempts from Medicare levy individual taxpayers on incomes at or below the low income threshold. It also phases in the levy for those taxpayers with taxable incomes that exceed that threshold.

Levy for Married Couples and Sole Parents

16.12. Section 8 of the Principal Act exempts from Medicare levy in respect of a year of income a person who has a family if two conditions are satisfied:

•

the person is

-

married or de facto married on the last day of the year of income; or

-

the person is entitled to a rebate in his or her assessment in respect of the year of income for a child-housekeeper or a housekeeper or as a sole parent; and

•

the family income in respect of the year of income (that is, the taxable income of the person plus that of his or her spouse, if any) does not exceed the family income threshold in relation to that person.

16.13. The basic level of the "family income threshold" (subsection 8(5) of the Principal Act) for a taxpayer is to be increased from $19,045 to $19,674 [Clause 5] . The level of that threshold in a year of income will continue to be increased by a further $2,100 for each dependent child or student. (The child or student is one in respect of whom the taxpayer or spouse would have been entitled to a dependant rebate in that year had those rebates been continued).

16.14. Clause 5 also proposes to amend subsection 8(6) of the Principal Act to account for the increase in the basic level of the family income threshold to $19,674.

16.15. Subsection 8(6) of the Principal Act places a restriction on increasing the "family income threshold" on account of a dependant in respect of a year of income. The restriction applies where the taxpayer was not a married person on the last day of the year of income. In these circumstances the "family income threshold" shall not be increased on account of another person unless family allowance under the Social Security Act 1991 was payable to the taxpayer in respect of the dependant.

16.16. The 1991-92 Medicare levy low income thresholds and shading-in ranges will therefore be as shown in the following table:

#

Consists of combined taxable income of taxpayer and spouse.

##

The figures for married taxpayers also apply to taxpayers entitled to a sole parent, child/housekeeper or housekeeper rebate.

•

Where there are five or more dependent children or students, add $2,100 for each extra child or student.

•*

Where there are five or more dependent children or students, add $2,240 for each extra child or student.

Commencement date

16.17. The amendment will take effect for the financial year commencing on 1 July 1991 [Clause 6] . That is, the changed threshold applies to the imposition of levy upon taxable income of the year of income commencing on 1 July 1991.

Clauses involved in the proposed amendments

Subclause 1(1): cites the amending Act as the Medicare Levy Amendment Act 1991.

Subclause 1(2): facilitates references to the Medicare Levy Act 1986 which it refers to as the "Principal Act".

Clause 2: provides for the amending Act to commence on the day on which it receives Royal Assent.

Clause 5: amends section 8 of the Principal Act by omitting "$19,045" from subsections (5) and (6) and substituting "$19,674".

Clause 6: provides that amendments to section 8 of the Principal Act will apply for the financial years commencing on or after 1 July 1991.

Chapter 17 Overview of Existing Law : Accruals Tax System

[Includes Definition of Key Terms]

Overview

Brief outline of basic concepts in the Taxation of Foreign Source Income.

Introduction

17.1. Chapters 17 to 22 deal with amendments that are proposed to be made to the provisions relating to the taxation of foreign source income.

17.2. They relate mainly to the provisions of the Act that deal with the accruals tax system introduced with general effect from the 1990-91 income year.

Some Basic Concepts in the Taxation of Foreign Source Income

The accruals tax system - controlled foreign companies

17.3. If Australian residents have specified interests in a non-resident company, then the accruals tax system may include certain income and gains derived by that company in the residents' assessable income. A non-resident company that is subject to these measures is called a controlled foreign company (CFC).

Attributable income

17.4. The income and gains of a CFC that may be included in the assessable income of resident taxpayers is called attributable income. That income is calculated, subject to some modifications, as if the CFC were a resident of Australia.

The active income test

17.5. The CFC's income will generally not be included in the assessable income of resident taxpayers if the CFC is predominantly engaged in active business operations. An active income test determines whether a CFC is to be treated as predominantly engaged in active business operations.

17.6. A CFC fails that test if, in broad terms, 5 per cent or more of the gross turnover of the CFC consists of tainted income. Tainted income includes passive income and income from certain related party transactions.

Listed and unlisted country CFCs

17.7. A listed country is a country that is treated as having a tax system that is generally comparable to Australia's. A list of these countries is contained in the Income Tax Regulations. An unlisted country is a country that is not listed in the Regulations.

Attributable income of a listed country CFC

17.8. The attributable income of a CFC that is a resident of a listed country will include :

•

certain tainted income that is taxed at concessional rates in the listed country. This type of income, called designated concession income, will be included in attributable income only if the CFC fails the active income test. A list of the income that is treated as taxed at concessional rates is contained in the Income Tax Regulation;

•

income from an unlisted country that is not taxed in the listed country; and

•

certain low taxed income that is derived, or treated as derived, from trusts.

Attributable income of an unlisted country CFC

17.9. The attributable income of a CFC that is a resident of an unlisted country includes :

•

certain tainted income, if the CFC fails the active income test; and

•

certain income that is derived, or treated as derived, from trusts.

Dividends paid by a CFC

17.10. The accruals tax measures will also include in the assessable income of resident taxpayers amounts of dividends paid by an unlisted country CFC to a:

•

listed country CFC; or

•

controlled foreign trust (CFT).

17.11. The amount that is included in the assessable income of a resident taxpayer is the proportion that relates to the taxpayer's interest in the CFC or CFT that receives the dividend.

Change of residence of a CFC

17.12. Where a CFC changes residence from an unlisted country to a listed country or Australia, a resident attributable taxpayer must include in his attributable income a certain amount of the distributable profits of the CFC (section 457).

17.13. Where a CFC changes residence to a listed country, its distributable profits are deemed to include the profits that would have been made if the assets of the CFC were sold for their market value.

17.14. Section 457 is an anti-avoidance provision to prevent an unlisted country CFC distributing its profits in a tax free form by simply changing its residence.

Tax exemption for distribution from attributed income

17.15. Dividends received by a resident taxpayer from a non-resident company are exempt from tax up to a certain limit. This limit is equivalent to the amount of the dividends that are paid out of profits of that company that have been previously attributed to the taxpayer. Put another way, if a dividend is paid by a company to an Australian taxpayer and, if on the payment of the dividend, and attribution debit arises, the dividend is exempt from tax under section 23AI to the extent of the debit (see definition of 'Attribution debit' below).

Definitions of Key Terms in the Taxation of Foreign Source Income

17.16. Certain terms that are used in Chapters 17 to 22 are explained below.

'Attribution account'

17.17. An attribution account establishes a link between:

•

income that has been attributed to the taxpayer from an attribution account entity; and

•

income actually distributed to that taxpayer by the entity.

'Attribution account entity'

17.18. An attribution account entity is an entity for which a resident taxpayer is to maintain an attribution account (in order to trace distributions of attributed income). An entity includes:

•

a company that is not a Part X Australian resident;

•

a partnership; and

•

a trust.

'Attribution credit'

17.19. When an amount is attributed to a taxpayer from an entity, the attribution account is credited (attribution credit) with the amount of the attributable income. For instance, an attribution credit will arise where an amount of the attributable income of a CFC is attributed to a taxpayer under section 456.

'Attribution debit'

17.20. When an entity subsequently distributes income that has been attributed to a taxpayer, the amount of the distribution is debited (attribution debit) to the attribution account. The amount of the debit cannot exceed the balance of the account, referred to as the attribution surplus.

'Attribution surplus'

17.21. An attribution surplus exists if the total of the attribution credits for an entity exceeds its attribution debits.

'Australian trust'

17.22. The term Australian trust is defined in section 338 of the Act. It includes, in broad terms, a trust that has a resident trustee. It also includes a trust that has its central management and control in Australia. Certain specified categories of trusts, such as a corporate unit trust and a public trading trust, are also treated as Australian trusts.

'Controlled foreign company' (CFC)

17.23. In broad terms, a controlled foreign company is a non-resident company in which resident individuals, partnerships, companies or trusts hold specified interests. The meaning of the term controlled foreign company is set out in section 340 of the Act.

'Controlled foreign trust' (CFT)

17.24. A controlled foreign trust is a non-resident trust in which resident individuals, partnerships, companies or trusts hold specified interests. The term includes a non-resident trust to which a resident person has transferred property or services in certain circumstances. The meaning of the term controlled foreign trust is set out in section 342 of the Act.

'Distributable profits'

17.25. The distributable profit is the amount of profits of the company that would be available for distribution by way of dividends.

'Exempting profits'

17.26. Exempting profits are the distributable profits of a company that result from the exempting receipts of a company. Exempting profits are calculated using the formula :

Exempting profits = exempting receipts less expenses and taxes attributable to those receipts


'Exempting receipts'

17.27. Exempting receipts of an unlisted country company are amounts received by that company that have either:

•

been included in assessable income for Australian tax purposes; or

•

been taxed at comparable rates in a listed country.

'Foreign tax credits'

17.28. A resident taxpayer whose assessable income includes foreign income could, subject to certain limits, claim a credit for the foreign tax paid on the foreign income against the Australian tax payable on that income. A resident company that receives a non-portfolio dividend from a foreign company is entitled to a credit for the foreign tax paid on the dividend as well as for the foreign underlying tax paid by the company on profits out of which the dividend is paid.

'Non-portfolio dividends'

17.29. 'Non-portfolio dividends' are dividends paid to a company with at least a 10% voting interest in the company paying the dividend.

'Part X Australian resident'

17.30. A Part X Australian resident is a resident of Australia other than one who is treated solely as a resident of treaty partner country under a double taxation agreement between Australia and that country.

'Passive income'

17.31. In broad terms, passive income includes items of income such as:

•

interest;

•

annuities;

•

royalties;

•

receipts from the assignment of intellectual property; and

•

capital gains on the disposal of certain assets.

17.32. The term passive income is defined in section 446 of the Act.

'Statutory accounting period'

17.33. A statutory accounting period of a CFC is a period of 12 months, ending on 30 June unless the CFC has elected a 12 month period ending on another day (section 319).

Chapter 18 Exemption of amounts paid out of attributed income

[Clause: 14, 85]

Overview

Enables certain resident trust to obtain a tax exemption for distributions received from a CFC up to the amount of the CFC's income attributed to them under the accruals tax measures. The trusts affected are corporate unit trusts, public trading trusts and superannuation trusts that are taxed as separate taxpayers.

Summary of proposed amendments

18.1. The proposed amendment to the Principal Act will enable certain trusts to obtain an exemption for distributions received from a CFC up to the amount of the CFC's income attributed to them under the accruals tax measures.

18.2. Generally, a distribution made to a taxpayer out of the income of a CFC that has previously been attributed to the taxpayer is exempt from tax. Under the current law, however, some trusts cannot obtain the exemption. The trusts affected are:

•

trusts that are taxed in the same way as companies, that is, corporate unit trusts and public trading trusts; and

•

superannuation trust that are taxed as separate taxpayers.

18.3. In order to ensure equity in the taxation treatment of distributions from CFCs, these trusts will now be able to obtain the exemption.

Background to the legislation

Section 23AI exemption

18.4. Section 23AI of the Act exempts from income tax certain attribution account payments made to a taxpayer by an attribution account entity.

18.5. Attribution accounts are used to establish a link between:

•

income that has been attributed to a taxpayer from a CFC under the accruals tax measures; and

•

income actually distributed to that taxpayer by the CFC.

18.6. The ways in which attributed income is actually distributed to the taxpayer are referred to as attribution account payments. The entity that makes the payment is called an attribution account entity.

18.7. Some attribution account payments are exempt from tax (section 23AI). Broadly, these attribution account payments include:

•

a dividend;

•

a share of partnership net income;

•

a share of the net income of a trust estate; and

•

a distribution from a trust estate.

18.8. These amounts are exempt because they relate to amounts previously attributed to the taxpayer.

Taxpayers who are unable to use the exemption for a distribution

18.9. The current law excludes a taxpayer who is the trustee of a trust from claiming the exemption under subparagraph 23AI(1)(a)(i). The exclusion of trustees of a trust was made because the intention of the law was to restrict access to the exemption to those taxpayers who were actually liable to tax as beneficiaries on the income already attributed from the CFC to the trust.

18.10. However, some trusts are taxed as separate taxpayers. For these trusts the attributable income of a CFC would be taxed to the trustee of the trust. Under the current law these trusts do not qualify for the exemption. To ensure equity in the taxation treatment of distributions from attributed income the amendment will enable these trusts to be exempt from tax on distributions from the CFC up to the amount of the attributed income.

