House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon Ralph Willis, M.P.)

General Outline and Financial Impact

The Taxation Laws Amendment Bill (No.4) will amend various taxing Acts (unless otherwise indicated all amendments refer to the Income Tax Assessment Act 1936) by making the following changes:

Depreciation Amendments

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Inserts a definition of effective life into the Act.

•

Allows 100% depreciation for depreciable plant where the value of the unit of property does not exceed $300 or the estimated effective life of the item is less than 3 years.

•

Reduces the number of depreciation rates to seven basic rate classes.

•

Standardises the loading at 20%.

•

Enables taxpayers to pool depreciable items with the same depreciation rate.

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Proposal announced: The measures were announced in the March Industry Statement and on 26 September 1991.

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Financial impact: The estimated cost of broadbanding of rates and immediate expensing is $100m in 1992-93, with a declining cost in later years.

Anti-avoidance Measures - Deduction Recoupment

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Amends a number of the capital allowance provisions to correct a technical deficiency which permits avoidance of tax on recoupments of deductions allowed under those provisions.

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Proposal announced: Not previously announced.

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Financial impact: The amendments will prevent a significant but unquantifiable loss of revenue.

Balancing Adjustment Roll-over Relief

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Makes available optional balancing adjustment roll-over relief for intra group company transfers of property (to which the capital allowance provisions have applied) occurring after 6 December 1990 and before [day after date of introduction]. Announced by former Treasurer on 8 December 1990.

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Applies balancing adjustment roll-over relief for disposals of assets (to which the capital allowance provisions have applied) to other persons if capital gains tax roll-over relief is obtained for the disposal.

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Makes available optional balancing adjustment roll-over relief for disposals of property (to which the capital allowance provisions have applied) that are taken to occur as the result of part changes in the ownership of that property.

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Proposal announced: The latter two amendments have not been previously announced.

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Financial impact: The amendments are likely to have some revenue cost; however, their nature is such that a reliable estimate of the revenue impact cannot be made.

Dividend Rebates: Company Beneficiaries and Partners

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Amends the Income Tax Assessment Act 1936 to allow a rebate of tax on dividends paid on shares that are beneficially owned by a company but are registered in the name of a trustee or partnership.

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Proposal announced: Not previously announced.

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Financial impact: This amendment will have no impact on the revenue.

Deferral of Deductions for Trading Stock Purchases Involving Prepayments

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Ensures that deductions for expenditure on goods to be used as trading stock are not allowable until the goods actually become part of the buyer's trading stock.

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Proposal announced: Not previously announced.

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Financial impact: There will be a significant but unquantifiable benefit to the revenue.

Tax File Number (TFN) Amendments

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Streamlines the application of the TFN arrangements to securities lending arrangements and unregistered "cum-dividend" and "cum-interest" sales of securities.

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Requires investors in securities having a "books closing time" to quote their TFN before that time.

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Prevents certain nominee companies (entrepot nominee companies) used by securities dealers from being treated as investment bodies for TFN purposes.

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Corrects a technical deficiency in the law which prevented the proper application of the TFN arrangements to unit trusts.

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Proposals announced: Not previously announced.

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

Capital Gains Tax Roll-over Relief for Partnerships

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Corrects a deficiency in the CGT roll-over provisions for transfers of partnership assets to wholly-owned companies, by ensuring that the cost bases of shares received as consideration for such transfers reflect the amount of partnership liabilities assumed by the company.

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Applies to transfers of assets after 6 December 1990.

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Proposal announced: Not previously announced.

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Financial impact: The amendment will avoid an unintended cost to revenue.

Capital Gains Tax (Publishing Indexation Factors)

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Replaces the requirement that the Treasurer publish the indexation factors to be applied in calculating the motor vehicle depreciation limit and the Capital Gains Tax (CGT) cost base limit for major capital improvements with a requirement that the Commissioner of Taxation publish the relevant factors.

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Proposal announced: Not previously announced.

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Financial impact: The amendments will have a nil effect on revenue.

The Taxation of Foreign Source Income

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Reduces the income of a controlled foreign company that is attributed to resident taxpayers by dividends paid by the company to unrelated parties on certain widely distributed finance shares.

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Proposal announced: The proposal was announced by the Treasurer on 28 June 1991.

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Financial Impact: This amendment will relieve taxpayers from an unintended liability to tax. A reliable estimate of its revenue cost cannot be made.

Foreign Exchange Gains and Losses

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Ensures that a deduction for a foreign exchange loss of a capital nature on a contract will be reduced by a gain on an underlying, hedging, or other contract if that gain is not included in assessable income.

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Proposal announced: Not previously announced.

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Financial impact: This amendment is to ensure that the provision operates as intended and will protect the revenue against any unintended leakages.

Rehabilitation of Mining, Quarrying and Petroleum Sites

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Clarifies the operation of the rehabilitation provisions in respect of partial restoration and expenditure on plant or articles. The amendments make it clear that the rehabilitation provisions apply to partial restoration, including restoration of part only of a site, and apply to revenue expenditures on plant or articles such as repairs.

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Proposal announced: Not previously announced.

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Financial impact: These amendments, being clarifying in nature, will have a nil effect on revenue.

Research and Development Amendments

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Allows a maximum deduction of upto 150% of expenditure, for qualifying plant expenditure claimed over three years in three equal instalments, for each year if that plant is first used prior to 30 June 1993.

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Limits deductions in respect of core technology expenditure to an arm's length amount.

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Excludes expenditure on core technology from the calculation of the deduction to be allowed in the case where there are guaranteed returns to investors. This modification will ensure that the calculation of the reduced deduction is not diluted by the inclusion of core technology which already only attracts a deduction of 100%.

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Proposal announced: Not previously announced.

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Financial impact: The cost of the first amendment is estimated to be $50 million for the 1993-94 and 1994-95 years. The gain to the revenue of the other two amendments is not quantifiable.

Fringe Benefits Tax - Substantiation Discretion

(Fringe Benefits Tax Assessment Act 1986)

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Provides the Commissioner with a discretion, in certain circumstances, to accept something less than the strict level of substantiation required under the fringe benefits law.

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Proposal announced: Not previously announced.

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Financial Impact: No significant impact on revenue.

Education Entry Payment

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Ensures that the education entry payment to be paid to sole parent pensioners from 1 January 1992 will be taxed.

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Proposal announced: Not previously announced

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Financial impact: The impact of the proposal on revenue in each financial year is expected to be less than $100,000.

Carry Forward of Excess Foreign Tax Credits

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Makes a technical amendment to clarify the operation of the provisions that deal with the carry forward of excess foreign tax credits.

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Proposal announced: Proposal announced in Treasurer's Press Release dated 12 November 1991.

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Financial impact: As the amendment will only clarify the operation of the provisions, a reliable estimate of the revenue impact cannot be made.

Income Tax (International Agreements) Act 1953

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Makes a technical correction to Schedule 32 of the Income Tax (International Agreements) Act 1953 to accurately reflect the text of the Australia-Fiji comprehensive taxation agreement.

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Proposal announced: Not previously announced.

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Financial impact: The amendment is not expected to have a significant effect on revenue.

Chapter 1 Depreciation Amendments

Clauses: 15,16,17,19,20,24,64,67,68,69 and 70

Overview

Inserts a definition of effective life into the Act

Allows 100% depreciation for depreciable plant where the value of the unit of property does not exceed $300 or the estimated effective life of the item is less than 3 years

Reduces the number of depreciation rates to seven basic rate classes

Standardises the loading at 20%

Enables taxpayers to pool depreciable items with the same depreciation rate.

Depreciation Amendments

Summary of the proposed amendments

1.1 This Bill puts into effect changes announced in the March 1991 Industry Statement and on 26 September 1991 to simplify the operation of the depreciation provisions of the income tax law and to allow taxation depreciation rates to be set objectively by reference to a statutory definition of effective life.

Effective life definition

1.2 The effective life of an item is to be defined as the period during which an item of property can reasonably be expected to be used for income producing purposes by any person. The effective life to be adopted by a taxpayer relates to the total estimated life of the item of property taking into account the taxpayer's circumstances of use. It may vary from potential physical life as a result of factors such as predictable obsolescence and the expected abandonment of the property at the termination of a project in which the property is used.

100% depreciation

1.3 100% depreciation will be available for items of depreciable property acquired on or after 1 July 1991, where the unit value of the item does not exceed $300 or the estimated effective life of the item is less than 3 years.

Broadbanding of rates

1.4 From the 1991-92 income year, most property subject to the general depreciation provisions may be written off at one of seven basic rates - 33 1/3%, 20%, 15%, 10%, 7 1/2%, 5% or 2 1/2%. These basic rates will be increased by a standardised 20% loading (unless a motor vehicle is involved).

1.5 If the prime cost rate for an item is not one of the seven basic rates, the item may be depreciated at the next highest basic rate.

1.6 Taxpayers may elect not to broadband.

Pooling

1.7 Taxpayers may choose to account for depreciation on the basis of pools of items of a given rate class. Pooling merely involves aggregating all items subject to the same depreciation rate. The total pool is then depreciated using the diminishing value method.

1.8 The pools are to operate as follows:

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Pooling is optional.

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Pooled items will be depreciated using the diminishing value method.

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Assets depreciated at a special depreciation rate such as 5/3 cannot be pooled as these are all straight line rates.

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Pooling can apply regardless of when an item was first used or installed or whether it was previously depreciated under section 56 using the prime cost method.

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Only assets wholly used for the purpose of producing assessable income (or installed ready for such use) and used for that purpose for the whole income year may be pooled.

•

A pro rata deduction only will be allowed in the first year of use or installation ready for use outside the pool. The item may then be allocated to the pool for the following year.

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Taxpayers may "unpool" an asset by deducting the reconstructed depreciated value of the item from the opening value of the pool.

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If a pooled item is disposed of, lost or destroyed, the taxpayer may either:

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take the item out of the pool and treat the difference between the depreciated value and the consideration received in the normal manner, or

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return the total proceeds of disposal up to the original cost as assessable income, while leaving the depreciated value of the item in the pool, or

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roll over the total proceeds of disposal up to the original cost, while leaving the depreciated value of the item in the pool.

Background to the legislation

How depreciation works

1.9 Depreciation allows the capital cost of plant to be deducted from assessable income over the item's effective life. Under the existing law, an estimate of effective life is made by the Commissioner of Taxation (section 55).

1.10 A taxpayer may elect to depreciate an item of plant using either the prime cost or diminishing value method (subsection 56(1)).

Prime cost

1.11 The prime cost method of depreciation allows a deduction equal to a fixed percentage of the initial cost in each year of income over the effective life of the asset. Under this method, without taking into account loadings, the cost of plant with an effective life of 5 years would be written off over 5 years with 20% of the cost being deducted in each year. For example, if the plant cost $1000, $200 could be deducted every year for 5 years. With the 20% loading, the rate will increase from 20% to 24% (20% plus 20% of 20%), so that 24% of the cost of the plant can be deducted each year until it is completely written off.

Diminishing value

1.12 The diminishing value method allows the item to be written off at a higher rate, but it is calculated differently. The rate applied is one and one-half times the standard rate and the depreciation deduction is calculated each year on the depreciated value of the property concerned. For example, with the $1000 item of plant, the diminishing value rate without loading would be 30% (one and one-half times 20%), or 36% with the loading. The taxpayer will be able to claim $360 in the first full year of use, and in the second year 36% of the written down value of $640 ($1000 minus $360), and so on.

Balancing charges and deductions

1.13 If a depreciated item is disposed of, lost or destroyed, the difference between any proceeds of sale and the depreciated value of the unit is deductible if the proceeds are less than the depreciated value. Where the sale price is greater than the depreciated value, the excess is included in assessable income to the extent of the original cost of the item (subsections 59(1) and (2)). For example, the depreciated value of an item which cost $1000, and on which $300 depreciation had been allowed, would be $700. If the item was sold for $500, a deduction of $200 would be allowed in the year of sale. If it was sold for $1200, the amount to be included in assessable income would be $300. The $200 by which the sale price exceeded the original cost would represent a capital gain and might be assessed under the capital gains tax provisions.

Roll-over

1.14 The amount which would otherwise be included in assessable income on the sale of a depreciated item of plant, may be "rolled over" by deducting it successively against the cost of replacement plant, other new plant or the opening written down value of existing plant (subsection 59(2A)).

Pro rata deductions

1.15 If an item is used for only part of the year, a pro rata depreciation deduction only will be allowed for that year (subsection 56(1A). For example, if the item is used for only 6 months, the taxpayer can deduct only half of the depreciation which would be available for a full year's use.

Setting rates

1.16 Under the existing law, the Commissioner of Taxation is required to determine the effective life of a particular item of property (subsection 55(1)). Rates are set on the basis of the industry norm and are published for the guidance of all taxpayers. Taxpayers can apply to the Commissioner for a variation from the published rate to take account of their particular circumstances of use.

1.17 Under the new system, taxpayers will be able to make their own estimate of the effective life of a particular item using the new definition. Although the Commissioner will continue to publish recommended rates as a guide, taxpayers will not be required to use those rates.

Why change the law?

1.18 The changes provide greater flexibility in the selection of an appropriate depreciation rate and will simplify the operation of the depreciation provisions. Inserting a legislative definition of effective life will ensure that taxpayers can use a depreciation rate reflecting their individual circumstances of use of an item. Broadbanding and the standardisation of loadings reduces the number of rates which need to be used. 100% depreciation and pooling will reduce the paperwork associated with calculating deductions for depreciation.

Explanation of the proposed amendments

Effective life

1.19 Effective life is defined by the new section 54A as the time an item of property can reasonably be expected to be used for income producing purposes by any person. The effective life to be adopted by a taxpayer relates to the total estimated life of the item of property taking into account the taxpayer's circumstances of use. [Clause 16 - new section 54A]

Objective test

1.20 The change to a system of determining effective life by reference to an objective statutory definition requires that a reasonable judgment as to the prospective effective life of an item of depreciable property be exercised at the time the particular item is first used for income-producing purposes. That judgment, or estimate, should take account of both known circumstances of use of the item and circumstances of use that can reasonably be expected.

1.21 For example, a taxpayer conducting an established business may know from experience that certain kinds of industrial plant are scrapped after 5 years because of the need to keep up with the latest technology. That factor ought to be taken into account as a known circumstance. On the other hand, the effects of working conditions on plant installed for a new venture may not be fully known, but nevertheless capable of reasonable prediction according to the physical surroundings, weather conditions, intended hourly use, and so on.

1.22 In all circumstances, a taxpayer needs to estimate effective life as a reasonable, independent person would having regard to the relevant facts and circumstances about the projected use of the item.

Total life for particular taxpayer

1.23 In estimating how long an item would be held and used for income producing purposes, taxpayers will not be obliged to gauge the life of the item as if it were in 'average' use but must look to their own particular circumstances.

1.24 When an item first comes into income-producing use by a taxpayer, the taxpayer must estimate the period that it would be useful for income-producing purposes if it was, for its total life, used in the expected circumstances and conditions of use by the taxpayer despite the fact that for commercial or other reasons it may be expected to be disposed of before the end of that period. The new section 54A builds in an assumption that the item was held by the taxpayer until this time.

Example

1.25 The practice in a business is to use executive cars for two years, then replace them with new models. The cars are then sold to someone else who uses them for private purposes. Does this mean their effective life is 2 years?

1.26 No. The effective life of the cars would not be limited to the time that they are used to produce income by a particular taxpayer. The relevant question is: for what period would the cars be used, assuming that they continue to be used at the taxpayer's rate of use, until they are no longer reasonably capable of being used to produce income by the taxpayer or any other person? This period is the effective life of the cars.

Second-hand plant

1.27 For second-hand plant, the estimate of effective life must be made as if, when first used or installed for income-producing purposes by the taxpayer, the item was new [new subparagraph 54A(1)(a)(i)]. That is, effective life relates to the total life of the item and must not be reduced on account of the second-hand condition of the item. This means that plant of the same kind and subject to the same conditions of use will have the same effective life even though one may be new and the other second-hand.

Example

1.28 According to the manufacturer's specifications, a new photocopier is capable of producing 1 million copies before needing to be replaced. When purchased new, the owner expects that, as used in the owner's business, it will have produced half a million copies after 2 years. On that evidence, it would be reasonable to conclude the copier had an effective life of 4 years, even if it is the taxpayer's intention to sell the copier after 2 years to someone else who will use it less heavily.

1.29 The photocopier is disposed of after 2 years to another taxpayer, who intends to make only 100,000 copies a year. The effective life of the copier in the hands of the second taxpayer must be judged on the basis of the expected conditions of use by that taxpayer as if the taxpayer had purchased the copier new. On that basis, the total effective life for the second taxpayer would be 10 years, reflecting his or her circumstances of use.

Example

1.30 An operator of a delivery service acquires a second hand vehicle which is 2 years old, for use in a delivery fleet. The other fleet vehicles were purchased new and have a depreciation rate of 15% consistent with an effective life of 7 years. The second hand vehicle will be used for similar mileage under comparable conditions to the other vehicles. The effective life of the second hand vehicle must be judged on the basis of the expected conditions of use by the taxpayer as if the vehicle had been purchased new. On that basis, the effective life of the second hand vehicle would also be 7 years.

Can a taxpayer take account of technological or economic obsolescence?

1.31 Yes, if it can be reasonably predicted when the plant is first used or installed ready for use that the item will not be able to be used by any person for the production of income at a specific point of time in the future. In such cases the effective life will last until that time.

1.32 That conclusion may be on the basis of experience in the particular industry in relation to the scrapping of plant. For example, plant may be scrapped where, because of the need to keep up with the latest international technology, it is no longer useful for income producing purposes. Plant may also be scrapped because it is known that the equipment will become redundant because the goods it produces are going out of production or because the process of production will change.

Example

1.33 Operators of a luxury hotel chain refurbish every 5 years. Carpets and curtains are scrapped. Television sets are sold via auction. If the televisions had continued in use instead of being sold, they would have had to be replaced after another 2 years. The effective life of the carpets and curtains is 5 years. The effective life of the television sets is 7 years. Given the likely wear and tear on a television used in those circumstances, it could hardly be expected after the 7 years to have a real commercial usefulness.

Example

1.34 A company that uses specialist machinery has a policy of continuous plant development and improvement. Experience has been that new generation machines replace existing machines every 5 years, after which the older machines are redundant for the functions they were designed for. The company could reasonably estimate effective life of the machines as 5 years.

Can a taxpayer use project life?

1.35 Where it is reasonable to conclude that plant acquired for a particular project will be scrapped, sold for scrap or abandoned at the end of a project, it can be depreciated over the life of the project. If plant can be readily used in other income producing activities at the end of the project, the effective life should not be governed by the life of the project.

Example

1.36 A mining company purchases mining equipment to use in a remote locality. The expected life of the mine is 10 years, at the end of which the equipment will be abandoned although potentially still physically capable of operation. The effective life of the equipment would be 10 years. If it was expected that the equipment could reasonably be transferred to, and used at, another minesite, the effective life could not be limited to the life of the first mine.

Other examples of effective life

Example 1

1.37 A company purchases machines for use in its business. Environmental legislation will outlaw the use of the particular type of machine throughout Australia within 5 years. The effective life of these machines will be no more than 5 years.

Example 2

1.38 A wheat farmer has acquired a tractor costing $100,000. It is built to do 20,000 hours work and the Commissioner of Taxation has determined the industry average usage is 10 years before scrapping; it thus has a 10 year life in the Commissioner's schedule.

1.39 The following scenarios set out possible tax treatment of the tractor under the new effective life rules.

(i)

The wheat farmer has an exceptionally large farm and expects to do 20,000 hours work with the tractor in 5 years at which point it would be retired from income producing use.

-

The farmer would be entitled to claim a 5 year effective life.

(ii)

The wheat farmer expects to do substantial ploughing over a 4 year period so that the tractor worked 16,000 hours over 4 years. The farmer expected that if the tractor continued in operation it would have to be retired from income producing use in another year. Because of the intensive work it would not be worth maintaining and the wheat farmer expected to sell the tractor to another farmer who will use it less intensively.

-

The wheat farmer could claim a 5 year effective life as that would be the effective life if the farmer continued to use the tractor.

(iii)

The wheat farmer anticipates that a new high-speed ploughing tractor will be on the market in 3 years making the old tractor uneconomic in the wheat industry. The wheat farmer uses the tractor on a normal basis for 3 years and sells it to a grazier.

-

The effective life is 10 years as this is the period the tractor is generally useful for income producing purposes notwithstanding that it may not be expected to be viable in the wheat industry after 3 years.

(iv)

The wheat farmer anticipates that a revolutionary new tractor will be on the market in 3 years making the old tractor uneconomic on all farms so that the tractor will have to be scrapped.

-

The tractor has a 3 year effective life as after that time it will no longer be useful for income production.

(v)

After 5 years of normal use the farmer sells the tractor to a neighbour. The neighbour expects to use the tractor very intensively and scrap it in 3 years.

-

On commencement of use of the tractor, the farmer has no basis to change from the industry average and hence the effective life to the farmer is 10 years. The neighbour will be able to use the Commissioner's rate or to self assess a shorter effective life if the very intensive use, if applied to a new tractor, could be expected to reduce the effective life below the 10 years set by the Commissioner.

(vi)

The farmer expects to use the tractor twice as much as the industry average.

-

The farmer may seek to apply an effective life rate allowing for extra usage; however it would not automatically follow that doubled use meant the Commissioner's estimated rate could be doubled. There would need to be an independent estimate of the effective life on the basis of the actual usage and working conditions that will apply.

Calculating the rate of depreciation

1.40 New section 55 sets out a step by step approach to calculating the rate of depreciation for a unit of property. [Clause 16 - new section 55]

1.41 Step 1:- converts the effective life of the item of property determined in accordance with the new section 54A into a raw percentage rate of depreciation.

1.42 Step 2:- provides that the depreciation rate for items where the unit value of the item does not exceed $300 or the estimated effective life of the item is less than 3 years will be 100%. [New subsection 55(3)]

1.43 Steps 2A and 3:- set out the special depreciation rates which apply to property used for scientific research or as employee amenities. [New subsections 55(3A) and (4)]

1.44 Step 4:- broadbands the rate to one of seven rate classes.

1.45 Step 5:- increases the broadbanded rate by a loading of 20% for property other than motor vehicles. [New subsection 55(6)]

Broadbanding of rates

1.46 New subsection 55(5) will reduce the number of basic depreciation rates to 7. These rates are 2 1/2%, 5%, 7 1/2%, 10%, 15%, 20%, and 33 1/3%.