Explanation of the proposed amendments

General effect of the amendment

18.11. The amendment varies the definition of trust to extend the exemption from tax of certain attribution account payments to those trusts that are taxed as separate taxpayers.

Trusts that are taxed separately

18.12. Subsection 371(7) lists the trusts that are taxed as separate taxpayers. The types of trusts affected include an Australian trust that is:

•

a corporate unit trust;

•

a public trading trust; or

•

an eligible entity within the meaning of Part IX of the Act, that is :

-

an eligible approved deposit fund;

-

an eligible superannuation fund; or

-

a unit trust that is a pooled superannuation trust.

18.13. These are the trusts which are currently unable to obtain the exemption under section 23AI of the Act.

Definition of a trust for the purposes of 23AI

18.14. The amendment will vary the definition of trust in subsection 23AI(3). The proposed definition of 'trust' in subsection 23AI(3) does not include those trusts that are taxed as separate taxpayers. As a result, subparagraph 23AI(1)(a)(i), which excludes 'trustees of a trust' from claiming the exemption, will no longer exclude trusts that are taxed as separate taxpayers. Consequently, those trust will be able to claim the exemption.

Commencement date

18.15. The amendment will enable these trust to benefit from the exemption from the time the accruals tax measures took effect. The accruals tax measures commenced generally from the 1990-91 income year.

Clauses involved in the proposed amendments

Clause 14: amends subsection 23AI(3) of the Act by changing the definition of 'trust'.

Subclause 85(4) : will provide that the amendment will apply from the commencement of the accruals tax measures which is generally the 1990-91 income year.

Chapter 19 Change of Residence of CFC - Election to defer attribution Credit

[Clause: 79, 81, 85]

Overview

Provides relief from the double taxation of profits that can occur when an Australian-controlled foreign company (CFC) changes its residence from an unlisted country to either a listed country or Australia. Where a CFC changes residence to Australia, a taxpayer will continue to be exempt from tax on distributions made by the CFC up to the amount of the CFC's income that was previously attributed to the taxpayer. Relief in relation to a change of residence to a listed country is provided by enabling a taxpayer to obtain foreign tax credits for foreign tax paid on certain gains arising to the CFC on the sale of the assets of the CFC after the change of residence.

Summary of proposed amendments

19.1. When a CFC changes residence from an unlisted country to a listed country, certain profits of the CFC are attributed to the attributable taxpayers of the CFC. These profits include unrealised gains on the assets of the CFC. (section 457)

19.2. The proposed amendment will allow an attributable taxpayer to elect to defer the timing of so much of an attribution credit that relates to the attribution (under section 457) of an unrealised gain on an asset. Section 457 applies where a CFC changes residence from an unlisted country to a listed country or to Australia.

19.3. By the election, the attributable taxpayer will be able to defer the attribution credit until the CFC pays a dividend out of the gain derived from the disposal of the asset. This will enable the payment of the dividend after the foreign tax payable on the disposal of the asset has been paid. That tax will therefore be taken into account when calculating the tax credit to which the taxpayer is entitled in relation to that dividend.

19.4. The election will be available in respect of a change in residence of a CFC which occurred on or after 1 July 1989.

19.5. In effect, the election will only benefit a resident company which is related to a CFC that has changed residence. This is because only a related company may claim a credit for the underlying tax paid by the CFC on the profits from which the dividend is paid. (sections 160AFB and 160AFC)

Background to the legislation

19.6. An amount relating to the unrealised gain on an asset held by a CFC which is attributed to a taxpayer when a CFC changes residence from an unlisted country to a listed country may, in some circumstances be taxed by both Australia and that listed country without the taxpayer receiving relief from double taxation.

19.7. In some instances, the taxable gain on an asset situated in a listed country is calculated by that country from the time the CFC purchased the asset. Consequently, that part of a gain which accrued prior to the change of residence of the CFC is taxed by both Australia and the listed country. Relief from double taxation is normally provided under section 160AFCD. Broadly, that section allows a corporate taxpayer that receives a dividend from a related company to claim a credit for the tax imposed by the listed country on that part of the company's profits that relate to an attribution surplus.

19.8. However, relief may not be available for the foreign tax that will be paid on the disposal of an asset relating to the unrealised gain which was attributed to the taxpayer under section 457. This is because a foreign tax credit determination may not be amended after the end of 4 years after the original determination date except to correct an error in calculation or a mistake in fact (subsection 160AK(2)). Consequently, a tax credit will not be allowable for foreign tax which is paid more than 4 years after the original credit determination under section 160AFCD.

19.9. The following diagram illustrates the problem.

CFC's residence: (Unlisted Country) (Listed Country)
1.8.90 1.3.91 1.7.91 1.8.98
(A) (B) (C) (D)


(A)

A CFC resident in an unlisted country purchases an asset located in a listed country.

(B)

The CFC changes residence to the listed country. The CFC's Australian parent company is attributed the unrealised gain accrued on the asset since 1.8.90. The attribution of the unrealised gain gives rise to an attribution credit for the parent company.

(C)

The CFC pays a dividend which reduces the attribution surplus to nil. The dividend will be exempt under section 23AI to the extent of the attribution debit which arose on the payment of the dividend (the balance of the dividend will be exempt under section 23AJ). No foreign tax credit is allowable under section 160AFCD because the foreign tax has yet to be paid on the unrealised gain which gave rise to the attribution credit.

(D)

The CFC disposes of the asset and pays capital gains tax in that country on the gain which has accrued since 1.8.90. However, no foreign tax credit will be available when the capital gain is distributed to the parent company (no attribution debit will arise) even though Australia has already taxed the gain which accrued during the period 1.8.90 to 1.3.91. Consequently, the gain which accrued during that period has effectively been taxed twice.

Explanation of the proposed amendments

19.10. Broadly, the proposed amendment will permit an attributable taxpayer to elect to defer the timing of an attribution credit that relates to the attribution (under section 457) of an unrealised gain on an asset held by a CFC. This election will permit the attributable taxpayer to defer the attribution credit until the CFC pays a dividend out of the gain derived from the actual disposal of the asset. Accordingly, a company taxpayer, which is related to the CFC, can claim a tax credit (under section 160AFCD) for the foreign tax paid on that part of the notional gain on assets held by the CFC which was attributed to the taxpayer when the CFC changed residence. This is because the foreign tax payable on the disposal of those assets will have been paid at the time the attribution debit arises.

19.11. An attribution credit relating to an amount included in a taxpayer's assessable income under section 457 arises at the time the CFC changes residence (paragraph 371(5)(b)). The amendment will allow a taxpayer that is able to satisfy certain conditions to elect to defer an attribution credit that is referable to an amount attributed to the taxpayer (under section 457) in respect of a notional gain on the assets of a CFC at the time it changed residence. The election will result in the attribution credit being deferred until immediately before the payment by the CFC of a dividend out of a gain derived from the disposal of those assets. [Clause 81, subsection 371(8)]

19.12. The election should be retained by the taxpayer for a 5 year period for the purpose of examination by the Tax Office if requested (section 262A). A penalty is provided on conviction for failure to comply with that section.

Commencement date

19.13. This amendment has effect in relation to any change of residence of a CFC that occurred on or after 1 July 1989.

Clauses involved in the proposed amendments

Clause 81 : inserts new subsections 371(8) and (9) which will permit an attributable taxpayer to elect to defer the timing of so much of an attribution credit that relates to the attribution (under section 457) of an unrealised gain on an asset.

Subclause 85(18) : provides that the amendment will apply in relation to a CFC changing residence after 1 July 1989.

Clause 79 : amends subsection 262A(4A) to provide that an election made under proposed subsection 371(9) is to be retained for 5 years.

Chapter 20 Amendments to carry forward Loss Provisions

[Clause: 88, 114, 115, 116]

Overview

Ensures that taxpayers are not disadvantaged by the rules that provide for conversion of the foreign income losses from the pre 1990-91 income year. This will enable a taxpayer to treat a pre 1990-91 loss that is able to be carried forward to subsequent years as relating to the same class of income to which it would have belonged had it been a loss incurred in the 1990-91 income year.

Summary of the proposed amendments

20.1. The proposed amendment will provide relief from the effect of certain anomalies which may arise when carry forward foreign losses of pre 1990-91 years of income, relating to a particular class of income from a foreign source, are converted into losses relating to the new classes of income that apply for the 1990-91 and subsequent years of income.

20.2. Broadly, subject to certain conditions, the amendment will allow a taxpayer to elect to reclassify foreign losses for pre 1990-91 years of income as belonging to the class of income which they would have belonged to if they had been incurred during the 1990-91 year of income.

20.3. Amendments of a technical nature are also being made to correct certain references in the provisions relating to the carry forward of losses.

Background to the legislation

Treatment of foreign losses - pre 1990-91

20.4. Former section 160AFD of the Income Tax Assessment Act 1936 (ITAA) had the effect that a foreign loss incurred by a taxpayer in a year of income, in respect of a class of income from a foreign source, could only be used to reduce future income from the same class of income from the same source.

20.5. Before 1990-91, a taxpayer could have had two foreign sources in relation to each foreign country (subsection 160AFD(7) of former section 160AFD). These were:

•

all the permanent establishments in that country through which the taxpayer carried on business in that country;

•

all other business, commercial and investment activity carried on by the taxpayer in that country.

20.6. From each of these foreign sources, a taxpayer could derive a maximum of three classes of income, i.e., interest income, offshore banking income and all other income.

Treatment of losses - 1990-91 and subsequent years

20.7. With effect from the 1990-91 income year, foreign losses are no longer quarantined on a per-country basis. The foreign losses are quarantined only on a class of income basis. The new classes of income used for this purpose are:

•

interest income;

•

offshore banking income;

•

modified passive income; and

•

all other income.

Conversion of pre 1990-91 losses into losses relating to the new classes

20.8. As the pre 1990-91 classes of losses were different from the new classes of losses, it was necessary to provide rules for the conversion of the pre 1990-91 losses of the old classes into the new classes of losses.

20.9. The following table shows how this conversion is effected (Section 53 of the Taxation Laws Amendment (Foreign Income) Act 1991).

20.10. The conversion of pre 1990-91 losses into losses of the new classes, gives rise to certain anomalies. For instance, a loss for a pre 1990-91 year of income relating to a particular source of income may be converted into a particular class of loss for the 1990-91 year of income even though that loss would have been classified as belonging to a different class of foreign income if it had arisen during the 1990-91 year of income. The loss for the pre 1990-91 year of income may, therefore, not be able to be offset against income derived during the 1990-91 year of income from the same source.

Example

20.11. A professional sportsperson may have incurred a loss in the United States in the 1989-90 year of income. That loss would have fallen into the "other income" class of losses in that year. For the 1990-91 year of income, that loss would be converted into the "modified passive income" class of loss as it relates to a business activity carried on in the US other than through a permanent establishment.

20.12. However, if the taxpayer derives assessable income as a professional sportsperson in the US during the 1990-91 year of income, that income will not belong to the modified passive class of income (as defined in section 160AEA of the ITAA for the purposes of section 160AFD) but will belong to the "other income" class of income. Consequently, the pre 1990-91 foreign loss cannot reduce the 1990-91 foreign income of the taxpayer relating to his or her profession.

Explanation of the proposed amendment

20.13. Where a taxpayer elects that proposed section 88 will apply, a loss for pre 1990-91 years of income relating to a particular class of foreign income, which satisfies certain conditions, will be reclassified as belonging to the class of income to which it would have belonged if it had been incurred during the 1990-91 year of income.

20.14. It should be noted that these conditions are only to be tested after the application of the transitional provision for new section 160AFD (section 53 of the Taxation Laws Amendment (Foreign Income) Act 1991). This means that deductions relating to amounts that would have been exempt if sections 23AH and 23AJ had always applied are to be ignored when calculating the pre 1990-91 loss attributable to assessable foreign income derived from a particular foreign source. [Paragraph 88(1)(d)]

20.15. A loss for a pre 1990-91 year of income which satisfies the following conditions will be reclassified as belonging to the class of income that it would have belonged to if it had been incurred during the 1990-91 year of income.

20.16. The taxpayer must elect that proposed section 88 is to apply [paragraph 88(1)(e)] . This election is to be made within 6 months of the commencement of the section (i.e., the day the Act receives Royal Assent) or within such further period as the Commissioner allows. [Subclause 88(2)]

•

The taxpayer must have incurred an overall foreign loss (as defined in subsection 160AFD(7)) in respect of a particular class of assessable foreign income in a pre 1990-91 year of income (paragraph 88(1)(a)).

•

The whole or a part of the loss must be attributable to assessable foreign income derived from a particular foreign source (paragraph 88(1)(b)). "Foreign source" is defined in subclause 88(3) to mean any business, commercial or investment activity carried on by the taxpayer in a foreign country.

•

The loss would have been classified as belonging to a different class of income if it had been incurred in relation to the same source of foreign income during the 1990-91 year of income (paragraph 88(1)(c)).

•

The loss would have been capable of offseting foreign income of the same class. This ensures that a taxpayer cannot carry forward a loss that could not otherwise have been carried forward to the 1990-91 income year under section 160AFD.

Commencement date

20.17. The amendment will apply with effect from the 1990-91 income year. Its application from 1990-91 will benefit taxpayers.

Clauses involved in the proposed amendments

Clause 88 : will provide transitional rules for section 160AFD which, subject to certain conditions, will enable a taxpayer to elect to reclassify certain foreign losses for pre 1990-91 years of income as belonging to the class of income which they would have belonged to if they had been incurred during the 1990-91 year of income.

Technical Amendments

The Bill will also make certain technical corrections to the provisions of the Taxation Laws Amendment (Foreign Income) Act 1990 that deal with the carry forward of pre 1990-91 losses. These amendments are contained in Part 3A of the Bill.

Clauses involved in the proposed amendments

Clause 114 : facilitates reference to the Taxation Laws Amendment (Foreign Income) Act 1990.

Clause 115 : will effect the technical correction by replacing the erroneous references in subparagraphs 53(2)(b)(ii) and (iii) of the Taxation Laws Amendment (Foreign Income) Act 1990 with references to "modified passive" income.

Clause 116 : provides that this amendment will apply to assessments in respect of income of the 1990-91 and subsequent years of income.

Chapter 21 Change of residence of a CFC from an unlisted country to Australia

[Clause: 80, 85]

Overview

Provides relief from the double taxation of profits that can occur when an Australian-controlled foreign company (CFC) changes its residence from an unlisted country to Australia. The relief will be granted by providing a tax exemption for distributions which represent income of the company that has previously been attributed to the company.

Summary of proposed amendments

21.1. The amendment relates to a CFC that has changed its residence from an unlisted country to Australia. A taxpayer may receive distributions of profits from the company after the change of residence to Australia. An unintended effect of the existing law is that double taxation may occur as a result of the change of residence. The proposed amendment ensures that the taxpayer will be exempt from tax on those distributions to the extent that the distributions represent income of the company that has been previously attributed to the taxpayer.

Background to the legislation

The current effects of the accruals tax measures

21.2. Dividends paid to a taxpayer out of income derived by a CFC that has been attributed to that taxpayer are exempt from tax under section 23AI of the Act. This avoids double taxation under the accruals tax measures. An anomaly has arisen, however, in the tax treatment of dividends paid after the CFC has changed residence to Australia. The current law is explained below.

21.3. To claim an exemption under section 23AI, the taxpayer is required to maintain an 'attribution account' in relation to the CFC which shows:

•

the amount of the income attributed to the taxpayer (recorded as an 'attribution credit'); and

•

amounts distributed to the taxpayer, eg, a dividend paid to the taxpayer by the CFC (recorded as an 'attribution debit').

21.4. Broadly, attribution credits arise in relation to a CFC if an amount is included in the assessable income of an Australian attributable taxpayer because:

•

an amount of the CFC's income is attributed to the taxpayer (see section 456); or

•

the CFC has both:

-

ceased to be a resident of an unlisted country; and

-

become a resident of a listed country or Australia (see section 457); or

•

an unlisted country CFC paid a non-portfolio dividend to a listed country CFC (see section 458).

21.5. The amount of the dividend which may be exempted from tax under section 23AI cannot exceed the 'attribution surplus' in the account. The attribution surplus is the amount by which attribution credits exceed attribution debits.

21.6. Currently, there is a requirement that the company (known as an 'attribution account entity'), which makes the payment to the Australian taxpayer wishing to claim the exemption, be a non-resident company. If a CFC changes residence to Australia, it ceases to be a non-resident company and therefore ceases to be an 'attribution account entity'. Thus, when a CFC changes residence to Australia, the Australian attributable taxpayer in relation to that CFC cannot take advantage of the unused attribution credits.

Removing the unintended inequity

21.7. The amendment will provide that distributions made to a resident taxpayer by a CFC after it has become a resident company will also qualify for the exemption under section 23AI of the Principal Act. The distributions to a taxpayer will be exempt from tax up to the amount of the surplus in the attribution account for the CFC at the time it changes residence.

Explanation of the proposed amendments

21.8. The amendment will ensure that a taxpayer can obtain the benefit of the section 23AI tax exemption even after the CFC has changed its residence to Australia.

Intended purpose of attribution surplus

21.9. When the income of a CFC is attributed to a resident taxpayer, an attribution credit arises in the attribution account kept by the taxpayer for the CFC. The balance in this account is referred to as the attribution surplus. It shows the extent to which distributions made by the CFC to the taxpayer will be exempt from tax.

Effect of change of residence on an attribution account

21.10. When a CFC changes residence from an unlisted country to Australia, its distributable profits are attributed to attributable taxpayers of the CFC. This amount is limited to the profits which are not the exempting receipts or have not previously been attributed to a resident taxpayer (section 457). An attribution credit arises for the amount so attributed. The CFC may already have an attribution surplus, ie, unused attribution credits, in its attribution account which arose prior to its change of residence (under section 456 of the Act).

21.11. After a change of residence to Australia, the unused attribution surplus cannot be utilised because the foreign company, by becoming a resident company, ceases to be an 'attribution account entity'.

Providing exemption from tax for distributions made after the change of residence

21.12. Currently, a distribution made by a CFC is exempt from tax under section 23AI only if an attribution debit arises for the CFC when the distribution is made. However, an attribution debit can arise for a company only if it is a non-resident company.

21.13. Consequently, if a CFC becomes a resident company and then distributes its profits, an attribution debit cannot arise for the company because it is not an 'attribution account entity'. The amount distributed to a taxpayer will therefore not be exempt from tax even if the distribution is out of income previously attributed to the taxpayer.

21.14. The amendment deems a company which has changed its residence from an unlisted country to Australia to be an attribution account entity. Accordingly an attribution debit can arise for the company when it makes a distribution.

21.15. The result is that a taxpayer is then exempt from tax on the distribution to the extent that it does not exceed the attribution surplus in the attribution account maintained by the taxpayer for the company. The company is deemed to be an attribution account entity only for the purpose of granting this exemption.

Commencement date

21.16. The amendment applies to companies that change their residence to Australia on or after 1 July 1989. Its retrospective operation will provide relief to taxpayers.

Clauses involved in the proposed amendments

Clause 80: inserts a new subsection in section 363 of the Principal Act which provides for this change.

Subclause 85(18): provides that the amendments will take effect in relation to changes of residence that occur on or after 1 July 1989.

Chapter 22 No access to underlying foreign tax credits when a CFC changes its residence from a listed to an unlisted country

[Clause: 82,85]

Overview

Prevents taxpayers from gaining an unintended advantage by changing the residence of a company from a listed country to an unlisted country and claiming foreign tax credits on dividends paid out of pre 1990-91 profits. The amendment will deny foreign tax credits in those circumstances.

Summary of proposed amendments

22.1. The proposed amendment applies to a CFC that changes its residence from a listed to an unlisted country. It will deny a resident company access to foreign tax credits on non-portfolio dividends paid out of the CFC's accumulated profits of accounting periods ending before 1 July 1990.

22.2. Access to the foreign tax credits will be denied by increasing the amount of the dividends that are treated as paid from exempting profits.

22.3. As non-portfolio dividends received by an Australian company, which are paid out of exempting profits, are exempt from tax, there is no credit for foreign tax paid in relation to those dividends.

Background to the legislation

What is the existing law?

Non-portfolio dividends paid by a listed country CFC to a resident company

Section 23 AJ amounts

22.4. Beginning from the 1990-91 income year, a non-portfolio dividend paid by a CFC that is a resident of a listed country to an Australian resident company is exempt from Australian tax (section 23AJ).

22.5. This is because:

•

foreign underlying taxes on the profits from which a non-portfolio dividend is paid; and

•

foreign direct (withholding) taxes on the dividend,

have been paid to the relevant foreign country at a rate generally comparable to the Australian rate of tax.

22.6. Foreign tax credits (FTCs) are not available on non-portfolio dividends paid by listed country companies to a resident company where those dividends are exempt from tax under section 23AJ.

Section 23AI amounts

22.7. A non-portfolio dividend paid from income previously attributed to a resident company under the accruals tax measures is exempt from tax (section 23AI).

22.8. Upon payment of the dividend FTCs are available for any additional foreign tax paid on the dividend such as withholding tax (s160AFCD).

Non-portfolio dividends paid by an unlisted country CFC to a resident company

Section 23AJ amounts

22.9. A non-portfolio dividend that is treated as paid by an unlisted country CFC out of exempting profits to a resident company is exempt from Australian tax (section 23AJ).

22.10. Income categorised as exempting receipts must be derived by the CFC in an accounting period of the company ending on or after 1 July 1990.

22.11. No foreign tax credit is available on dividends exempt from tax under section 23AJ.

Section 23AI amounts

22.12. The rules which apply to a listed country CFC also apply to unlisted country CFCs.

Other income

22.13. A non-portfolio dividend paid from other income of the unlisted country company (ie, income other than exempting profits or income previously attributed to the taxpayer) is liable to tax (section 44). A credit is available for any foreign withholding and underlying taxes in relation to the dividend (section 160AFC).

Possibility for an undue tax advantage under the existing law

22.14. In certain situations, a resident taxpayer can reduce Australian tax liability by taking undue advantage of the access to foreign tax credits. In effect, this is achieved by converting a non-portfolio dividend from a listed country company that would have been exempt from tax (section 23AJ), to a dividend paid from 'other income' of an unlisted country CFC.

22.15. This may occur where a listed country CFC has:

•

profits accumulated prior to the accounting period ending on or after 1 July 1990,

•

paid listed country taxes out of those profits at a level sufficient to generate excess tax credits in Australia; and

•

changed its residence from a listed to an unlisted country.

22.16. Clause 82 of the bill will deny FTCs in the above situation. This will be achieved by treating those profits as exempting receipts.

Explanation of the proposed amendments

Removing the possibility of an undue tax advantage

22.17. The proposed amendment is necessary to prevent a resident company from obtaining an unintended tax advantage.

22.18. Under the current law the advantage occurs through access to excess FTCs for non-portfolio dividends. The FTCs are available because the CFC changes its residence from a listed to an unlisted country before the dividend is paid.

22.19. The proposed amendment will only affect resident companies to which non-portfolio dividends are paid by unlisted country CFCs which have changed their residence from a listed country. These dividends may be paid directly or through other foreign companies.

22.20. Currently, subsection 378(1) applies to all CFCs resident in an unlisted country.

22.21. After the amendment, subsection 378(1) will apply to CFCs resident in an unlisted country who have not changed their residence from a listed country.

22.22. Proposed subsection 378(3) will apply to CFCs that have changed their residence from a listed to an unlisted country.

Exempting profits where no change of residence

22.23. The exempting profits of an unlisted country CFC which has not changed its residence from a listed country are determined by proposed subsection 378(1) [Clause 82] . In this case, exempting profits arise only for the accounting period of the CFC that ends on or after 1 July 1990, and for subsequent accounting periods.

Exempting profits where change of residence occurs

22.24. Exempting profits of a CFC that has changed its residence from a listed to an unlisted country are determined by proposed subsection 378(3). [Clause 82]

22.25. The exempting profits of an unlisted country CFC that has changed its residence will be determined in a similar manner to a CFC that has not changed its residence [proposed paragraph 378(3)(a)] . However, the distributable profits at the time of the change of residence will also be treated as exempting profits of the CFC. [Proposed paragraph 378(3)(b)]

22.26. When the distributable profits represent attributed income they will not be treated as exempting profits. [Proposed subparagraph 378(3)(b)(iii)]

Exempting receipts to be counted only once as exempting profits

22.27. Exempting receipts that are treated as exempting profits under proposed subparagraph 378(3)(a) will not be included under proposed subparagraph 378(3)(b)(ii). This means you do not count any exempting receipts as exempting profits twice. [Clause 82, proposed subparagraph 378(3)(b)(ii)]

Commencement date

22.28. Proposed subsection 378(3) applies where the change of residence occurred on or after 1 July 1989 and the dividend was paid after 28 June 1991. [Clause 82]

Clauses involved in the proposed amendments

Clause 82 : amends section 378 of the Act by inserting proposed subsection 378(3).