1.47 If the initial depreciation rate determined on the basis of the effective life of an item is not one of the seven basic rates, the item may be depreciated at the next highest rate.

1.48 Broadbanding will apply to all items of property except for:

•

items to which the 5 year/3 year ("5/3") or other special or accelerated depreciation provisions (other than loadings of 20% or less) apply, and

•

paintings, sculptures, drawings, engravings, photographs or articles of a similar nature.

1.49 A taxpayer may elect not to broadband. [New subsection 55(8)]

Loading

1.50 The broadbanded rate of depreciation will be increased by a loading of 20% for all depreciable items other than motor vehicles. The seven broadbanded rate classes after the loading of 20% will be 3%, 6%, 9%, 12%, 18%, 24% and 40%.

1.51 For these purposes, a motor vehicle includes a four wheel drive vehicle; a motor car, station wagon, panel van, utility truck or similar vehicle; a motor cycle or similar vehicle; or any other road vehicle designed to carry a load of less than 1 tonne or fewer than 9 passengers. [New subsection 55(10), adopting the existing subsection 57AG(1)]

Example

1.52 A taxpayer buys a $1000 item of machinery with an effective life of 4 years. What rate can the taxpayer use?

1.53 Beginning with step 1, the initial rate of depreciation (the "raw percentage) is 1/4 x 100 or 25% based on an effective life of 4 years. Steps 2, 2A, or 3 do not apply. Under step 4 the rate is broadbanded by moving to the next highest rate of 33 1/3%. Under step 5 the loading is applied by multiplying the rate (33 1/3%) by 1.2 making 40%. This is the annual depreciation percentage.

Calculation of depreciation deduction

1.54 The amount of depreciation allowable is calculated under section 56 of the Act. Depreciation is allowable under either the prime cost of the diminishing value method. Existing section 56 will be amended to take account of new section 55.

1.55 Using the example referred to above, under the amended subsection 56(1), 40% will be the rate which can be used for the prime cost method. One and one-half times that rate or 60% will the rate which can be used for the diminishing value method. Assuming the taxpayer began to use the machinery at the start of the income year, a deduction of $400 would be allowable under the prime cost method in each of the first two years of use and the remaining $200 in the third year. If the diminishing value method was used a deduction of $600 would be allowable in the first year, $240 in the second year and so on.

If a taxpayer buys an item costing less than $300 part way through the year, does the taxpayer still have to pro rata the depreciation claim?

1.56 No. Section 56 will be amended to override the normal pro rata provisions where 100% depreciation applies. The item may be completely written off in its first year of use. [Subclause 17(c) - amended subsection 56(1A)]

Pooling

How do I pool?

1.57 Pooling merely involves aggregating items subject to the same depreciation rate. It provides a simpler method of calculating depreciation. [Clause 24 - new section 62AAB]

1.58 The total pool is effectively treated as a single item and depreciated accordingly using the diminishing value method. [New sections 62AAO to 62AAP]

Example

1.59 If the opening written down value of a taxpayer's 24% rate pool was $1000, the taxpayer would simply have to deduct $360 ($1000 by 1.5 times 24%) as depreciation for that pool, and note that the closing written down value of the pool was $640 ($1000 less $360). $640 would form the basis of the opening written down value of the pool for the following year.

Do I have to pool?

1.60 No. Pooling is optional. A taxpayer will have to provide written notice of the creation of a pool and of the allocation of items to a pool. [New sections 62AAC and 62AAE]

If a taxpayer chooses to pool, must the taxpayer pool all assets?

1.61 No. A taxpayer may pool only some assets. [New section 62AAE]

Putting assets in and out of a pool

1.62 The system of pooling is similar to maintaining a ledger. First the taxpayer must create a pool [new section 62AAC]. Then the taxpayer may allocate items to the pool if they satisfy certain conditions [new section 62AAE]. Items may be taken out of the pool by cancelling the allocation [new section 62AAF]. In some circumstances the allocation will be cancelled automatically. [New sections 62AAG to 62AAJ]

Which assets can a taxpayer pool?

•

An item may be pooled regardless of when it was first used or installed.

•

An item may be pooled even if it was previously depreciated using the prime cost method under paragraph 56(1)(b).

•

An item may not be pooled if it is currently being depreciated using a special depreciation provision such as 5/3 or the old provisions relating to primary production. These are all straight line methods. [New paragraphs 62AAE(1)(e) and (f)]

•

Only assets wholly used for the purpose of producing assessable income (or installed ready for use) while in use by the taxpayer and used for that purpose for the whole income year may be pooled. [New paragraph 62AAE(1)(b) and section 62AAG]

Opening value of pool

1.63 For the 1991-92 income year, the opening written down value of each pool is created by adding together the opening written down value of the items which are to be included in the pool. A pool can be created for each annual depreciation percentage - thus there can be a 40% pool, a 24% pool, an 18% pool, etc. [New section 62AAN]

What happens with items which a taxpayer buys part way through a year?

1.64 These items may not be pooled in the first year of use (or installation ready for use), [as they have not been used for income producing purposes for the whole year] [new paragraph 62AAG(1)(b)]. For the first year, the depreciation allowance is calculated in the usual way. That is, the deduction is pro rated from the date of first use or installation ready for use for income producing purposes to the end of the income year. The item may be pooled in the following year by adding the depreciated value of the item at the end of the first year to the opening value of the relevant pool. [New section 62AAN]

Example

1.65 Louise purchases a computer for $1000 which she begins to use for income producing purposes on 1 January 1992. For the year ending 30 June 1992, she would be able to deduct only half of the depreciation which she would have been able to deduct if the computer had been used for income producing purposes for a full year. Assuming an effective life of 5 years, and if Louise used the diminishing value method, the rate of depreciation would be 36% (including the 20% loading). A deduction of $180 would be allowable in the first partial year of use. The written down value of $820 could then be added to the 24% pool for the following year's calculations.

How does a taxpayer make calculations for the pool if some items are used partly for private purposes?

1.66 Where an item is used partly for private purposes it will not be subject to the pooling arrangements. These items will have to be depreciated individually. [New paragraph 62AAE(1)(b) and section 62AAG]

What happens if a taxpayer begins to use a pooled item for private purposes?

1.67 The item must be taken out of the pool, and any depreciation deductions calculated outside the pool. The reconstructed depreciated value of the asset at the beginning of the income year should be deducted from the opening value of the pool. The item may not be pooled again. [New sections 62AAG and 62AAN]

If a taxpayer chooses to pool a particular asset, can the taxpayer take it out of the pool later on?

1.68 Yes, as long as the written down value of the item can be calculated. Taxpayers may "unpool" an asset by deducting the reconstructed depreciated value of the item at the beginning of the year from the opening value of the pool. This is called a cancellation. Depreciation claims for the time after the beginning of the year must be calculated individually [new section 62AAF] If an item has been pooled, it must continue to be depreciated using the diminishing value method. [New section 62AAR]

What is the reconstructed depreciated value of an item?

1.69 The reconstructed depreciated value of a pooled asset at any time is the amount that would have been its depreciated value (i.e. cost less depreciation allowed) at that time if, during the period it is in the pool, it had been depreciated as a separate unit of property at the pooled rate of depreciation.

1.70 If an asset has been depreciated using the prime cost method prior to going into the pool, it must be treated as if it had been depreciated using the diminishing value method while in the pool. [New section 62AAM]

What happens if a taxpayer sells or scraps an item that has been included in a depreciation pool?

1.71 If a pooled item is disposed of, lost or destroyed, the taxpayer may either:

•

take the item out of the pool and treat the difference between the depreciated value and the consideration received in the normal manner, or

•

return the total proceeds of disposal up to the original cost as assessable income, while leaving the depreciated value of the item in the pool, or

•

roll over the total proceeds of disposal up to the original cost, while leaving the depreciated value of the item in the pool.

1.72 In order to use the first mentioned method, the taxpayer must be able to calculate the reconstructed written down value of the item so that it can be removed from the pool. The new section 62AAS provides that the normal methods of dealing with the disposal of depreciated property provided by subsections 59(1) and (2) do not apply to items which are in a pool. [New section 62AAS]

1.73 Under section 59, if a depreciated item is disposed of, lost or destroyed, the difference between the proceeds of sale and the depreciated value of the unit is deductible if the sale price is less than the depreciated value. Where the sale price is greater than the depreciated value, the excess is included in assessable income to the extent of the original cost of the item. (Subsections 59(1) and (2)) Alternatively, this excess may be "rolled over" by deducting it successively against the cost of replacement plant, other new plant or the opening written down value of existing plant. (Subsection 59(2A))

1.74 If it is not possible to determine the reconstructed depreciated value of an asset (possibly because the purchase price and/or date of purchase were unknown), it will be obligatory to either return the total proceeds of disposal up to the original cost of the item as assessable income or roll-over that amount under subsection 59(2A). [New section 62AAT]

1.75 In exercising the roll-over options in subsection 59(2A), taxpayers may not reduce the value of a pool. The new sections 62AAN and 62AAO, which exhaustively define the adjustments which may be made to the value of the pool, do not provide for a deduction for the roll-over of such amounts.

1.76 If a taxpayer has no replacement plant or other new plant, or the cost of such items is less than the amount which is to be rolled over, individual pooled items must be "unpooled" before they can be used to offset the amount being rolled-over.

Summary of options on disposal of a pooled asset

1.77 Assuming that the taxpayer has sufficient records to "unpool" an asset which has been sold or scrapped, the taxpayer may either:

•

Leave the item in the pool and include the proceeds of sale up to the original cost in assessable income; or

•

Leave the item in the pool and roll-over the proceeds of sale up to the original cost by deducting that amount successively from the cost of replacement plant, other new plant or the opening written down value of existing unpooled plant; or

•

If the item was sold for less than its reconstructed depreciated value at the date of disposal, the taxpayer may unpool the item and claim a balancing deduction.

The deduction allowable will be the difference between the reconstructed depreciated value of the item at the date of disposal and the proceeds of disposal (the balancing deduction).

If the item was disposed of part way through the year, the taxpayer may also make a pro rata depreciation deduction outside the pool for the time between the beginning of the income year and the date of disposal.

The item will be "unpooled" by deducting the reconstructed depreciated value of the item at the beginning of the income year from the opening value of the pool; or

•

If the item is sold for more than its reconstructed depreciated value at the date of disposal, the taxpayer may unpool the item and treat the difference between the proceeds of disposal up to the original cost of the item and the reconstructed depreciated value at the date of disposal in the normal way.

This amount may either be included in assessable income or deducted successively from the cost of replacement plant, other new plant or the opening written down value of existing unpooled plant (section 59).

If the item was disposed of part way through the year, the taxpayer may also make a pro rata depreciation claim outside the pool for the time between the beginning of the income year and the date of disposal.

The item will be "unpooled" by deducting the reconstructed depreciated value of the item at the beginning of the income year from the opening value of the pool. Any excess over the original cost may be subject to the capital gains tax provisions.