Subclause 85(19) : provides the proposed amendment will apply where a change of residence occurs on or after 1 July 1989 and the dividend is paid after 28 June 1991.

Chapter 23 Amendments relating to Garnishee Notices

[Clause: 119, 120]

Overview

Provides that, in relation to building society shares, only withdrawable shares (and not permanent or fixed shares) in the capital of a building society can be garnisheed from such a society.

Summary of proposed amendments

23.1. Part 10 of the Bill will amend various taxation laws so that, in relation to shares in building societies, the Commissioner may only garnishee those shares known as withdrawable shares. This will prevent the Commissioner from garnisheeing permanent or fixed shares in building societies.

Background to the legislation

What is garnisheeing?

23.2. The garnishee provisions in the tax law allow the Commissioner to collect outstanding taxes from persons who owe or may owe money to the taxpayer concerned (see, for example, section 218 of the Income Tax Assessment Act 1936). In other words, the Commissioner may collect taxes owed by a taxpayer from funds owed to that taxpayer by another person. This is done by the Commissioner giving notice in writing to the person who owes or may owe money to the taxpayer.

Why should only withdrawable shares be garnisheed?

23.3. Building societies generally have two classes of shares:

•

shares of a class called permanent or fixed shares; and

•

withdrawable shares.

23.4. Permanent or fixed shares in a building society are similar to shares in other companies in that the capital cannot be withdrawn by the member and is available only on redemption or cancellation. These shares are similar in nature to company shares but are not listed for quotation on a Stock Exchange. Withdrawable shares, on the other hand, are akin to deposits in savings bank accounts and are generally withdrawable under the rules of a society.

23.5. Prior to 1984, the Commissioner could not garnishee shares held in the capital of a building society, including withdrawable shares. In 1984, the tax laws were amended to allow the garnishee of shares in a building society except those listed for quotation on a Stock Exchange. By way of comparison, money held in a savings bank account can be garnisheed while shares in a company cannot. This amendment was intended to place withdrawable shares in building societies and money held in savings bank accounts in the same position in relation to the garnishee rules.

23.6. Permanent or fixed shares in a building society and company shares are similar in nature. Accordingly, they should be in a similar position to company shares in relation to the garnishee rules. The 1984 amendments included permanent or fixed shares among those building society shares that could be garnisheed by the Commissioner. This consequence was not the intention of those amendments.

23.7. The Bill will, therefore, amend the garnishee provisions in most tax laws to provide that only withdrawable shares in building societies can be garnisheed by the Commissioner.

Explanation of the proposed amendments

23.8. The garnishee rules in the tax law which relate to shares in building societies will be amended to provide that withdrawable shares only can be garnisheed from a building society. This means that permanent or fixed shares in a building society will not be subject to garnishee.

23.9. Withdrawable shares are those shares in the capital of a building society where the share is withdrawable by the person who owns it. In this way "withdrawable shares" has its ordinary meaning regardless of any special meaning given to that term in State or Territory legislation relating to building societies.

23.10. The following provisions are affected by this amendment:

•

subsection 99(9) of the Fringe Benefits Tax Assessment Act 1986;

•

subsection 218(6) of the Income Tax Assessment Act 1936;

•

subsection 36(4) of the Pay-roll Tax (Territories) Assessment Act 1971;

•

subsection 91(9) of the Petroleum Resource Rent Tax Assessment Act 1987;

•

subsection 38(6) of the Sales Tax Assessment Act (No.1) 1930;

•

subsection 81(9) of the Training Guarantee (Administration) Act 1990; and

•

subsection 54(3A) of the Wool Tax (Administration) Act 1964.

23.11. The amendment of these provisions will apply to garnishee notices issued after the commencement of clause 120 of the Bill (see below).

Commencement date

23.12. The amendments made by Part 10 will commence from the date that the Bill receives the Royal Assent.

Clauses involved in the proposed amendments

Clause 119 : changes the garnishee rules relating to shares in building societies.

Clause 120 : provides for the application of the amendments made by clause 119.

Chapter 24 Deferral of initial payment of company income tax and consequences for dividend imputation

[Clause: 121, 122, 123, 124, 125, 126, 127, 128, 129]

Overview

Defers the time for the initial payment of income tax for the 1990-91 income year by companies, superannuation funds, approved deposit funds and pooled superannuation trusts (all referred to as companies) from the 28th day of the month following balance date to the 15th day of the third month following balance date.

Summary of Proposed Changes

24.1. Part 11 of the Bill will formally defer the time for the initial payment of income tax (IP) for the 1990-91 income year by companies, superannuation funds, approved deposit funds and pooled superannuation trusts (all referred to as companies).

24.2. The affected companies are those which have a tax liability of $1,000 or more but less than $400,000 and which pay their tax in two instalments.

24.3. The date for the IP was deferred from the 28th day of the month following balance date to the 15th day of the third month following balance date.

Abbreviations Used in this Chapter

IP = initial payment of company income tax.

FDT = franking deficit tax.

Background to the Legislation

Collection of Tax

24.4. In the 1989-90 Budget, new arrangements for the collection of company tax were announced with the purpose of reducing the timing advantage available to companies compared to other businesses not conducted as companies.

24.5. Companies are required to pay their income tax under one of the following methods, depending on their level of tax liability:

Companies with a tax liability of $20,000 or more

24.6. Companies with a notional tax liability of $20,000 or more (and which do not estimate their liability on income of the relevant year to be less than $20,000) are required to make two payments of tax each year. For a company balancing in June, the IP is due on 28 July following balance date (section 221AP of the Income Tax Assessment Act 1936 (the Act)). The IP is:

•

85% of the notional tax (i.e. the tax payable at the current year rate on the taxable income of the preceding income year (section 221AD));

or

•

85% of the tax which the company estimates will be payable on its taxable income for the income year (subsection 221AQ(1)).

24.7. The balance of the company's total actual tax liability is due on 15 March following the balance date (section 221AZD). If the IP made by a company exceeds the total actual tax liability, the company will receive a refund from the Commissioner unless a debt exists under another taxation law (section 221AZF).

Companies with a tax liability of $1,000 or more but less than $20,000

24.8. Companies with a notional tax liability of $1,000 or more but less than $20,000, or a notional tax of $20,000 or more but which estimate their tax liability for the income year to be in the range $1,000 to $20,000, have two payment options: They may pay in the same way as companies whose tax liability is $20,000 or more (see above notes). Alternatively, they may elect to make a single payment of the total actual tax liability for the income year on 15 December following balance date (section 221AU).

Companies with a tax liability of less than $1,000

24.9. Companies with a tax liability of less than $1,000 are required to make a single payment of their total actual liability for the income year on 15 March following balance date (section 221AT). Examples of when companies and funds fall into this category:

•

no notional tax (such as new companies and those previously non-taxable); or

•

the notional tax is less than $1,000; or

•

the total actual liability for the year of income is estimated to be less than $1,000.

Companies with substituted accounting periods

24.10. As explained above, the possible payment dates are 28 July, 15 December and 15 March for companies whose balance date is 30 June. For companies with substituted accounting periods ending on or before 31 May in lieu of the following 30 June, the corresponding payment dates are the 28th day of the first month and the 15th day of the sixth and ninth months following balance date (subject to 28 January being the earliest required payment date). For late balancing companies the corresponding payment dates are within the same timeframe as for early balancing companies, except that no final payment is due later than 15 June in the year following the year of income (section 221AN).

Transitional arrangements for payments for the 1989-90 income year

24.11. To ease the impact of the new measure in the 1990-91 year (for income earned in the 1989-90 income year), a one year transitional arrangement was introduced. This allowed companies with a notional or estimated liability which was $20,000 or more and less than $400,000 to also elect to pay their full liability in the sixth month after balance date (paragraph 221AU(1)(a)). The vast majority of companies eligible to benefit from this transitional arrangement took up the option, resulting in the payment of tax liabilities in December 1990.

Why change the law?

24.12. In the current economic situation, it could be onerous for companies with a notional or estimated tax liability of $1,000 or more and less than $400,000 to make the 85% IP for the 1990-91 income year in the month following balance date. This is because, in most cases, the IP would have been required on 28 July 1991 only seven months after the payment of full liability in respect of the 1989-90 income year (see above notes on the transitional arrangement for that year). Extending the due date for the IP of tax for these companies will ease this burden.

Franking account credits and debits for initial payment of tax

24.13. Credits in excess of debits to a company's franking account enable franked (tax paid) dividends to be paid to shareholders.

24.14. When a company makes an IP, a franking credit for the adjusted amount of that IP arises on the day it makes its IP (section 160APMA).

24.15. When a company tax assessment is made, a franking credit arises to the company for the adjusted amount of the assessment (section 160APNA). To prevent a double credit for the IP (i.e. when it is paid and on assessment), a franking debit arises where the amount of an IP is applied by a company against tax assessed or refunded (section 160APYA).

24.16. Special credits and debits arise to life assurance companies to account for the concessional tax treatment they receive under Division 8 of Part III of the Act (sections 160APVA and 160AQCD).

The Existing Law for Franking Deficit Tax (FDT)

24.17. A company which pays franked dividends in excess of its franking credits in a given year may be liable to pay an amount of FDT. This is essentially a payment required to make good the amount imputed to shareholders which exceeds the amount available to be imputed. The amount of FDT to be paid is calculated based on the amount of the franking deficit and the company tax rate (subsection 160AQJ(1)).

24.18. FDT must be paid on the last day of the month following balance date. For companies balancing in June, payment of FDT is due on 31 July. This date is three days later than the due date for the IP (see above).

Current penalties for excessive franking deficit

24.19. Where a company's franking deficit exceeds its franking credits for a year by more than 10%, and the franked amount of a dividend paid by the company was more than the required franking amount, the company is liable to pay a penalty. This penalty is by way of additional tax and is equal to 30% of the FDT payable (section 160ARX).

The IP reduces the FDT payable under the current law

24.20. The payment of FDT may be reduced or made unnecessary by the IP (if any) payable by a company where that IP is based on an estimate made by the company. Accordingly, where the FDT due does not exceed the IP, no FDT is payable by the company. Where the FDT due exceeds the IP, the company need only pay the excess (subsection 160AQJ(2)).

Current special rules for life assurance companies

24.21. The reduced amount of FDT required to be paid by life assurance companies as a result of the IP differs from that payable by other companies. The FDT amount payable by life assurance companies is calculated on 80% of the fund component of the company (subsection 160AQJ(2)). The fund component is that part of the taxable income that is subject to concessional tax treatment under Division 8 Part III of the Act (Life Assurance Companies).

Current franking account debits for reduced FDT

24.22 If the FDT due does not exceed the IP, a franking debit equal to the adjusted amount of the FDT arises (paragraph 160APYC(a)). If the FDT due exceeds the IP, a franking debit equal to the adjusted amount of the IP arises (paragraph 160APYC(b)).

Deferral arrangements will affect FDT payments

24.23. The due date for payment of FDT will not change as a result of Part 11 of the Bill. However, payments of FDT will affect the amount of the IP otherwise due.

Explanation of the Amendments

Seven Week Deferral of IP for 1990-91 Income Year

24.24. On 13 June 1991 the Government announced that it would defer the time for certain companies to pay their IP.

24.25. The companies affected by this deferral are those companies:

•

whose 1990-91 income year ended after 30 April 1991;

•

whose notional or estimated tax liability for the 1990-91 income year was $1,000 or more but less than $400,000; and

•

who will pay their tax in two instalments (an IP and a final payment).

24.26. The Bill will modify the operation of the Income Tax Assessment Act 1936 (the Act) by extending the time for these companies to pay the IP from the 28th day after balance date to the 15th day of the third month after balance date. For companies which balanced on 30 June 1991, this meant the due date for the IP was deferred from 28 July to 15 September 1991. [Clause 122]

FDT Reduces the IP

24.27. As mentioned above, any FDT due by a company was still due on the last day of the month following balance date. For companies balancing in June 1991, any payment of FDT was required on 31 July 1991.

24.28. Therefore, under the deferral arrangements, FDT was paid before the IP, rather than after the IP as would normally be the case. Accordingly, the Bill provides for the IP for companies estimating their tax payable to be reduced or made unnecessary by any prior payment of FDT. This ensures that the same total of FDT and IP is paid under both the existing arrangements and the deferral arrangements.

* Amended Page*

24.29. This reduction of the IP does not in any way affect the calculation of FDT due or franking credits and debits to be made in the franking account.