Example 1 - Sold at a loss

1.78 Q. I purchase an item for $1000, claim $400 depreciation, and then sell the item for $200.

1.79 A. You may either:

•

Include the $200 in assessable income and continue to write off the remaining $600 depreciation in the pool; or

•

Deduct the $200 successively from the cost of replacement plant, other new plant or the opening written down value of existing unpooled plant and continue to write off the remaining depreciation in the pool; or

•

Claim the balancing deduction of $400 (reconstructed depreciated value of $600 minus $200 sale proceeds) provided that you can calculate the reconstructed depreciated value. The item will be unpooled by deducting the reconstructed depreciated value of the item, $600, from the opening value of the pool.

Example 2 - Sold at a profit

1.80 Q. I purchase an item for $1000, claim $400 depreciation, and then sell the item for $1200.

1.81 A. You may either:

•

include $1000 in assessable income and continue to write off the remaining $600 depreciation in the pool; or

•

Deduct the $1000 successively from the cost of replacement plant, other new plant or the opening written down value of existing unpooled plant, and continue to write off the remaining $600 depreciation in the pool; or

•

Include only $400 in assessable income or deduct the amount from the cost of replacement plant etc., provided that you have retained sufficient records to calculate the reconstructed depreciated value of the item. The reconstructed depreciated value of $600 would be deducted from the opening value of the pool.

1.82 As the item has been sold for $200 more than its cost, there may be a liability to capital gains tax on the $200.

Example 3 - Sold at less than purchase price but more than written down value

1.83 Q. I purchase an item for $1000, claim $400 depreciation, and then sell the item for $800.

1.84 A. You may either:

•

Include the $800 in assessable income and continue to write off the remaining $600 depreciation in the pool; or

•

Deduct the $800 successively from the cost of replacement plant, other new plant or the opening written down value of existing unpooled plant, and continue to write off the remaining $600 depreciation in the pool; or

•

Include only $200 ($800 minus $600) in assessable income or deduct the amount of $200 from the cost of replacement plant etc., provided that you have maintained sufficient records to enable you to calculate the reconstructed depreciated value. The reconstructed depreciated value of $600 would be deducted from the opening value of the pool.

Example 4 - Item lost, scrapped, destroyed or abandoned

1.85 Q. I purchase an item for $1000, claim $400 depreciation and then scrap the item.

1.86 A. You may either:

•

Unpool the asset by deducting the $600 reconstructed depreciated value from the pool, and claim the depreciated value of $600 as a deduction; or

•

Leave the item to continue to be written off in the pool. As no consideration was received, no other adjustments are necessary.

Will I have to maintain unit cost records for items in the pool?

1.87 No. However, if cost records are not kept, it will be impossible to calculate any balancing deduction where an item is disposed of for less than the depreciated value or, alternatively, include only the difference between the consideration and the depreciated value of the item in assessable income. In that case, the only options available under Examples 1, 2, and 3 above would be to include the amounts of $200, $1000 and $800 respectively in assessable income or roll the amounts over against the cost of replacement plant etc.. The availability of pooling for depreciation purposes will not, of course, relieve taxpayers of the obligation to keep sufficient records to enable them to calculate any capital gains tax liability on disposal of depreciated property.

Disposal of a pooled asset - effect on the capital gains tax provisions

1.88 For the purposes of calculating the reduced cost base of an asset for the purposes of the capital gains tax provisions, namely, section 160ZK, the asset is treated as if it had not been pooled and only the difference between the consideration up to the original cost and the depreciated value was assessed for the purposes of section 160ZK. This prevents double deductions if the total consideration up to the original cost was assessed or rolled over by virtue of section 62AAT. [New section 62AAU]

Disposal of a pooled asset - effect on purchaser under section 60

1.89 Existing section 60 limits the depreciation allowable to a purchaser of depreciated property in some circumstances. If the total consideration up to the original cost was assessed under the new section 62AAN, the section 60 limit will be that amount. Subsection 62(2), which defines "depreciated value", will also apply as if the person had acquired the item at a cost equal to this amount. [New subsection 62AAT]

Other situations where an allocation may be cancelled

1.90 Some special depreciation provisions, namely the employee amenities and scientific research provisions, require an asset to be used solely or principally for a specific purpose. If, through a change in use of an asset (for example a change from use in employee amenities to use in other parts of a taxpayer's business) or for other reasons, the appropriate rate for a pooled asset becomes different from the pool rate, the allocation of that asset to the pool will be cancelled. [New section 62AAH]

1.91 If an item used in a taxpayer's business begins to be used for basic iron or steel production, it will become eligible for a different flat rate of depreciation under section 57AK. The allocation of the item to the pool must therefore be cancelled. [New section 62AAJ]

Cancellation of allocation to pool

1.92 In all cases where an item of property is removed from a pool during a year, the item is treated as if it had not been in the pool for the whole of the year. [New section 62AAL]

Transitional provisions

1.93 Property acquired, or, if constructed by the taxpayer, where construction commenced before 13 March 1991 will only be written off on the basis of its effective life calculated as before, but with access from the 1991-92 income year to broadbanding and pooling under the new provisions [Subclause 64(5)] . 100% depreciation is confined to property acquired, or, if constructed by the taxpayer, where construction commenced, on or after 1 July 1991 [Subclause 64(7)] . (100% depreciation is in any case confined to those items costing less than a limit, initially $300, or with an effective life of less than three years.)

1.94 Transitional provisions are included to take account of property still being depreciated under provisions which are now repealed [Clauses 67, 68, 69, and 70] . Other provisions provide for the application of the new rules to taxpayers with substituted accounting periods, that is, a tax year ending on a day other than 30 June. [Subclauses 64 (5), (6), (8) and (9)]

Repealed provisions

1.95 There may be property that is still being depreciated under provisions which are now repealed or amended. Paragraph 56(1)(b) - straight-line depreciation - was substituted by the Taxation Laws Amendment Act (No. 4) 1988. Sections 57AE, 57AH and 57AL were repealed by the Taxation Laws Amendment Act (no. 4) 1988. (They each gave special five or three year deductions. Section 57AE applied to certain on-farm storage facilities for grain, hay or fodder; section 57AH applied to new property used only for primary production; and section 57AL gave a five or three year deduction, depending on the rate that would otherwise have been available, for most kinds of depreciable property.) Section 57AG is repealed by this Bill. (It gave loading on the depreciation of property, and is superseded by the proposed subsection 55(6) under clause 16.)

1.96 Transitional provisions ensure that assets which still retain the option to switch depreciation methods under the repealed paragraph 56(1)(b) will continue to have that right. [Clause 68 and subclause 64(5)]

1.97 Property already being written off over three or five years under sections 57AE, 57AH or 57AL will continue to be written off in that way, without any extra loading or broadbanding under the new provisions [clause 67]. Property written off under section 57AH will still exclude employee amenities and plant used for scientific research [clause 69]. The choice of five or three year write-off under section 57AL will continue to be based on the rate of depreciation under the former section 55 [Clause 70].

Substituted accounting periods

1.98 For taxpayers with substituted accounting periods, transitional provisions provide for the different dates of effect which will apply for the year in which 1 July 1991 occurs.

1.99 For taxpayers with a substituted accounting period ending after 30 November, the income year from, say, 1 January 1991 to 31 December 1991 will be the 1991/92 income year. For that year, broadbanding and the standardisation of loadings will be available, any new depreciation rate will apply to assets acquired after 12 March 1991 from 1 July 1991, and 100% depreciation may apply to assets acquired on or after 1 July 1991.

1.100 For these taxpayers, assets acquired on or prior to 12 March 1991 should be treated under subclause 64(5), while assets acquired after 12 March should be treated under the formula in subclause 64(6). [Subclauses 64(5) and (6)]

1.101 Subclause 64(5) inserts the old unloaded prime cost rate into the step by step process in the new section 55, so that broadbanding and the standardisation of the loading will apply. Subclause (6) provides a formula using both the old and new effective lives, which are put through the step by step procedure in the new section 55, and then pro rated to work out a composite percentage.

1.102 For taxpayers with a substituted accounting period ending earlier than 1 December, the income year from, say, 1 November 1990 to 31 October 1991 will be the 1990/91 income year. For that year, broadbanding and the standardisation of loadings will not be available, but any new depreciation rate will apply to assets acquired after 12 March from 1 July 1991, and 100% depreciation may apply to assets acquired on or after 1 July 1991. For these taxpayers, assets acquired on or prior to 12 March 1991 should be treated under subclause 64(8), while assets acquired after 12 March should be treated under the formula in subclause 64(9). [Subclauses 64(8) and (9)]

1.103 Subclause 64(8) provides that the old depreciation rate will continue to apply as if the repealed section 57AG still applied without broadbanding. Subclause 64(9) sets out a formula incorporating the old and new effective lives, which are loaded as if the repealed section 57AG still applied, but are not broadbanded. The two resulting rates are then pro rated to work out a composite percentage for use in the calculation of depreciation for the 1990/91 income year.

Example

1.104 A company with a substituted accounting period ending on 31 December purchased an asset worth $100,000 on 1 April 1991.

1.105 The first step is to calculate the notional former annual depreciation percentage and the notional new annual depreciation percentage. Let's assume these are 12% and 60% respectively.

1.106 Using the formula in subclause 64(6), the annual depreciation rate for the asset would be (using months rather than days for the purpose of the example):

3/9 x 12 + 6/9 x 60 = 4 + 40 = 44%


1.107 In calculating the amount of depreciation allowable, the company would multiply the cost of the asset by 44% and by 3/4 to pro rate the claim:

$100,000 x 44% x 3/4 = $33,000.


Commencement dates

Effective life

•

Applies from 1 July 1991.

•

Applies to property acquired after 12 March 1991 or, if constructed by the taxpayer, where construction commenced after 12 March 1991; but a taxpayer can only use the new rate from 1 July 1991 [Subclauses 64(4), (5), (6), (8) and (9)]

Broadbanding of rates and pooling

•

Apply for the 1991-92 and subsequent income years.

•

Apply regardless of when property was acquired or constructed. [Subclauses 64(4), (5), (6), (8), (9) and (10)]

100% depreciation

•

Only applies to property acquired on or after 1 July 1991 or, if constructed by the taxpayer, where construction commenced on or after 1 July 1991. [Subclause 64(7)]

Clauses involved in the proposed amendments

Clause 15: Inserts a new subsection 54(2A) to ensure that an item subject to 100% depreciation is only allowed a deduction in the first year of use or installation ready for use.

Clause 16: Repeals existing section 55 and inserts new sections 54A and 55. These sections provide a definition of effective life and a step by step method of calculating the appropriate depreciation rate. The new subsection 55(3A) has been numbered with an "A" with the intention that the subsection be repealed when the scientific research provisions expire in 1995.

Clause 17: Amends section 56 to take account of new section 55 and ensures that an item eligible for 100% depreciation may be totally written off even if it is only used for the production of assessable income for part of the year of income.

Clause 19: Repeals existing section 57AG. Any residual effect of section 57AG is catered for by the transitional provisions in clause 64.

Clause 20: Amends section 57AK to take account of new section 55.

Clause 24: Inserts new sections 62AAB to 62AAV relating to the pooling of depreciable items of property.

Clauses 64, 67, 68, 69 and 70: Contain the commencement dates and transitional provisions for the depreciation amendments.

Chapter 2 Anti-avoidance Measures - Deduction Recoupment

Clauses: 22,23,26,36,39,41,46,48 and 63

Overview

Amends a number of the capital allowance provisions to correct a technical deficiency which permits avoidance of tax on recoupments of deductions allowed under those provisions.

Anti-avoidance Measures - Deduction Recoupment

Anti-avoidance Measures - Deduction Recoupment

Summary of the proposed amendments

2.1 This chapter deals with amendments to the income tax law which will correct a technical deficiency in various capital allowance provisions. The amendments will prevent avoidance of tax on recoupments of previously allowed deductions.

Background to the legislation

2.2 Deductions are available in respect of certain capital expenditure incurred in income producing activities; examples include plant depreciation allowances, various capital mining expenditure concessions, scientific research buildings, and timber industry access roads and buildings. A common feature of these capital allowance provisions is that balancing adjustments may be required for disposals of property to which the provisions have applied.

2.3 For example, the plant depreciation provisions require a reconciliation to be made between the consideration for a disposal of depreciated property with its depreciated value (ie. the cost of the property less the amount of deductions allowed).

2.4 Any excess of the consideration for disposal over depreciated value (depreciation recoupment) is assessable to the extent of deductions allowed to the taxpayer disposing of the property. (Any consideration for disposal which is in excess of the cost of the property will fall for consideration under the capital gains tax provisions).

2.5 Similarly, if the consideration for disposal is less than depreciated value, the deficiency is deductible.

2.6 To prevent tax avoidance where property is transferred at less than true value between persons who are not dealing with each other at arm's length, some of the capital allowance provisions require balancing adjustments calculated as if the disposal was at market value. However, others (most notably, plant depreciation allowances) treat such non-arm's length disposals as made for consideration equal to the lesser of market value or depreciated value.

2.7 This has resulted in tax avoidance. For example, an asset that has a low depreciated value, but a substantial market value, might be sold for its depreciated value by the original owner to a related entity, eg. a company of which the original owner is the principal shareholder. That transaction would not result in any recoupment of the vendor's depreciation. The related company could then sell the asset for its true market value without being taxed on recoupment of depreciation allowed to the original owner.

2.8 Similar avoidance can arise under the provisions dealing with partial changes in ownership of property.

2.9 Under those provisions, a part change in the ownership of property (as can occur where a partnership is varied) is taken to be a disposal of the whole of the property by the persons who owned the property before the change, to the persons who owned the property after the change. For example, an old partnership would be deemed to have disposed of the whole of the property to the new partnership. This measure was a response to the High Court's decision in Rose's case [(1951)
84 CLR 118] which said that the depreciation balancing adjustment provisions could only apply to disposals of the whole of the ownership of property, not part changes of ownership.

2.10 Most of the capital allowance provisions permit the parties to a partial change in ownership of property to specify the value of the property for purposes of applying the balancing adjustment rules to the disposal that is taken to have occurred. The specified amount must not be less than the lesser of the property's market value or written down value (cost less deductions allowed). This rule ensures that deductible balancing adjustments are not generated artificially.

2.11 However, in cases where the true value of property exceeds its written down value, undesirable outcomes could occur if the parties were to specify an amount less than market value, eg. the depreciated value. If that occurred on the transfer of depreciated partnership plant to a differently constituted partnership, there would be no taxable recoupment of the old partnership's depreciation deductions. Nor would any depreciation recoupment on a future sale of the property by the new partnership include recoupment of depreciation deductions allowed to the old partnership.

Explanation of the proposed amendments

2.12 The avoidance possibilities described above arise under various capital allowance provisions which do not treat all non-arm's length disposals, or disposals taken to occur on a part change in ownership, as occurring at market value. Accordingly, those provisions are being amended to ensure that such disposals are deemed to occur at market value.

2.13 Disposals of property between parties who are not dealing with each other at arm's length will be taken to be made for consideration equal to the market value of the property. The provisions affected by this amendment are:

•

depreciation of plant (section 59);

•

expenditure on buildings used for scientific research (section 73A); and

•

timber industry access roads and buildings (Division 10A).

2.14 Similarly, disposals of property which are deemed to occur on a part change in ownership of that property will be treated as being made for consideration equal to the market value of the property. The provisions to be amended are:

•

depreciation of plant (section 59AA);

•

mining and quarrying (section 122R);

•

transport of minerals and quarrying materials; (section 123F); and

•

petroleum mining (section 124AO).

The amendments will make those provisions consistent with other capital allowance provisions which already treat non-arm's length and deemed disposals as occurring at market value.

Commencement date

2.15 The amendments apply to disposals of property occurring after [date of introduction].

Clauses involved in the proposed amendments

Clause 22: Amends subsection 59(4) so that non arm's length disposals of depreciable plant will be taken to occur at market value. It also repeals subsection 59(4A) which, by the amendment, becomes redundant.

Clause 23: Amends subsection 59AA(1) and replaces subsection 59AA(2) with a new subsection 59AA(2). The effect is that part changes in ownership of plant which under section 59AA are taken to be disposals of the whole of the property are treated as occurring at market value, unless an election for balancing adjustment roll-over relief is made (see Chapter 3 ).

Subclause 26(1): Inserts subsection 73(4A) which will treat non arm's length disposals, or part disposals, of scientific research buildings as occurring at market value.

Clause 36: Amends subsections 122R(1) and 122R(3), and replaces subsection 122R(2) with new subsections 122R(2) and 122R(2A). The effect is that disposals of mining or quarrying property that section 122R deems to occur as the result of a part change in ownership are taken to occur at market value, unless an election is made for balancing adjustment roll-over relief (see Chapter 3 ).

Clause 39: Amends subsections 123F(1) and 123F(3), and substitutes new subsections 123F(2) and 123F(2A) for subsection 123F(2). The effect is that part changes in ownership of mining or quarrying transport property which are taken under section 123F to be disposals of the whole of the property are treated as made for consideration equal to market value, unless an election for balancing adjustment roll-over relief is made (see Chapter 3 ).

Clause 41: Amends subsection 124AO(1) and substitutes subsection 124AO(2) with new subsection 124AO(2). This ensures that disposals of petroleum mining property that are deemed under section 124AO to occur as the result of a part change in ownership of the property are taken to occur at market value, unless an election for balancing adjustment roll-over relief is made (see Chapter 3 ).

Clause 46: Inserts new section 124JE so that non arm's length disposals of property for which deductions are allowable under the timber industry access roads and buildings provisions are treated as occurring at market value.

Clause 48: Amends subsection 124W(2), and replaces subsections 124W(3), (4), and (5) with new subsection 124W(3). This means that part changes in ownership of industrial property that are taken under section 124W to be disposals of the whole of the property are treated as made at market value, unless an election for balancing adjustment roll-over relief is made ( Chapter 3 ).

Subclauses 63(6) & (7) specify that these amendments will apply to disposals after [date of introduction].

Chapter 3 Balancing Adjustment Roll-over Relief

Clauses: 21,23,27,34,35,36,37,38,39,40,41,45,46,47,48,56,63,71 and 72

Overview

Makes available optional balancing adjustment roll-over relief to be available for intra group company transfers of property (to which the capital allowance provisions have applied) occurring after 6 December 1990 and before [day after date of introduction]. Announced by former Treasurer on 8 December 1990.

Applies balancing adjustment roll-over relief for disposals of assets (to which the capital allowance provisions have applied) to other persons if capital gains tax roll-over relief is obtained for the disposal.

Makes available optional balancing adjustment roll-over relief for disposals of property (to which the capital allowance provisions have applied) that are taken to occur as the result of part changes in the ownership of that property.

Balancing Adjustment Roll-over Relief

Balancing Adjustment Roll-over Relief

References in this chapter to "capital allowance provisions" are references to the following provisions under which deductions are available in respect of the capital costs relating to property used in income producing activities:

•

depreciation of plant (sections 54 - 62);

•

buildings used in scientific research (section 73A);

•

mining and quarrying (Division 10);

•

transport of minerals and quarry materials (Division 10AAA):

•

petroleum mining (Division 10AA);

•

timber industry access roads and buildings(Division 10A); and

•

industrial property (10B).

Summary of the proposed amendments

3.1 This Bill will amend the Income Tax Assessment Act 1936 to provide for a deferral (ie. roll-over) of balancing adjustments that could otherwise arise from disposals of property to which the various capital allowance provisions have applied. This balancing adjustment roll-over relief will apply where either:

•

capital gains tax roll-over relief is obtained for a disposal of property to another person; or

•

an election is made in respect of a disposal of property that is taken to occur as the result of a part change in ownership of property (eg. where the membership of a partnership is varied).

Background to the legislation

3.2 Under capital gains tax (CGT), taxpayers can obtain roll-over relief for disposals of assets (including property to which capital allowance provisions have applied) in a number of circumstances where there is no real change in the underlying ownership of property, eg. as occurs when property is transferred within a wholly-owned company group.

3.3 The effect of CGT roll-over relief is that the exempt status of assets acquired before 20 September 1985 (the commencement date of CGT) is retained, and accrued capital gains and losses in respect of assets acquired after that date are deferred for taxation purposes until the assets are ultimately disposed of in circumstances where roll-over relief is not obtained, eg. an asset is disposed of outside a wholly-owned company group.

3.4 The broad effect of CGT roll-over relief is to treat the disposal as if it had not occurred and treat the transferee as if the transferee had been the original owner of the asset.

3.5 A common feature of the various capital allowance provisions is that balancing adjustments may be required on the disposal of property for which deductions have been allowed under those provisions. This means that disposals of such property can result in assessable recoupments of deductions. Under the plant depreciation provisions, for example, that happens when the consideration for disposal is more than the asset's depreciated value (ie. cost less deductions allowed). Similarly, deductions are available for losses on disposal (ie. where the consideration for disposal is less than depreciated value).

3.6 A disposal of property also terminates the basis of deduction applicable to that property. That is, the transferee may not claim deductions on the same basis as the transferor. For example, the transferor may have obtained a concessional rate of depreciation on transferred plant which either no longer applies, or is available for new property only.

Explanation of the proposed amendments

CGT derived balancing adjustment roll-over relief

3.7 Capital allowance balancing adjustment roll-over relief is to apply to disposals of property in the following circumstances:

•

a disposal of an asset to a wholly-owned company where CGT roll-over relief is obtained under section 160ZZN;

•

a disposal of partnership property to a company which is wholly-owned by the partners where CGT roll-over relief is obtained under section 160ZZNA;

•

a disposal of an asset within a wholly-owned company group where CGT roll-over relief is obtained under section 160ZZO;

•

a transfer of an asset between spouses as the result of a marriage breakdown where CGT roll-over is obtained under section 160ZZM; and

•

a transfer of an asset from a company or trust to a spouse as the result of a marriage breakdown where CGT roll-over relief is obtained under section 160ZZMA.

3.8 The main consequence of capital allowance balancing adjustment roll-over relief is that the balancing adjustment provisions will not apply to the disposal. However, to ensure that the balancing adjustment provisions operate properly at the time the transferee eventually disposes of the property, the transferee will be taxable on recoupments of capital allowances calculated as if the transferor had continued to own the property, ie. by reference to deductions allowed to both the transferor and the transferee.