When did the FDT reduce the IP?

24.30. The IP was reduced or made unnecessary where a company:

•

made an estimate of its tax due for the purposes of determining the amount of its IP; and

•

was liable, under the deferral arrangements, to make an IP not later than the 15th day of the third month following balance date; and

•

paid FDT before giving a notice estimating its taxable income for 1990-91. [Subclause 123(1)]

24.31. Where the IP due did not exceed the FDT paid, a company was not required to make the IP. [Subclause 123(2)]

Example 1

24.32. Consider a company which balanced in June 1991 and paid $30,000 FDT on 31 July 1991. If the company's IP due on 28 July was $25,000, the FDT liability $30,000 would have been reduced to $5,000 under the existing rules. However, under the deferral arrangements, as $30,000 FDT has already been paid on 31 July, no IP was due on 15 September.

What if the IP was greater than the FDT?

24.33. Where the IP due exceeded the FDT paid, a company was only required to pay the difference between the IP and the FDT. [Subclause 123(3)]

Example 2

24.34. Assuming $30,000 FDT was paid on 31 July 1991 as in example 1 and the company's IP due was $50,000 on 15 September 1991. Under the deferral arrangements, the IP was offset by the FDT paid and reduced to $20,000. Under the existing arrangements, the company would have paid $50,000 in total (i.e. an IP on 28 July of $50,000, and no FDT on 31 July because of the existing offset rules).

New special offset arrangements apply for life assurance companies

24.35. Special provisions are required to ensure that life assurance companies pay the same total amount of FDT and IP under the deferral arrangements as they would have under the existing arrangements.

24.36. Where the amount of the IP due does not exceed the FDT paid plus 80% of the fund component (defined as the eligible fund component in subclause 123(6)), the life assurance company is required to pay an amount equal to the eligible fund component on the due date for the IP. [Subclause 123(4)]

24.37. Where the amount of the IP due exceeds the FDT paid plus the fund component, the life assurance company is required to pay the difference between the IP due and the FDT paid. [Subclause 123(5)]

A reduced amount of IP does not affect the calculation of certain thresholds

24.38. The amount of the IP is used to calculate the thresholds which determine whether a company (balancing in June) can:

•

pay its income tax in one payment on 15 March (i.e. where its tax liability is less than $1,000) (section 221AU); or

•

pay its tax :

-

in two payments, an IP on 28 July and a final payment on 15 March (i.e. where its tax liability is between $1,000 and $20,000); or

-

elect to make one payment on 15 December (section 221AT).

24.39. Any reduction or elimination of an IP by a prior payment of FDT as described above does not apply for the purposes of calculating these thresholds. [Clause 124]

Credits where the IP is Reduced by FDT

24.40. Under the existing rules, a company is given credit against any tax assessed for the full amount of an IP made by the company.

24.41. Where the IP made by a company was reduced, either partly or fully, under the deferral arrangements by a payment of FDT, the company will be given credit against tax assessed as though no reduction has been made. This will ensure that companies are in no way disadvantaged by the deferral arrangements. [Clause 125]

24.42. Where an IP was made unnecessary by a prior payment of FDT, the credit arose when the company notified the Commissioner of its estimated income tax liability (described as a "paragraph 221AQ(1)(a) notice" in the Bill). [Subclause 125(1)]

24.43 . Where an IP was reduced by a prior payment of FDT, the credit arose when the reduced payment was made. [Subclause 125(2)]

Franking Credits and Debits where FDT is Paid

24.44. As explained in the Background section above, payments of IP and FDT give rise to credits and debits to a company's franking account. Franking account credits enable franked dividends to be paid to shareholders.

The IP is notionally increased for franking account and FDT purposes

24.45. The deferral arrangements are not intended to affect the amount of the franking account credits and debits that arise under sections 160APMA, 160APVA, 160APYA, 160APYC and 160AQCD. They are also not intended to affect the liability for FDT and consequential offset allowable under section 160AQK.

24.46. To ensure this result, the Bill provides that, for these purposes, the amount of the IP will be taken to be the amount that would have been paid if the IP had been made before any FDT was due. For FDT purposes, this notional increase has a consequential affect on the FDT liability. [Clauses 126 and 127]

Examples

24.47. In the examples used above and assuming the deferred IP was made on 15 September, the franking account was credited on that day for the adjusted amounts for $25,000 (Example 1) and $50,000 (Example 2). The debits on that day were the adjusted amounts for $25,000 (Example 1) and $30,000 (Example 2). These are the franking account credits and debits that would have been made under the existing arrangements when the IP was paid and the FDT was offset.

The notional increase in the IP does not affect liability for FDT

24.48. This notional increase in the IP will ensure the FDT and franking account credits and debits are not affected by the deferral. Accordingly, as explained above, a notional increase in the IP for franking account purposes reduced the FDT otherwise payable. [Clause 127]

24.49. A reduction in FDT under clause 127 will reduce the franking additional tax payable (section 160ARX of the Act). If the Commissioner had made an assessment as to additional tax payable (section 160ARL of the Act) before the reduction, a refund of the excess franking additional tax can be requested under section 160ARR of the Act.

24.50. The Bill also prevents a company from gaining a refund for the reduction in FDT [Clause 128] . If a company was able to gain a refund in these circumstances, it would pay less tax than under the existing arrangements.

24.51. For the same reason, the notional increase in the IP and consequent reduction in FDT will not give rise to an extra franking account credit under section 160APS for a reduced offset under sections 160AQK and 160AQKA. [Clause 129]

Changed timing for franking credits and debits

24.52. Franking credits and debits that arose because of an IP or payment of FDT arose when the company made its IP. Where, because of a prior payment of FDT, a company was not required to make an IP, the credits and debits arose when the company gave the Commissioner its estimate of tax due (i.e. its paragraph 221AQ(1)(a) notice). [Subclause 126(1)]

Commencement date

24.53. The amendments made by Part 11 will commence from the date that the Bill receives the Royal Assent. However, the amendments retrospectively affect payments of company tax for the 1990-91 income year. This retrospectivity does not disadvantage companies and is concessional in nature.

Clauses involved in the proposed amendments

Clause 121 : provides for the interpretation of certain terms used in Part 11 of the Bill.

Clause 122 : provides for the deferral of the IP for affected companies to the 15th day of the third month following balance date.

Clause 123 : provides for the amount of the IP to be made by a company to be reduced by the amount of any prior payment of FDT.

Clause 124 : provides that any reduction of an IP by clause 123 does not affect the calculation of the thresholds that determine how a company will pay its income tax liability.

Clause 125 : provides that, where an IP is reduced under clause 123, the credit to be allowed to the company against tax assessed is to be equal to the amount of the IP as though no reduction had been made.

Clause 126 : provides that, for franking credit and debit purposes, the amount of the IP is to be equal to the amount that would have been paid if the IP had been made before the payment of FDT (i.e. as if the deferral had not occurred).

Clause 127 : provides that, for franking account and FDT purposes, the FDT due by a company is to be calculated on the assumption that the amount of the IP is equal to the amount that would have been paid if the IP had been made before the payment of FDT (i.e. as if the deferral had not occurred).

Clause 128 : prevents a refund of FDT as a result of the notional increase in the IP for the purposes of clause 127.

Clause 129 : prevents an additional franking account credit being given as a result of the notional increase in the IP for the purposes of clause 127.

Chapter 25 The Pay-As-You-Earn (PAYE) Provisions

[Clause: 3, 4, 67, 68, 69, 87, 98, 99 Schedule 3]

Overview

Restructures the definitions and corrects a technical inconsistency in the pay-as-you-earn (PAYE) provisions.

Summary of proposed amendments

25.1. The amendments in Part 4 of the Bill will :

•

restructure the definitions of "employee" and "salary or wages" in subsection 221A(1) of the Principal Act;

•

update definitions referring to arrangements between the Governor-General and the States; and

•

correct a technical inconsistency between the definition of "employer" in subsection 221A(1) and the penalty provisions contained in section 221EAA and subsection 221F(12) of the Principal Act, to ensure that the Commonwealth is not subject to the PAYE penalties.

Background to the legislation

Restructuring definitions

25.2. The definitions of "employee" and "salary or wages" in subsection 221A(1) will be restructured by the amendments proposed. These definitions have been subject to judicial criticism because of the circularity contained in them.

25.3. "Employee" is currently defined as a person entitled to receive salary or wages and includes specific references to members of the Commonwealth Parliament, persons employed by the Commonwealth or Commonwealth authority and members of the Defence Forces.

25.4. The term "salary or wages" is defined as salary, wages etc paid to an "employee as such". This definition covers a broader range of employees than the common law definition. The effect is that the two definitions are not only confusing but also rely on each other for meaning. Both their clarity and certainly can be improved.

Updating definitions

25.5. The definitions of "employer" and "employee" currently refer to section 221B. This section empowers the Governor-General to enter into arrangements with the States or State authorities in respect of any obligation imposed by the Principal Act on the States in their capacity as employers.

25.6. This reference is no longer required as it is now clear from case law [ Victoria v Commonwealth (1971) 122 CLR 353 (The Payroll Tax case)], that the Commonwealth has direct power under the Constitution to apply the PAYE provisions to the States, Territories and their authorities.

Correcting a technical inconsistency in the scope of the exemption from PAYE penalties

25.7. A technical inconsistency currently exists between the definition in subsection 221A(1) of "employer" in relation to the exemption from the imposition of a PAYE penalty, and the penalty provisions contained in section 221EAA and subsection 221F(12).

25.8. The definition of "employer" excludes, in relation to the imposition of a penalty,

•

the Commonwealth,

•

an authority of the Commonwealth,

•

a State, or

•

an authority of a State.

25.9. However, the existing PAYE penalty arrangements and the provisions relating to the Prescribed Payments System which were inserted in the Principal Act in 1984, exclude only the Commonwealth from the imposition of PAYE penalties. This is the intended effect of the penalty provisions and is inconsistent with the definition of "employer".

25.10. The reference to penalties in the definition of "employer" which should have been removed in 1984, will now be deleted to remove this inconsistency.

Explanation of the proposed amendments

Restructuring the definition of "employee" to improve clarity and certainty

25.11. The circularity, mentioned earlier, which is presently contained in the definitions of "employee" and "salary or wages" has led to confusion in the application of the PAYE provisions. The proposed amendment will simplify the definition of "employee" and insert a new definition, that of "eligible person". The definition of "salary or wages" will include a reference to "eligible person as such". This will improve the clarity of the definition of "employee" and resolve the present circularity.

25.12. The restructured definition of "employee" will be "a person who receives, or is entitled to receive, salary or wages". Also, in the definition of "salary or wages" the words "employee as such" will be substituted by the words "eligible person as such".

25.13. The new definition of "eligible person" will restate the position that the PAYE provisions extend to members of an Australian Parliament, persons holding or performing the duties of a statutory office, appointment or position and persons otherwise in the service of the Commonwealth, State or Territory. [Paragraph 67(g)]

25.14. The replacement of the definition of "employee" with "eligible person" will not affect the current extension of the PAYE arrangements. These arrangements currently extend to payments made, and persons who are not "employees as such". These payments and persons are listed in paragraphs (a) to (nb) of the definition of "salary or wages" in subsection 221A(1), and include the following:-

•

payments made under a contract for labour (paragraph (a));

•

payments made by way of remuneration to a director of a company (paragraph (b));

•

pension and annuity payments (paragraph (c));

•

commissions (paragraph (d));

•

compensation payments (paragraph (f));

•

some education and training allowances (paragraphs(g) to (nb))

25.15. The meaning of "director" in paragraph (b), will be expanded to clarify persons who perform the duties of a director. "Company" is defined in subsection 6(1) to include "all bodies and associations corporate and unincorporated". The expanded definition of "director" will clarify that office holders of unincorporated bodies are directors for PAYE purposes. [Paragraph 67(d)]

25.16. The restructure will not disturb the current scope of the PAYE provisions as they apply to these persons and payments.

25.17. A new definition of "Australian Parliament" will be inserted to enable all parliamentarians to be referred to in one term in the new definition of "eligible person", rather than having separate references to Commonwealth, State and Territory members. [Paragraph 67(g)]

Effect of the restructuring of the definition of "employee" on local government councillors

25.18. A local government councillor would be included in the new definition of "eligible person" as being a person who holds or performs the duties of a position under a law of State or a Territory. As a result, allowances received by a local government councillor would fall within the definition of "salary or wages".