3.9 Successive roll-overs will be available, so that the transferee first disposing of the property in "non-roll-over" circumstances will be required to account for deductions allowed to both the transferee and earlier transferors.

3.10 Another outcome of roll-over relief is that the transferee will "inherit" the transferor's basis of claiming deductions. In the case of depreciable plant, for example, this will mean that the transferee will adopt the same rate of depreciation as the transferor (eg. there will be no need for the transferee to recalculate the effective life of the property).

3.11 It will also mean that the transferee will be taken to have made any choices made by the transferor that affect the relevant capital deduction. For example, if the transferor of depreciable property had opted to claim depreciation under the prime cost method, the transferee's depreciation entitlement will be on a similar basis. If the transferor had instead chosen the diminishing value method, the transferee will be taken to have acquired the relevant plant at its depreciated value for the purpose of ongoing depreciation entitlements.

3.12 This "inheritance" mechanism will be available for successive roll-overs where CGT roll-over relief is obtained on the disposal of the property.

3.13 Certain motor vehicles are not treated as assets for CGT purposes, so that disposals of those vehicles are not subject to CGT. Nevertheless, unnecessary balancing adjustments can occur in circumstances where CGT roll-over would otherwise be available, eg. on the transfer of a vehicle within a wholly-owned company group.

3.14 Accordingly, balancing adjustment roll-over relief is to apply on the disposal of a motor vehicle in the same circumstances that it would be available if motor vehicles themselves were treated as assets for CGT purposes.

Elected balancing adjustment roll-over relief on part change of ownership of property

3.15 Optional balancing adjustment roll-over relief is to be available on certain disposals of property where there is some continuity of ownership of the property. Under most of the capital allowance provisions, a part change in the ownership of property (eg. as occurs where the membership of a partnership is varied) is taken to be a disposal of the whole of the property by all of the persons who owned the property before the change, to all of the persons who owned the property after the change (eg. the old partnership is deemed to have disposed of the whole of the property to the new partnership).

3.16 Under anti-avoidance measures introduced by this Bill (see Chapter 2 ), such deemed disposals will be taken to occur at market value. Under the various balancing adjustment rules, this could lead to continuing partners being taxed on amounts that relate to a share of partnership property which they continue to own.

3.17 To alleviate this difficulty, it will be open to all of the transferors and transferees to elect to take balancing adjustment roll-over relief where there is some continuity of ownership of the property. This is broadly similar to the rules that apply to disposals of trading stock that are taken to occur at market value where there is a part change in ownership of the trading stock.

3.18 The consequences of such elected balancing adjustment roll-over relief are the same as for CGT derived roll-over relief, ie. the capital allowance balancing adjustment provisions will not apply to the deemed disposal, and the transferee taxpayer will "inherit" the transferor's basis of deduction; however, the transferee will be subject to tax on recoupments of deductions calculated as if the transferor had retained ownership, ie. by reference to capital allowance deductions allowed to both the transferor and the transferee.

Record keeping

3.19 Written elections will need to be made where balancing adjustment roll-over relief is sought for disposals of property that are taken to occur as the result of part changes in ownership of the property. They must be made within six months after the end of year in which the disposal occurred by all of the persons who owned the property both before and after the change in ownership. Parties to an election must retain the election, or a copy, for five years after they dispose of the property.

3.20 Elections will generally not be necessary where CGT roll-over relief applies to the disposal, as balancing adjustment roll-over relief will automatically apply in such cases. An exception will be where CGT roll-over relief is obtained for a disposal of an interest in property which is taken to be a disposal of the whole of the property under a capital allowance provision, eg. where a partner obtains CGT roll-over relief for the disposal of an interest in an asset to a wholly-owned company of the partner. An election by all of the persons who owned the property before and after the disposal would be required in order to obtain balancing adjustment roll-over relief.

3.21 Transferors will need to provide transferees with such information as is necessary for transferees to ascertain how the roll-over provisions will apply to them. For example, a transferor of depreciable plant will need to provide details of the property's cost, date of acquisition, and effective life, and of elections made, and deductions obtained, in respect of the property.

Commencement date

3.22 The amendments apply to disposals of property occurring after [date of introduction].

3.23 It was previously announced (Treasurer's press release of 8 December 1990) that optional balancing adjustment roll-over relief would be available for intra group company asset disposals occurring after 6 December 1990, ie. roll-over relief would be available irrespective of whether CGT roll-over relief was obtained under section 160ZZO. Optional roll-over relief will not be available for disposals taking place [ after date of introduction ], but will apply automatically if CGT roll-over relief applies to the disposal.

3.24 Optional balancing adjustment roll-over relief will apply to intra group company disposals occurring after 6 December 1990 and before [ day after date of introduction ] if an election is made within 6 months of the later of the end of the transferor's income year in which the disposal occurred, or [ date of introduction ].

Clauses involved in the proposed amendments

3.25 The following clauses insert new sections that set out rules for capital allowance balancing adjustment roll-over relief on the disposal of property.

3.26 The following clauses insert complementary new provisions to enable elections to be made for balancing adjustment roll-over relief on disposals of property that are taken to occur as the result of part changes in ownership.

3.27 The following clauses are also involved in the amendments.

Clause 56: Inserts subsection 262A(4AA) which deals with requirements for keeping notices of elections. It also inserts subsections 262A(4AC) & (4AD) which deal with the giving and keeping of information about assets for which balancing adjustment roll-over relief is obtained.

Subclause 63(6): Provides for balancing adjustment roll-over relief to be available for disposals of property after [date of introduction].

Clause 71: Provides transitional arrangements for repealed depreciation provisions applicable to property immediately before the disposal for which roll-over relief is obtained. Broadly, the effect is to enable transferees of property to continue to apply a repealed basis of depreciation that applied to the property immediately before the disposal, eg. the "5/3" depreciation write-off in repealed section 57AL.

Clause 72: Enables balancing adjustment roll-over relief to be obtained for intra group company asset disposals occurring after 6 December 1990 and before [day after date of introduction].

APPENDIX TO CHAPTER 3

Detailed Explanation of Balancing Adjustment Roll-over Relief

Depreciable property

Summary of the existing law

Deductions are available for capital expenditure incurred in acquiring plant or articles used for income producing purposes. The standard rate of depreciation is based on the effective life of the property. Special accelerated rates of depreciation are available in specific cases, eg. expenditure on both employee amenities and plant used in scientific research is deductible over 3 years even though the effective life may be longer.

A taxpayer may elect to use either the diminishing value method or prime cost method to calculate annual deductions.

Under the prime cost method, the cost of the property is written off evenly over its effective life. Under the diminishing value method, deductions are calculated by reference to the depreciated value of the property, ie. cost less deductions allowed.

Generally speaking, deductions are pro rated where property is either partly used for income producing purposes, or used for part of the year only, eg. property purchased or sold part way through a year.

Further details of the operation of the depreciation provisions are set out in Chapter 1 on "Depreciation Amendments".

Consequences of balancing adjustment roll-over relief

The transferor

The basic rule is that where roll-over relief is obtained in relation to a disposal of depreciable property the balancing adjustment provisions will not apply. [New Subsections 58(1)-(3)]

Consistent with the usual rules, pro rata depreciation deductions will be available for the period of the year of income up to the date of disposal. Pro rating will also apply to disposals of property to which pro rating would not usually apply, eg. the repealed concessions for certain property used in primary production which continue to have application. [New Subsection 58(6)]

However, if the depreciation percentage is 100%, pro rating will not be necessary because the cost would have been fully deductible to the transferor (see Chapter 1 ).

The transferee

The transferee will be taken to have acquired the property for consideration equal to the cost of the property to the transferor where the prime cost method of depreciation had been adopted by the transferor, or the depreciated value of the property at the time of the transfer where the diminishing value method had applied.

The transferee will also "inherit" the basis of depreciation that applied to the property in the hands of the transferor. Thus, the transferee need not calculate a new effective life for the property under the new rules for calculating depreciation rates (explained in Chapter 1 ). [New Subsection 58(4)]

It will also mean that the transferee will be entitled to depreciation deductions at concessional rates to which the transferor was entitled, even though the concession may not have been otherwise available to the transferee, eg. it has been withdrawn, or applies to new property only. [New Subsection 58(5) and transitional clause 71]

The entitlement is subject to the transferee using the property for the same purposes as the transferor where that use is a condition for the entitlement, eg. plant used in primary production. If the transferee is not eligible for the same concessional rate, the transferee will adopt the depreciation rate that would have otherwise applied to the property in the hands of the transferor if the concessional rate had not applied.

The transferee will be entitled to claim a pro rata deduction for depreciation in the year of transfer. That rule will also apply where pro rating would not normally apply. [New subsection 58(6)]

The transferee will be deemed to have obtained depreciation deductions allowed to the transferor in relation to the property. This means that any balancing adjustment included in the transferee's assessable income on the disposal of the asset by the transferee will be calculated taking into account both the transferor's and the transferee's depreciation deduction entitlements. [New Subsection 58(7)]

The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.

Transitional rules

A number of depreciation rules continue to have application despite their repeal, eg. the special depreciation rates for certain plant used in primary production (former sections 57AE and 57AH), and "5/3" depreciation (former section 57AL). Some threshold conditions under those provisions are that expenditure be incurred within certain periods of time or under specified contractual arrangements.

If any of those provisions apply to the transferor, then the transferee will be taken to have acquired the property under the same threshold conditions as the transferor. This will enable the transferee to "inherit" special depreciation rates if the property continues to be used in the circumstances required under those repealed rules. [Subclauses 71(3)-(6)]

Similarly, a number of existing depreciation rules are to be replaced by new provisions (see Chapter 1 ). They are 18%-20% loadings (section 57AG), and the "basis of depreciation" rules (section 55). Furthermore, owners of depreciable plant acquired after 12 March 1991 and before 1 July 1991 will be entitled to change the basis of depreciation to new "effective life" rules on 1 July 1991.

Transitional rules will ensure that those changes will affect a transferee in the same way they affected the transferor, or would have affected the transferor but for the disposal of the property, eg. if the transferor's property was acquired before 13 March 1991, then the transferee will be taken to have also acquired it before that date, with the consequence that the "old depreciation percentage" will continue to apply. [Subclauses 71(2),(7)-(12)]

Buildings used in scientific research

Summary of the existing law

Broadly, capital expenditure in respect of a building, or part of a building, to be used solely in scientific research is deductible evenly over three income years. The expenditure must be either:

•

in respect of the construction of, or alteration or addition to, a building, which was commenced before 21 November 1987;

•

in respect of an acquisition of a building before 21 November 1987, or

•

incurred on the acquisition, construction etc. of a building under a contract entered in to before 21 November 1987.

Any consideration received for a disposal of a building, or part of a building, to which the provisions have applied, is assessable to the extent of the deductions allowed.