25.19. The Government recently reviewed the taxation position of local government councillors. As a result, local government councillors will remain outside the PAYE provisions in respect of remuneration and allowances related to their council duties. A Treasurer Press Release dated 5 September 1991 outlined the current position which is achieved through these amendments.

25.20. To achieve this, a new paragraph (pa) will be inserted in the definition of "salary or wages" in subsection 221A(1) to exclude such payments from the scope of the PAYE arrangements. [Paragraphs 67(e)]

Effect of the restructuring on the definition of "employer"

25.21. The definition of "employer" will be amended to remove any requirement for special arrangements with the States in respect of the application of the PAYE provisions. [Paragraphs 67(a) and (b)]

25.22. As a consequence of the removal of the reference to these arrangements it is necessary for a definition of "government body" to be included in the definition of employer. [Paragraph 67(b)]

25.23. A "government body" is defined in subsection 221A(1) to mean the Commonwealth, State or Territory or their authorities.

Constitutional severability

25.24. Paragraphs 72(iii) and 103(iii) of the Constitution provide that federal judges and members of the Inter-State Commission "shall receive such remuneration as the Parliament may fix".

25.25. In a recent opinion, the Solicitor-General concluded that paragraph 72(iii) does not prevent the Parliament providing for PAYE deductions from salaries of federal judges as part of the non-discriminatory operation of revenue laws as they affect all citizens. This conclusion would also apply to the remuneration received by members of the Inter-State Commission under paragraph 103(iii) of the Constitution.

25.26. This matter has not been considered by the High Court. In the event of the High Court disagreeing with the Solicitor-General, proposed new section 221DA (and proposed new subsection 46(9) of the Child Support (Registration and Collection) Act 1988) will ensure that only the provisions of the law which create obligations to make PAYE deductions (and deductions under the Child Support legislation) will be read down so as not to apply to federal judges and members of the Inter-State Commission. The definitions of "employee", "employer" and "salary or wages" in the PAYE provisions will not be read down. Accordingly, the income tax substantiation and the fringe benefits tax provisions, which rely on those definitions of provisions in the Principal Act, will not be affected. [Clause 69]

25.27. Part 2 of the Bill proposes the necessary amendment to the Child Support (Registration and Collection) Act 1988. [Clause 3 and 4]

Updating definitions which contain references to arrangements between the Governor-General and the States

Authority for Commonwealth/State Taxation Arrangements

25.28. Section 221B allows the Governor-General to enter into arrangements with the States with regard to the States' obligations as employers. These arrangements were entered into in 1942. It has been established by case law that the Commonwealth has constitutional power to apply the PAYE provisions directly to the States, Territories and their authorities. The reference to such arrangements is thus no longer necessary and can be removed.

25.29. The repeal of section 221B will result in a consequential amendment to the definitions of "employer" and "employee" in subsection 221A(1). The reference to the section 221B arrangements will be removed from both definitions. [Paragraphs 67(c), 67(f) and clause 68]

Correcting a technical inconsistency in the scope/exemption from PAYE penalties

25.30. In 1984, section 221EAA and subsection 221F(12) were inserted into the Principal Act to provide a PAYE penalty regime which extended to all employers except the Commonwealth.

25.31. However, this was inconsistent with the existing definition of "employer" which excludes not only the Commonwealth, but also the States and authorities thereof from the imposition of a penalty.

25.32. The "employer" definition therefore requires amendment to remove the reference to penalty which became obsolete as a result of the insertion in 1984 of the new penalty regime. PAYE penalties are provided for in sections 221EAA and subsection 221F(12). [Paragraph 67(b)]

Transitional arrangements

25.33. The amendments to section 221A made by these amendments are to be disregarded in determining the meaning that an expression had before these amendments were made. [Clause 98]

Commencement date

25.34. The amendments will take effect from the date of Royal Assent of the Amending Act. [Subclause 2(1)]

25.35. Other provisions affected by the amendments:

•

Fringe Benefits Tax Assessment Act 1986,

•

Income Tax Rates Act 1986,

•

Income Tax Assessment Act 1936 provisions relating to -

-

substantiation,

-

provisional tax,

-

lump sum payment in arrears, and

-

income of children [Clause 87]

Clauses involved in the proposed amendments

Clause 67 : amends some existing definitions (paragraphs 67(a) to 67(f)) and inserts new definitions (paragraph 67 (g)) in subsection 221A(1) of the Principal Act.

Clause 98 : is transitional and retains the existing meaning of the PAYE definitions until these amendments have effect.

Clause 99 : allows the amendment of assessments under the Principal Act where the assessment was made prior to the commencement of this Amending Act.

Amendments consequential to the proposed amendments

The definitions of "employer", "employee", and "salary or wages" as used in the Principal Act, are relied upon in other taxation laws. The updating of these definitions in the Principal Act will result in consequential amendments to the following Acts, including the Principal Act. [Schedule 3]

Child Support (Registration and Collection) Act 1988

•

The definition of "employer" in subsection 4(1).

•

The definition of "employee" in subsection 4(1).

Fringe Benefits Tax Assessment Act 1986

•

The definition of "current employer" in subsection 136(1).

•

The definition of "current employee" in subsection 136(1).

Income Tax Rates Act 1986

•

The definition of "salary or wages" in subsection 16(1)

Income Tax Assessment Act 1936 (The Principal Act)

•

The definition of "employer" in section 82KT.

•

The definition of "employee" in section 82KT.

•

Subsection 159ZR(3) will be omitted.

Chapter 26 Direct lodgment of appeals and applications for review with the Federal Court and the Administrative Appeals Tribunal (the AAT)

[Clause: 2(10), 2(11), 106, 108-113]

Overview

Introduces new arrangements for taxpayers to lodge appeals against, or applications for review of, objection decisions directly with the Federal Court or the Administrative appeals Tribunal.

Repeals the objection and appeals provisions of various taxation laws administered by the Commissioner of Taxation and includes a set of generic objection and appeal provisions in the Taxation Administration Act.

Summary of proposed amendments

26.1. Under the existing law, if a taxpayer is dissatisfied with the Commissioner's decision on an objection, the taxpayer may lodge with the Commissioner a request to refer the decision to either the AAT or the Federal Court of Australia. This right of review or appeal is provided for in various taxation laws. Each of these taxation laws sets out the mechanisms and conditions for the lodgment of objections, request for review and appeals, and the Commissioner's responsibilities and duties in relation to them.

26.2. This Bill will amend these taxation laws in two ways.

•

Firstly, applications for review and appeals will no longer need to be lodged with the Commissioner for him to refer them to the AAT or the Federal Court. Taxpayers will now lodge applications for review and appeals directly with the AAT or the Federal Court.

•

Secondly, there will be one set of generic provisions for objections, reviews and appeals included in the Taxation Administration Act 1953 (the Principal Act).

Background to the legislation

The current law

26.3. The various taxation laws enable taxpayers to dispute certain decisions made by the Commissioner, e.g. to object against an assessment made by the Commissioner. A taxpayer who is dissatisfied with the decision on the objection may lodge with the Commissioner a request in writing to refer that decision to either the AAT or the Federal Court. Taxpayers must lodge this request with the Commissioner within sixty days after service of the notice of the decision on the objection.

26.4. Taxpayers may also apply for an extension of time in which to lodge the objection, request for review or the appeal.

26.5. When the request for review or the appeal is heard taxpayers cannot rely on any grounds other than those stated in their objection, unless the AAT or the Federal Court orders otherwise. Also, the burden of proving that the assessment is excessive lies upon the taxpayer.

26.6. In relation to requests for review, Part IVB of the Taxation Administration Act modifies the operation of Part IV of the Administrative Appeals Tribunal Act (the AAT Act) in so far as it relates to the review by the AAT of the Commissioner's decision on the objection.

Why change the law?

26.7. A review of the Australian Taxation Office's (ATO) processes for resolving disputes recommended that taxpayers should lodge applications for review and appeals directly to the AAT and the Federal Court. The Government accepted this proposal.

26.8. A number of provisions in various taxation laws must now be amended to remove the requirement that applications for review and appeals should first be lodged with the Commissioner. The Commissioner will cease to have any involvement in the processing of these applications or appeals, or in processing applications for extension of time to lodge these applications or appeals.

26.9. These changes provided an opportunity to bring the objection, review and appeal provisions of the various laws within the one Act -the Principal Act. These amendments use more modern language and drafting techniques.

Explanation of the proposed amendments

Will these amendments change taxpayers' rights?

26.10. The Bill does not substantially change the law. The only significant changes are:

•

Taxpayers need to lodge their requests for review or appeals directly with the AAT or the Federal Court.

•

the provisions concerning the manner in which taxation objections are to be made, the manner in which the Commissioner is to deal with these objections, and about applications for review or appeal to either of the AAT or the Federal Court, will now be found in the Principal Act rather than the particular Act that gave rise to the initial assessment, determination, notice or decision, and

•

Subsection 14ZB(2) of Part IVB of the Principal Act will not be re-enacted. (More information on the effect of this repeal is given under the heading "Consequential Amendments" in relation to the Training Guarantee (Administration) Act 1990).

26.11. Taxpayers will still be given the right to object against an assessment, etc by the Act under which the assessment, etc is made, but Part IVC of the Principal Act will set out the manner in which the objections - made under all of those Acts - is to be made, unchanged from the existing laws. The Commissioner will have the same responsibilities and duties in dealing with objections that he has under the current law.

Part IVC of the Principal Act

26.12. Part IVC of the Principal Act will have 5 Divisions:

Division 1 - Introduction

Division 2 - Words and expressions defined

Division 3 - Describes how taxpayers are to make objections and how the Commissioner is to deal with them

Division 4 - Contains provisions about applications to the AAT for review of objection decisions

Division 5 - Contains provisions about appeals to the Federal Court against objection decisions.

26.13. For the purpose of illustrating the ways in which Part IVC either preserves or departs from the operation of the existing laws, this memorandum compares various new provisions with provisions being repealed (generally in Part V of the Income Tax Assessment Act 1936 (ITAA) and Part IVB of the Principal Act).

How to make an objection

26.14. Taxpayers dissatisfied with a taxation decision (e.g. and assessment) who wish to object against it will be required to object in the manner prescribed in Division 3 of Part IVC of the Principal Act. These requirements are similar to those set out in section 185 of the ITAA being repealed by this Bill. [Sections 14ZU and 14ZV, and Subsections 14ZR(1) and 14ZW(1) and the definition of "taxation objection" in section 14ZL]

26.15. Subsection 14ZR(1) is intended to replace existing provisions such as subsection 185(3) of the ITAA in relation to the incorporation into one notice of more than one taxation decision where at least one of those decisions is in respect of the imposition of additional tax. In other words, the subsection will operate where a provision such as subsection 227(2) of the ITAA enables the Commissioner to incorporate decisions into the one notice.

* 26.16. The Commissioner must consider and determine objections that have been properly made and serve notice of his decision on the taxpayer. This obligation is the same as that set out in section 186 of the ITAA being repealed by this Bill. [Section 14ZY and the definition of "objection decision" in section 14ZQ] * Amended during passage - refer Supplementary EM)

Application for extension of time to lodge objection

26.17. Taxpayers wishing to lodge an objection after the 60 day period has elapsed can ask the Commissioner to treat the objection as having been lodged within time. [Subsections 14ZW(2) and (3)]

26.18. The Commissioner must consider this request and either agree to it or refuse it. He must then advise the taxpayer of his decision. If he refuses the request the decision is referred to in the Bill as an "extension of time refusal decision" which is reviewable by the AAT [Section 14ZX 14ZQ] . These provisions reflect subsections 188(1) and (3) and section 188A of the ITAA being repealed by this Bill.

Application for review or appeal against objection decision

26.19. An objection decision may be either a "reviewable objection decision" or an "appealable objection decision". [Section 14ZZ and the relevant definitions in section 14ZQ]

26.20. A reviewable objection decision is any objection decision other than an "ineligible income tax remission decision" or an "ineligible sales tax remission decision". These ineligible remission decisions are the same as those referred to in section 193 of the ITAA and section 42F the Sales Tax Assessment Act (No.1) 1930 being repealed by this Bill. [Sections 14ZQ, 14ZS and 14ZT]

26.21. If the objection decision is both "reviewable" and "appealable" the taxpayer may either apply to the AAT for review of the decision, or appeal against it to the Federal Court. If the decision is only "reviewable", the taxpayer can only apply for review (by the AAT). A decision that is solely "appealable can only be appealed against (to the Federal Court). [Section 14ZZ]

Review of decisions by the AAT

26.22. A modified AAT Act will apply to:

•

reviewable objection decisions [Sections 14ZZ and 14ZZA]

•

extension of time refusal decisions [subsection 14ZX(4) and section 14ZZA]

•

application, under subsection 29(7) of the AAT Act, to the AAT for an extension of time in which to lodge an application for review [Sections 14ZQ and 14ZZA]

26.23. The modifications are intended to have substantially the same effect as did the provisions of Part IVB of the Principal Act being repealed.