Consequences of balancing adjustment roll-over relief

The transferor

The basic rule is that where roll-over relief is obtained in relation to a disposal of a building or part of a building to which the provisions have applied, the balancing adjustment provisions will not apply to the disposal. [New Subsections 73AA(1)&(2)]

The transferor will not be entitled to any deductions in respect of the building in the year of disposal; however, a full year's deduction will be available to the transferee in respect of any unclaimed capital expenditure of the transferor in respect of the building. [New Paragraphs 73AA(3)(b)&(c)]

The transferee

The transferee will be taken to have acquired the building, or the part of the building, for consideration equal to its cost to the transferor. The transferee will be also taken to have "acquired" the building before 21 November 1987. [New Paragraph 73AA(3)(a) and new subsection 73AA(4)]

This gives the transferee entitlement to the deductions the transferor would have obtained if the building continues to be used solely for scientific research purposes.

The transferee will be deemed to have obtained the deductions allowed to the transferor. This means that any consideration received by the transferee on the disposal of the building or part of the building will be included in the transferee's assessable income to the extent of the deductions allowed to both the transferor and the transferee. [New Subsection 73AA(5)]

The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.

Mining (other than petroleum)

Summary of the existing law

Concessions are available in respect of capital expenditure incurred in mining operations and exploration or prospecting activities.

Expenditure incurred in mining operations

Deductions are available for allowable capital expenditure (ACE) incurred in prescribed mining operations. Examples of ACE include capital expenditure on preparing a site for mining operations, buildings to be used in the mining operations, infrastructure costs, and employee housing and welfare facilities. Expenditure incurred on plant prior to 25 May 1988 also qualified for deduction, unless an election was made to claim deductions under the ordinary plant depreciation provisions.

Expenditure incurred in acquiring mining or prospecting rights or information is treated as ACE to the extent of the vendor's undeducted ACE and undeducted exploration and prospecting expenditure in respect of the property, plus any amounts included in assessable income as a result of the disposal, and which is specified in a notice given by both the vendor and purchaser.

The method of calculating annual deductions for ACE has varied over time. ACE incurred after 19 July 1982 is evenly deductible over the lesser of 10 years or the life of the mine. However, deductions are limited to the amount that does not exceed net income (broadly, the amount by which assessable income exceeds other allowable deductions). Excess amounts are deductible in the following year. If that year's income is insufficient to absorb all of the excess, the balance will be carried forward for successive deduction against the income of following years.

Alternatively, an election can be made that the limit not apply so that excess amounts are not carried forward to the next year, but are immediately deductible. Resultant losses are available for carry forward or, or in the case of a group company, for transfer to a profitable group company under the group loss transfer provisions.

Deductions for ACE incurred on or before 19 July 1982 are calculated by dividing the year end balance of undeducted ACE by a number being the lesser of the number of years in the estimated remaining life of the mine or a "statutory" number which has varied (between 5 and 25) over time.

Unless an election is made, deductions are limited to the amount that can be absorbed by net income. However, unlike post 19 July 1982 excess amounts, pre 20-July 1982 excess amounts are treated as undeducted ACE, ie. deductible over the life of mine etc.

The effect of an election is similar to that for post 19 July 1982 excess amounts, ie. they are treated as losses available for carry forward or transfer under the group loss transfer provisions.

Exploration and prospecting expenditure

Generally speaking, expenditure (including the cost of depreciable plant) incurred on exploration and prospecting activities is immediately deductible in the year it is incurred. However, an election is available to treat expenditure on plant as deductible under the plant depreciation provisions.

Deductions are conditional on the Commissioner being satisfied that either:

•

prescribed mining operations are carried on, or are proposed to be carried on, or

•

the expenditure was necessarily incurred in carrying on a business of mining exploration and prospecting.

Expenditure is deductible to the extent that it is absorbed by net income. The treatment of unabsorbed expenditure (excess amounts) varies according to when the expenditure to which the excess amounts relate was incurred.

Excess amounts in respect of expenditure incurred before the end of the 30 June 1974 income year are treated as allowable capital expenditure incurred in the first subsequent year in which prescribed mining operations are carried on.

Excess amounts in respect of expenditure incurred after the 30 June 1974 income year and before 22 August 1984 are deductible in the first subsequent year in which prescribed mining operations are carried on.

Excess amounts relating to expenditure incurred after 21 August 1984 are deductible in the first subsequent year in which assessable income is derived and:

•

prescribed mining operations are carried on or are proposed to be carried on, or

•

the expenditure was necessarily incurred in carrying on a business of mining exploration and prospecting.

Deductions for post 30 June 1974 excess amounts are limited to the amount of net income. Unabsorbed excess amounts are carried forward successively against the net income of following years. However, excess amounts applicable to deemed gold exploration and prospecting expenditure incurred before 1 January 1991 (the date exemption for gold mining income ceased) are subject to a seven year carry forward limit.

Since the end of the 30 June 1985 income year, an annual election has been available for exploration and prospecting expenditure incurred in a year of income. The effect of the election is that deductions for both the expenditure actually incurred in that year, and the relevant proportion of excess amounts attributable to post 21 August 1984 expenditure, are not limited to the amount of net income. Resultant losses are available for carry forward, or transfer under the group loss transfer provisions.

Consequences of balancing adjustment roll-over relief

The transferor

Balancing adjustments will not be made to the transferor's taxable income where roll-over relief is obtained in relation to a disposal of property to which the mining provisions have applied. [New Subsections 122JAA(1)-(3)]

Consistent with the existing law, the transferor will not be entitled to any deductions in respect of the property in the year of disposal or any subsequent year except for any actual exploration and prospecting expenditure incurred during the disposal year.

The transferee

The transferee will be taken to have acquired the property for an amount equal to the transferor's undeducted ACE in respect of the property at the time of the disposal, irrespective of the actual consideration paid. The characteristics of this undeducted ACE will pass to the transferee. This will mean that:

•

amounts attributable to the transferor's undeducted allowable (post 19 July 1982) capital expenditure will be deductible to the transferee over the remaining number of years (including the year of transfer) in the transferor's ten year period, unless the life of mine is shorter;

•

amounts relating to expenditure incurred by the transferor on or before 19 July 1982 will be deductible to the transferee under the rules that applied at the time the transferor incurred the expenditure. For example, deductions for an amount attributable to ACE incurred by the transferor between 17 August 1976 and 30 April 1981 will be calculated by dividing that amount by the lesser of the number years in the life of the mine, or 5;

As well, amounts in respect of property which qualified as ACE at the time of acquisition by the transferor, but which would no longer qualify (eg. plant) will continue to be treated as ACE to the transferor. [New Subsections 122JAA(4),(9),(10),&(15)]

The transferee will stand in the place of the transferor as regards any excess (exploration or ACE) amounts in respect of the property at the time of disposal. These amounts will be deductible on the same basis as for the transferor; for example, an excess amount attributable to expenditure incurred by the transferor between the end of the 30 June 1974 income year and 22 August 1984 would be deductible to the transferee in the first year, not being a year prior to the year of transfer, in which the transferee carries on prescribed mining operations. [New Subsections 122JAA(5)-(8),(11),&(12)]

However, excess amounts relating to gold exploration and prospecting expenditure incurred between 25 May 1988 and 1 January 1991 will not be deductible to the transferee after the transferor's original seven year carry forward deduction limit has expired. [New Subsections 122JAA(17)&(18)]

The transferee will be taken to have made any election made by the transferor regarding plant, ie. if the transferor had elected to deduct the cost of depreciable plant under the mining provisions, that basis of deduction will apply to the transferee, and vice versa. [New Subsections 122JAA(13)&(14)]

Balancing adjustments will apply on the subsequent disposal of property by the transferee where capital allowance roll-over relief is not available. Balancing adjustments will be calculated taking into account both the transferor's and the transferee's capital deduction entitlements. For that purpose, the transferee is taken to have acquired the property for an amount equal to the transferor's costs, rather than the transferee's actual or deemed consideration. [New Subsections 122JAA(20)-(22)]

The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.

Quarrying

Summary of the existing law

Concessions are available in respect of capital expenditure incurred in exploring for quarry materials and carrying on quarrying operations.

Expenditure incurred in quarrying operations

Deductions are available for allowable capital expenditure (ACE) incurred in eligible quarrying operations. Examples of ACE include capital expenditure in preparing the quarrying site, buildings (excluding employee housing and welfare facilities), infrastructure costs, etc.

Expenditure incurred in acquiring quarrying or prospecting rights or information qualifies as ACE to the extent of the vendor's undeducted ACE and undeducted exploration and prospecting expenditure in respect of the property plus any amounts included in assessable income as a result of the disposal, and which has been specified in a notice given by both the vendor and purchaser.

ACE is deductible evenly over the lesser of 20 years or the estimated life of the quarry. Deductions are allowable to the extent they are absorbed by net income (broadly, the amount by which assessable income exceeds other allowable deductions). Unabsorbed amounts (excess amounts) are deductible in the following year. However, if that year's net income is insufficient to fully absorb the excess, the balance will be carried forward for successive deduction against the income of following years.

Alternatively, an election can be made that the limit not apply so that excess amounts are not carried forward to the next year, but are immediately deductible. Resultant losses are available for carry forward or, or in the case of a group company, for transfer to a profitable group company under the group loss transfer provisions.

Quarrying exploration expenditure

Expenditure, including expenditure on plant, incurred in exploring and prospecting for quarry materials is immediately deductible in the year it is incurred.

Deductions are conditional on the Commissioner being satisfied that either:

•

eligible quarrying operations are, or are proposed to be carried on, or

•

the expenditure was necessarily incurred in carrying on a business of quarrying exploration.

Unless an election is made, deductions are limited to the amount of net income available to absorb the deductions. Unabsorbed expenditure (excess amounts) is immediately deductible in the first subsequent year in which assessable income is derived, again subject to the limit and conditions mentioned above.

Alternatively, an annual election can be made for the limit not to apply to both expenditure incurred in the year and the relevant proportion of prior year excess amounts. Resultant losses are available either for carry forward, or, in the case of a group company, for transfer to a profitable group company under the group loss transfer provisions.

An election can be made for depreciable plant, which may otherwise be deductible as exploration and prospecting expenditure, to be depreciated under the ordinary plant depreciation provisions.

Consequences of balancing adjustment roll-over relief

The transferor

Balancing adjustments will not be made to the transferor's taxable income where roll-over relief applies to a disposal of property to which the quarrying provisions have applied. [New Subsection 122JG(1)-(3)]

Consistent with the existing law, the transferor will be entitled to claim deductions for exploration/prospecting expenditure incurred on the property during the year of disposal, but deductions will not be available in respect of undeducted ACE and excess amounts that relate to the property.

The transferee

The transferee will be deemed to have acquired the property for consideration equal to the transferor's undeducted ACE in respect of the property at the time of the disposal, irrespective of the actual consideration paid. The transferee will continue to deduct the expenditure on the same basis as the transferor, ie. over the lesser of the remaining number of years (including the year of transfer) in the transferor's twenty year period, or the life of the quarry. [New Subsection 122JG(4)]

The transferee will stand in the place of the transferor as regards any excess amounts in respect of the property at the time of disposal. Such amounts will be available for immediate deduction in the manner described above, eg. an excess amount in respect of exploration expenditure will be immediately deductible against the transferee's assessable income in the first year, not prior to the year of disposal, in which the Commissioner is satisfied that either:

•

eligible quarrying operations are, or are proposed to be carried on, or

•

the expenditure was necessarily incurred in carrying on a business of quarrying exploration.