How to apply to the AAT

26.24. Applications to the AAT for review must be made under section 29 of the AAT Act as modified by this Bill. Previously, section 29 did not apply at all as applications for review were lodged with the Commissioner. Subsections 29(7) to (11) will now apply to "AAT extension applications". [Section 14ZQ and 14ZZC]

Other modifications of the AAT Act

26.25. Sections 27, 41, 28 and 44A of the AAT Act do not apply to the review of reviewable objection decisions and sections 27 and 41 of that Act do not apply to extension of time refusal decisions. However, these provisions do apply to reviewable objection decisions that are "registration-type sales tax decisions". A registration-type sales tax decision is one made under new subsection 38A(4) of the Sales Tax Assessment Act (No.1) 1930. (More information on section 38A is given under the heading "Consequential Amendments"). These modifications, and the modification to section 41 of the AAT Act that applies to reviewable objection decisions that are registration-type sales tax decisions continue the operation of sections 14ZD and 14ZJ of Part IVB of the Principal Act that is being repealed by this Bill. [Section 14ZQ, 14ZZB and 14ZZH]

26.26. The modification of section 30 of the AAT Act being made by Part IVC of the Principal Act, while different in form from the modifications made by section 14ZE of Part IVB, (being repealed by this Bill), the substance of the new modification is the same. [Section 14ZZD]

26.27. The modification of section 35 of the AAT Act effected by section 14ZF of Part IVB, being repealed, is continued so that the hearing of an application for review by the AAT will, generally, not be in public. [Section 14ZZE]

What documents are to be lodged with the AAT?

26.28. Division 4 of Part IVC will modify the operation of section 37 of the AAT Act in relation to the lodgement of material documents with the AAT. Section 37, as presently modified by section 14ZG of Part IVB of the Principal Act, requires the Commissioner to lodge with the AAT copies of a statement setting out:

•

the findings on material questions of fact, the evidence on which those findings are based and the reasons for the objection decisions; and

•

every other document that is in the Commissioner's possession, or under his control, that he thinks is relevant to the review by the AAT.

26.29. This practice led to many copies of documents being lodged with the AAT that were never referred to in the review or were otherwise unnecessary. Accordingly, Part IVC of the Principal Act modifies section 37 of the AAT Act in relation to relevant objection decisions in a slightly different way. The new approach will reduce the number of documents referred to the AAT when the application for review is made, without restricting the AAT's power to obtain any documents it requires in particular cases.

26.30. After being notified that there is an application for review with the AAT, the Commissioner will now be required to lodge with the AAT the prescribed number of copies of:

•

a statement giving the reasons for the decision. Section 25D of the Acts Interpretation Act requires that this statement set out the findings on material questions of fact and refer to the evidence on which those findings are based.

•

the notice of the taxation decision (eg the assessment), the taxation objection and the notice of the decision on the objection.

•

every other document that is in the Commissioner's possession, or under his control, that the Commissioner considers is necessary to the review of the objection decision and a list of those documents. The change from relevant to necessary puts the requirements to lodge documents with the AAT on a similar footing to that required for appeals by Order 52A Rule 8 of the Federal Court Rules. [paragraph 14ZZF(1)(a)]

26.31. Part IVC of the Principal Act also modifies the AAT's power, under section 37, to order the lodgment of additional documents. The AAT will now be able to:

•

issue oral orders at a preliminary conference requiring a person to lodge additional relevant documents;

•

serve a notice on a person requiring specified documents in the person's possession or control to be lodged within a specified time; and

•

serve a notice requiring the person to lodge a list of documents in the person's possession or control that he or she considers to be relevant to the review of the objection decisions. [Paragraph 14ZZF(1)(b)]

26.32. The imposition of a requirement to lodge a list of relevant documents with the AAT is not intended to prevent the AAT from subsequently ordering the lodgment of documents identified in the list. [Subsection 14ZZF(3)]

26.33. As the modification of section 37 of the AAT Act has been changed it is necessary to make a consequential change to the way section 38 is modified. As with the existing law, the modification ensures that the AAT can order a person to lodge an additional statement of reason where the initial statement of reasons and findings on material questions of fact did not contain adequate particulars. [Section 14ZZG]

Reasons for the Tribunal's decision

26.34. The AAT may still publish its reasons for decision even if a review is not held in public. This continues the modification of section 43 of the AAT Act made by section 14ZK of Part IVB of the Principal Act being repealed by this Bill.

26.35. Section 43 will be further modified by Part IVC of the Principal Act so that if a review is not held in public, and a notice of appeal against the AAT's decision has not been lodged with the Federal Court, then the AAT's reasons must be framed so that the applicant is not likely to be identified. This modification was not made in the previous law. [Section 14ZZJ]

Appeals to the Federal Court

26.36. Division 5 contains provisions about appeals to the Federal Court against certain objection decisions referred to as "appealable objection decisions".

26.37. Appeals to the Federal Court against "appealable objection decisions" are to be lodged with the Court within 60 days after the service of the notice of the decision on the objection. [Section 14ZZN]

26.38. On the hearing of an appeal against an appealable objection decision, the Federal Court may make such orders as it thinks fit. This continues the operation of provisions in various taxation laws, such as section 199 of the ITAA, being repealed by this Bill. [Sections 14ZQ and 14ZZP]

Transfer of appeal proceedings to the Family Court

26.39. A proceeding that is pending in the Federal Court on an appealable objection decision in relation to a taxation decision made under the ITAA, may be transferred by the Federal Court to the Family Court. This may be done on the application of a party to the proceeding or at the Court's own initiative. This continues the operation of section 189B of the ITAA, being repealed by this Bill. [Section 14ZZS]

Other provisions of the Bill

26.40. The law in relation to limitation of the grounds of objection and the burden of proof, in proceedings before the AAT or the Federal Court, has not been altered from that which operated previously. For example, the effect of provisions such as section 190 of the ITAA, being repealed by this Bill, will continue. [Sections 14ZZK and 14ZZO]

26.41. The law in relation to the implementation of AAT and Federal Court decisions has not been altered from that which operated previously. For example, the effect of provisions such as section 200B of the ITAA, being repealed by this Bill, will continue. [Sections 14ZZL and 14ZZQ]

26.42. Similarly, the law in relation to the effect of pending reviews and appeals on the implementation of taxation decisions has not been altered. The effect of provisions such as subsection 201(1) of the ITAA being repealed by this Bill, will continue. [Sections 14ZZM and 14ZZR]

Consequential amendments

26.43. As a consequence of the introduction of common objection, review and appeal provisions into Part IVC, the affected taxation laws must be amended to repeal or omit their specific objection, review and appeal provisions. These consequential amendments are set out in Schedule 4 of the Bill. [Clause 109]

26.44. Each of the affected taxation laws will now contain a section that will enable a taxpayer to object against a relevant taxation decision in the manner set out in Part IVC of the Principal Act (eg, proposed section 175A of the Income Tax Assessment Act 1936).

26.45. A definition of "this Act" has been included in the following Acts:

Estate Duty Assessment Act 1914

Fringe Benefits Tax Assessment Act 1986

Gift Duty Convention (United States of America) Act 1953

Income Tax Assessment Act 1936

Pay-roll Tax (Territories) Assessment Act 1971

Petroleum Resource Rent Tax Assessment Act 1987

Sales Tax Assessment Act (No 1) 1930

Training Guarantee (Administration) Act 1990

Wool Tax (Administration) Act 1964.

26.46. The definition operates to include in each Act, Part IVC of the Principal Act. This amendment has been made to ensure that provisions in these Acts that operate for taxation decisions will also operate for objection decisions, reviews and appeals. For example, this amendment will ensure that the Commissioner's access and information gathering powers under sections 263 and 264 of the Income Tax Assessment Act will continue to operate as they do now in relation to the assessment, objection, review and appeal process.

Specific Amendments

Administrative Decisions (Judicial Review) Act 1977 (AD) JR) Act)

26.47. It is necessary to include objection decisions made under section 14ZY of the Principal Act in Schedule 1 (as a class of decisions that are not decision to which the AD(JR) Act applies). This is to ensure that objection decisions made under the Principal Act are not reviewable under the AD(JR) Act.

* Amended during passage through Parliament refer Supplementary EM*

Income Tax Assessment Act 1936

26.48. Subparagraph 82KZAA(3)(d)(ii) has been replaced with a new subparagraph which ensures that the subparagraph still operates for relevant objections where the objection decisions are made after the commencement date for these amendments.

26.49. Section 175A is intended to apply to both assessments actually made by the Commissioner and assessments the Commissioner is deemed to have made under section 166A of the ITAA.

Sales Tax Assessment Act (No.1) 1930

26.50. A new section 38A will be included in the Sales Tax Assessment Act (No.1) 1930 as a consequence of the repeal of Part VII of that Act (sections 39A to 44A). Subsection 38A(1) replaces subsection 40(1) of the previous Act. Subsections 38A(2) and (3) replace subsections 40(2),(3) and includes the definition of "refund decisions" in section 39A of the previous Act.

26.51. Subsection 38A(4) replaces subsection 40(4). The taxation decisions referred to in section 38A(4) are called registration-type sales tax decisions in the new Part IVC of the Principal Act (See section 14ZQ, 14ZZB and 14ZZH).

Taxation Administration Act 1953

26.52. A new subsection 3B(4) will be included in the Principal Act to ensure that the Commissioner does not have to report to Parliament in respect of the same matters under two Acts, for example the Income Tax Assessment Act and the Principal Act.

26.53. A new subsection 3C(9) will be included in the Principal Act to ensure that only one set of secrecy provisions apply in respect of each matter. This amendment, when read together with the amendments to other relevant Acts that include in them Part IVC of the Principal Act, will mean that only one secrecy provision will apply. For example, the secrecy provisions in section 16 of the Income Tax Assessment Act will apply to income tax matters throughout the decision, objection, review or appeal process.

Taxation (Interest on Overpayments) Act 1983

26.54. As the objection provisions of the various taxation laws are being repealed it is necessary to amend the definition of "objection" in subsection 3(1) of the Taxation (Interest on Overpayments) Act 1983.

Training Guarantee (Administration) Act 1990

26.55. New sections 44A and 44B are to be included in the Training Guarantee (Administration) Act as a consequence of the repeal of Part 7 of that Act to be effected by this Bill.

26.56. Sections 44A and 44B replace sections 61 and 62 of the Act, which are being repealed by this Bill.

26.57. Subsection 14ZB(2) of Part IVB of the Principal Act is not being re-enacted. As a result, a decision of the Training Advisory Body to issue a certificate under section 44 or 44A will not be taken to be an objection decision. The consequence of this is that the modifications to the AAT Act made by Division 4 of Part IVC of the Principal Act will not apply to the review of these decisions by the AAT.

Commencement date

26.58. The amendments made by clauses 108-113 (inclusive) of this Bill will commence on a day to be fixed by proclamation. [Subclause 10 of clause 2]

Application of the amendments

26.59. Generally, these amendments will apply in relation to objections to taxation decisions which were notified to a taxpayer after the commencement date. In relation to the Training Guarantee (Administration) Act the amendments will apply in relation to certificates issued under section 44, or refusal decisions under subsection 43(3) of that Act, where the certificate was given or the decision notified after the commencement date. [Clause 110]

Transitional measures

26.60. The amendments made to the Principal Act will apply to any application for review of, or appeal against, an objection decision made after the commencement date in respect of an assessment, determination, etc made prior to the commencement date. That is, the objection decision is treated as if it had been made under section 14ZY. The intended effect of this measure is that applications for review and appeals in respect of objection decisions made after the commencement date will need to be lodged directly with the AAT or the Federal Court.

Clauses involved in the proposed amendments

Clause 108 : Repeals Parts IVAB and IVB of the Principal Act and substitutes a new Part IVC which contains common objection, review and appeal provisions that relate to the various taxation laws administered by the Commissioner.

Clause 109 : Provides for the consequential amendment of the Acts set out in schedule 4.

Clause 110 and 2 (10) : Provide that this Part will commence on a day to be proclaimed. (More information on the commencement and application of this Part is given under the heading "Commencement Date").

Clause 111 : Provides that despite the amendments to the Principal Act made by Part 4 of this Bill, sections 3B and 3C, and Parts IVAB and IVB of the Principal Act will continue to apply to certain Acts.

Clause 112 : Enables the new review and appeal procedures (ie, direct lodgment) to apply to reviews and appeals against objection decisions made after the commencement of this Part in respect of assessments, determinations, notices and decisions made before the commencement of this Part. (More information on the transitional measures is given under the heading "Commencement Date").

Chapter 27 Occupational Superannuation Standards

[Clause: 103, 104, 105]

Overview

Corrects a technical deficiency whereby certain payers of eligible termination payments were not required to report such payments to the Insurance and Superannuation Commissioner.

Gives the Insurance and Superannuation commissioner the power to treat a superannuation fund as if it had satisfied the superannuation fund conditions for a particular year even though it had not complied with a request by the Insurance and Superannuation Commissioner to commute an excessive pension.

Reasonable Benefit Limits Administrative Arrangements

27.1. The Bill will make several minor changes to the arrangements for the administration of the reasonable benefit limits as set out in the Occupational Superannuation Standards Act 1987.

27.2. For convenience, the Occupational Superannuation Standards Act 1987 will be referred to as the "Principal Act" in the following chapter.

Summary of the proposed amendments

27.3. The proposed changes to the administration of the reasonable benefit limits are -

Provision of Information on Benefits Paid

27.4. The reasonable benefit limits are a lifetime limit on the amount of superannuation or termination of employment benefits that a person may receive concessionally taxed.

27.5. The limits are administered by the Insurance and Superannuation Commissioner who keeps a record of all concessionally taxed benefits that a person receives and determines whether each benefit is within, or in excess of, the recipient's reasonable benefit limits. Central to this administrative arrangement is the notification by the payer of information on benefits paid.

27.6. The definition of 'payer' will be amended so that all payers of eligible termination payments will be covered by the requirements to report such payments to the Insurance and Superannuation Commissioner.

Deemed Pension Commutations - Discretion

27.7. Where the Insurance and Superannuation Commissioner determines that a pension benefit is in excess of the reasonable benefit limits, the superannuation fund paying the pension is required to commute the excessive component to a lump sum. A fund that does not commute this amount is taken not to have satisfied the superannuation fund conditions for as long as the excessive pension remains payable.

27.8 . The amendment will give the Insurance and Superannuation Commissioner a discretion to determine that a fund has complied with the superannuation fund conditions, even though it has failed to commute the excessive component of a pension.

Background to the legislation

27.9. In determining whether a benefit received by an individual is within or in excess of his or her reasonable benefit limits, the Insurance and Superannuation Commissioner relies, in the first instance, on information which is required to be provided to him by the payer of the benefit under the provisions of Part IIIA of the Principal Act.

27.10. The existing definition of payer in subsection 15E(1) has proved to be inadequate as some payers of eligible termination payments have avoided reporting such payments because they are not one of the types of organisations listed.

27.11. A superannuation fund which fails to comply with a request by the Insurance and Superannuation Commissioner to commute the excessive component of a pension under subsection 15S(4) is taken not to have satisfied the superannuation fund conditions. Hence, even where there are good reasons for the fund failing to commute the excessive component of the pension, this provision would operate so that the fund is non-complying.

27.12. There are some funds that are unable to commute excessive pension benefits without the member's consent. In such cases the Commissioner currently has no discretion to treat the fund as a complying fund.

Explanation of the proposed amendments

27.13. All payers of eligible termination payments will be required to report those payments to the Insurance and Superannuation Commissioner in accordance with Part IIIA of the Principal Act. [Clause 104]

27.14. Notwithstanding that a superannuation fund has failed to comply with a request by the Insurance and Superannuation Commissioner to commute the excessive component of a pension, it may seek an exercise of discretion by the Insurance and Superannuation Commissioner so that it does not lose its compliance status. [Clause 105]

Clauses involved in the proposed changes

Clause 104 : amends subsection 15E(1) so that any entity which makes an eligible termination payment is a payer for the purpose of Part IIIA of the Principal Act.

Clause 105 : enables the Insurance and Superannuation Commissioner to treat a superannuation fund as having satisfied the superannuation fund conditions where the fund has failed to comply with a request under subsection 15S(4) to commute the excessive component of a pension.

Part 2 - Pre - 1 July 1988 Funding Credits

Summary of the proposed amendments

27.15. The Bill provides that a superannuation fund must apply for a pre - 1 July 1988 funding credit on or before a date to be prescribed in the Occupational Superannuation Standards Regulations.

Background to the legislation

27.16. The Act currently provides that an application for a pre - 1 July 1988 funding credit must be made by 31 December 1991.

27.17. The method by which the Insurance and Superannuation Commissioner will grant a pre - 1 July 1988 funding credit is to be prescribed in the Regulations.

27.18. As these regulation will not be made by 31 December 1991, the date by which a fund must apply for a funding credit must be extended.

Explanation of the proposed amendments

27.19. Section 15D of the Act provides that the trustees of a superannuation fund may apply to the Insurance and Superannuation Commissioner for such a credit and that the Commissioner shall grant a specified amount of credit if he is satisfied that certain conditions apply. One of those conditions is that the amount is an amount that the Regulations provide may be treated as a pre - 1 July 1988 funding credit.

27.20. It is intended that the Regulations will provide that a pre - 1 July 1988 funding credit is, essentially, and amount of contributions that may be made exempt from contributions tax to a superannuation fund after 30 June 1988 to meet an obligation to make those contributions that existed as at that date.

27.21. The Act currently specifies that applications for pre - 1 July 1988 funding credits must be made by 31 December 1991. The amendment will allow applications to be made up to a date prescribed in the Regulations.

Clauses involved in the proposed amendments

Clause 103 : will amend section 15D of the Principal Act so that an application for a pre - 1 July 1988 funding credit must be made on or before a date prescribed in the Regulations.

Chapter 28 Registered Organisations

[Clause: 47, 52, 53, 58, 86, 93]

Overview

Denies registered organisations the right to maintain franking accounts.

Summary of proposed amendments

28.1. The Bill will give effect to the measure announced in the 1991-92 Budget to:

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deny registered organisations the right to maintain a franking account from 3.00 pm standard time in the Australian Capital Territory on 20 August 1991; and

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cancel the franking surplus of these organisations at that time.

Background to the legislation

28.2. Under the existing law, all companies other than mutual life assurance companies that are sufficiently resident in a year of income derive franking credits on the assessment and payment of company tax and on the receipt of franked dividends. Companies receive franking credits so that they can pay franked dividends to shareholders who are then entitled to a franking rebate in their assessment.

28.3. Companies use their franking credits to pay franked dividends. The extent to which a company can pay franked dividends to its shareholders is determined by the amount of the surplus in its franking account on the day the dividend is paid. The surplus on a particular day is the amount by which franking credits exceed franking debits (subsection 160APJ(1)).

28.4. An organisation is a registered organisation if it is a trade union, a friendly society or an employee association for the purposes of the Industrial Relations Act 1988 and;

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the income from its insurance and superannuation business is assessable under Division 8A of Part IIIAA; and

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its other income is exempt from income tax.

28.5. Registered organisations are similar to mutual life assurance companies and government insurance offices in that they do not have shareholders and are not able to use their franking credits to pay franked dividends. Mutual life assurance companies and government insurance offices are specifically excluded from receiving franking credits and incurring franking debits (sections 160APKA and 160APWA).

28.6. The effect of the proposed amendments is that registered organisations will be treated the same for imputation purposes as other companies that do not have shareholders (ie, mutual life assurance companies and government insurance offices).

Explanation of the proposed amendments

28.7. A registered organisation will not receive a franking credit under any provision in Subdivision B of Division 2 of Part IIIAA of the Principal Act after 3pm standard time in the Australian Capital Territory on 20 August 1991. [Clause 47 - new section 160APKB] Similarly, no franking debits will arise for registered organisations under any provision of Subdivision C after that time. [Clause 58 - new section 160APWB]

28.8. Registered organisations that are companies do not derive franking credits when they receive franked dividends. This is the case whether the dividends are received directly or indirectly as a beneficiary or partner in a trust or partnership. The provisions that prevented franking credits arising when a registered organisation received a franked dividend directly (subsection 160APP(4)) or indirectly through a trust or partnership (subsection 160APQ(2)) are no longer necessary and will be repealed. [Clauses 52 and 53]

28.9. The surplus in the franking account of a registered organisation at 3pm standard time in the Australian Capital Territory on 20 August 1991, will be cancelled by a franking debit, equal to the amount of the surplus, arising at the time. [Clause 93]

Commencement date

28.10. New sections 160APKB and 160APWB will commence by 3pm standard time in the Australian Capital Territory on 20 August 1991, the time of the 1991-92 Budget. The repeal of subsections 160APP(4) and 160APQ(2) will apply to franking credits arising after that time. [Subclauses 2(5) and 86(2)]

Clauses involved in the proposed amendments

Clause 47 : inserts new section 160APKB.

Clause 52 : amends section 160APP to omit subsection (4).

Clause 53 : amends section 160APQ to omit subsection (2).

Clause 58 : inserts new section 160APWB.

Subclause 86(2) : contains the application provision for the repeal of subsections 160APP(4) and 160APQ(2).

Clause 93 : is a transitional provision that will cancel the franking surplus of registered organisations at 3pm on 20 August 1991.

Chapter 29 Minor Technical Amendments

[Clause: 2, 12, 13, 33, 41, 44]

Overview

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Wool tax

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Clarifying amendment

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Overseas employment income

Part 3B - Amendment of the Wool Tax (Administration) Act 1964

29.1. A "registered laboratory" is currently defined in the Wool Tax (Administration) Act 1964 to have the same meaning as in the Wool Marketing Act 1987. The Wool Marketing Act was repealed on 1 July 1991 and replaced with the Australian Wool Corporation Act 1991 and the definition of "registered laboratory is now contained in that Act.

29.2. The definition of "registered laboratory" in the Wool Tax (Administration) Act 1964 is being amended to provide that it has the same meaning as in Part 10 of the Australian Wool Corporation Act 1991. The amendment is taken to have commenced on 1 July 1991.

Miscellaneous Minor Clarifying Amendments

Summary of proposed amendments

29.3. Several minor amendments are proposed to clarify the operation of certain deduction provisions which are expressed to be subject to the same limitations on deductibility as section 51.

29.4. The changes make clear what the provisions mean.

Background to the legislation

29.5. Several deductions are qualified by a provision which states:

"A provision of this Act (including a provision of section 51) that expressly prevents or restricts the operation of section 51 applies in the same way to this provision."

29.6. It has been suggested that subsection 51(1) itself contains express restrictions on the operation of section 51, in the form of the exclusion of expenditure of a capital, domestic or private nature or expenditure incurred in deriving exempt income.

29.7. Tax-related expenses, deductible under section 69, might be thought to be affected. And deductions for certain expenses on mine site rehabilitation, available under Division 10AB, might be thought to exclude capital expenditure, even though subsection 124BA(1) applies to expenditure "whether of a capital nature or otherwise".

29.8. Although the provision was not intended to and should not be read that way, the proposed amendment will remove any doubt as to the proper interpretation of the provisions.

Explanation of the proposed amendments

29.9. Each of the relevant provisions will be amended to insert the words "other than subsection 51(1)" after the first reference to "section 51" to remove any doubt as to the intended effect of the provisions. [Clauses 33, 41 and 44]

Commencement date

29.10. The amendments will take effect from the date of Royal Assent of the Bill.

Clauses involved in the proposed amendments

Clause 2 : Date of effect.

Clause 33 : Amends subsection 69(6).

Clause 41 : Amends subsection 113(4).

Clause 44 : Amends subsection 124BA(2).

Technical changes to exemption of income earned in overseas employment.

29.11. The Bill will make two minor technical corrections to the provisions of the Income Tax Assessment Act that deal with the taxation of foreign employment income where the period of continuous overseas service is between 3 months and 12 months. Since 1 July 1990 a full exemption has been available where overseas service has been 91 days or more. Before that date a proportionate exemption was allowed if the service was between 91 days and 365 days. The amendment will delete the now redundant references to a part exemption.

Clauses involved in the proposed amendments

Clause 12 : amends paragraph 23AF(15)(b) of the Income Tax Assessment Act to remove the redundant reference to partial exemptions.

Clause 13 : amends paragraph 23AG(6F)(b) of the Income Tax Assessment Act to remove the redundant reference to partial exemptions.