The transferee will be taken to have made any election made by the transferor regarding plant, ie. if the transferor had elected to deduct the cost of depreciable plant under the mining provisions, that basis of deduction will apply to the transferee, and vice versa. [New Subsections 122JG(5)-(8)]

Balancing adjustments will apply on the subsequent disposal of property by the transferee where capital allowance roll-over relief is not available. Balancing adjustments will be calculated taking into account both the transferor's and the transferee's capital deduction entitlements. For that purpose, the transferee is taken to have acquired the property for an amount equal to the transferor's costs, rather than the transferee's actual or deemed consideration. [New Subsections 122JG(10)-(12)]

The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.

Transport of minerals

Summary of the existing law

Capital expenditure incurred on facilities (such as railroads, pipelines and ports) used for the transport of minerals (including petroleum) from mining sites is generally evenly deductible over 10 years. However, expenditure incurred between 17 September 1974 and 17 August 1976 is deductible over 20 years.

An election can be made that expenditure otherwise deductible over 10 years be deducted over 20 years instead.

Consequences of balancing adjustment roll-over relief

The transferor

Balancing adjustments on the disposal of property will not be made to the taxable income of the transferor where roll-over relief is obtained for a disposal of property. [New Subsections 123BBA(1)-(3)]

Consistent with the existing law, the transferor will not be entitled to deductions in respect of the property in the year of disposal, or in any subsequent year.

The transferee

The transferee will be taken to have acquired the property for consideration equal to so much of the cost to the transferor as was deductible mining transport expenditure, and as having obtained the deductions allowed to the transferor in respect of that expenditure in the relevant years.

That cost will be deemed to have been incurred at the same time as the transferor, enabling the transferee to obtain deductions over the remaining number of years in the 10 or 20 year period applicable to the transferor's expenditure.

If the transferor had elected to deduct "10 year" expenditure over 20 years, the transferee will be deemed to have also made an election and will therefore be entitled to deductions over the remaining years in the 20 year period. [New Subsections 123BBA(4)-(11)]

Balancing adjustments will apply on the subsequent disposal of property by the transferee where capital allowance roll-over relief is not available. Balancing adjustments will be calculated taking into account both the transferor's and the transferee's capital deduction entitlements. For that purpose, the transferee is taken to have acquired the property for an amount equal to the transferor's costs, rather than the transferee's actual or deemed consideration. [New Subsections 123BBA(13)-(15)]

The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.

Transport of quarry materials

Summary of the existing law

Capital expenditure incurred after 15 August 1989 on facilities (such as railroads, roads, pipelines and ports) used for the transport of quarrying materials from quarrying sites is evenly deductible over 20 years.

Consequences of balancing adjustment roll-over relief

The transferor

Balancing adjustments will not be made to the taxable income of the transferor where capital allowance roll-over relief is obtained in respect of a disposal of property. [New Subsections 123BF(1)-(3)]

Consistent with the usual rules, the transferor will not be entitled to deductions in respect of the property in the year of disposal

The transferee

The transferee will be treated as having acquired the property for consideration equal to so much of the transferor's cost as is deductible expenditure on facilities to transport quarry materials. This means that the transferee will be entitled to the same deductions that the transferor would have been entitled to if the disposal had not occurred. [Subsection 123BF(4)]

Balancing adjustments will apply on the subsequent disposal of property by the transferee where capital allowance roll-over relief is not available. Balancing adjustments will be calculated taking into account both the transferor's and the transferee's capital deduction entitlements. For that purpose, the transferee is taken to have acquired the property for an amount equal to the transferor's costs, rather than the transferee's actual or deemed consideration. [New Subsections 123BF(6)-(8)]

The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.

Petroleum mining

Summary of the existing law

Concessions are provided for capital expenditure incurred in exploring or prospecting for petroleum and carrying on prescribed petroleum operations.

Expenditure incurred in petroleum mining operations

Deductions are available for allowable capital expenditure (ACE) incurred in prescribed petroleum operations. Examples of ACE include capital expenditure on infrastructure costs, employee housing and welfare facilities, and post 14 January 1986 cash bidding payments for exploration permits and production licences.

Expenditure incurred on plant prior to 25 May 1988 also qualified for deduction, unless an election was made to claim deductions under the ordinary plant depreciation provisions.

Expenditure incurred in acquiring mining and/or prospecting rights, or information, qualifies as ACE to the extent of the vendor's undeducted ACE and undeducted exploration and prospecting expenditure in respect of the property plus any amounts included in assessable income as the result of the disposal, and which has been specified in a notice given by both the vendor and purchaser.

Exploration permit and production licence cash bidding payments are deductible only after the production licence has been granted. Accordingly, there is provision for the transfer, by way of written notice, of such cash bidding payment entitlements to purchasers of exploration permits for which production licences have not been granted.

The treatment of ACE has varied over time. Under the present rules, applicable to expenditure incurred after 19 July 1982, ACE is deductible evenly over the lesser of 10 years or the life of the petroleum field. Deductions are limited to amounts which can be absorbed by net income (broadly, the amount by which assessable income exceeds other deductions). Excess amounts are deductible in the following year. If that year's income is insufficient to fully absorb the excess, the balance is carried forward for successive deduction against income of following years.

Deductions for ACE incurred before 20 July 1982 are calculated by dividing the balance of unclaimed expenditure at the end of the year by a number being the lesser of the number of years in the estimated remaining life of the field or a "statutory" number which has varied (between 5 and 25) over time. Deductions are limited to the amount that can be absorbed by net income. Unabsorbed excess amounts are treated as undeducted ACE, ie. deductible over the life of the field etc.

Alternatively, an election can be made that the deduction limit not apply. Resultant losses are available either for carry forward or transfer under the group loss provisions.

Exploration and prospecting expenditure

Generally speaking, expenditure incurred on exploration and prospecting activities is immediately deductible in the year it is incurred. However, an election can be made to treat expenditure in respect of plant as deductible under the plant depreciation provisions.

Expenditure is deductible to the extent that it is absorbed by net income. The treatment of undeducted expenditure (excess amounts) varies according to when the expenditure to which the excess amounts relate was incurred.

Excess amounts relating to expenditure incurred before 18 August 1976 is deductible in the first subsequent year in which assessable income is derived from petroleum.

Excess amounts attributable to expenditure incurred after 17 August 1976 are deductible in the first subsequent year that assessable income is derived.

Deductions for post 17 August 1976 expenditure is conditional on the Commissioner being satisfied that either:

•

prescribed petroleum operations are carried on or are proposed to be carried on; or

•

the expenditure was incurred in carrying on a business of exploration or prospecting for petroleum.

Deductions for excess amounts are also limited to the amount which can be absorbed by net income. Unabsorbed excess amounts are carried forward for successive deduction against following years' income.

Since the end of the 30 June 1985 income year, an annual election has been available to the effect that the net income limit does not apply either to expenditure incurred in the year to which the election relates or the relevant proportion of post 17 August 1976 excess amounts.

Consequences of balancing adjustment roll-over relief

The transferor

Balancing adjustments will not be made to the transferor's taxable income where roll-over relief is obtained in relation to a disposal of property to which petroleum mining provisions have applied. [New Subsection 124AMAA(1)-(3)]

Consistent with the existing law, the transferor will be entitled to claim deductions for exploration/prospecting expenditure incurred in respect of the property during the year of the disposal. Deductions will not be available in respect of any undeducted ACE and any excess amounts that relate to the property.

The transferee

The transferee will be taken to have acquired the property for consideration equal to the undeducted ACE in respect of the property at the time of the disposal, irrespective of the actual consideration paid. The characteristics of this undeducted ACE will pass to the transferee.

Thus, the deemed consideration for acquisition will be deductible over the same period (including the year of transfer) that it would have been deductible to the transferor if the disposal had not occurred, ie:

•

the portion of the undeducted ACE that relates to expenditure incurred by the transferor under the existing rules (ie. after 19 July 1982) will be deductible to the transferee over the lesser of the remaining number of years (including the year of transfer) in the ten year period, or the life of the mine.

•

the portion of undeducted ACE which is in respect of the transferor's expenditure incurred on or before 19 July 1982 will be deductible to the transferee under the rules that applied at the time the transferor incurred the expenditure.

As well, amounts in respect of property which qualified as ACE at the time of acquisition by the transferor, but would no longer qualify (eg. plant) will continue to be treated as ACE to the transferor.

If the property is a qualifying interest in relation to a cash bidding exploration permit, the transferee will "inherit" any of the transferor's eligible cash bidding amount entitlement in respect of the property. This entitlement will be treated as ACE incurred in the first year in which the production licence is granted to the transferee. [New Subsections 124AMAA(4),(8),(9)&(14)]

The transferee will stand in the place of the transferor as regards any excess amounts in respect of the property at the time of the disposal. Such amounts will be available as immediate deductions subject to the same rules that would have applied to the transferor. [New Subsections 124AMMA(5)-(7),(10)&(11)]

The transferee will be taken to have made any election made by the transferor regarding plant, ie. if the transferor had elected to deduct the cost of depreciable plant under the mining provisions, that basis of deduction will apply to the transferee, and vice versa. [New Subsections 124AMAA(12)&(13)]

Balancing adjustments will apply on the subsequent disposal of property by the transferee where capital allowance roll-over relief is not available. Balancing adjustments will be calculated taking into account both the transferor's and the transferee's capital deduction entitlements. For that purpose, the transferee is taken to have acquired the property for an amount equal to the transferor's costs, rather than the transferee's actual or deemed consideration. [New Subsections 124AMAA(16)-(18)]

The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.

Access roads used in timber operations

Summary of the existing law

Deductions are available for capital expenditure incurred on access roads used in timber operations. Annual deductions are calculated by dividing the amount of residual capital expenditure (ie. eligible capital expenditure less deductions allowed) by a number being the lesser of the number of years in the estimated period of use of the road in timber operations, or 25.

Consequences of balancing adjustment roll-over relief

The transferor

A balancing adjustment will not be made to the taxable income of the transferor on the disposal of property where capital allowance balancing adjustment roll-over relief is obtained for the disposal. [New Subsections 124GA(1)&(2)]

As occurs under the existing rules, the transferor will not be entitled to any deduction in respect of the property in the year of disposal.

The transferee

The transferee will be deemed to have acquired the property for consideration equal to the transferor's residual capital expenditure in respect of the property immediately before the disposal. This will entitle the transferee to deductions on the same basis that would have been available to the transferor if the disposal had not occurred, ie. deductions will be calculated by dividing the transferor's undeducted expenditure by the lesser of the remaining number of years in the estimated period of use of the road in timber operations, or 25. [New Subsection 124GA(3)]

On a future disposal of the property by the transferee where roll-over relief is not available, balancing adjustments made to the transferee's taxable income will be calculated taking into account both the transferor's and the transferee's deductions. That is, for balancing adjustment purposes, the transferee is taken to have been allowed deductions that were allowed to the transferor. [New Subsection 124GA(4)]

The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.

Timber mill buildings

Summary of the existing law

Deductions are available in respect of the cost of constructing or acquiring buildings used mainly in timber milling operations. Annual deductions are calculated by dividing the amount of residual capital expenditure (ie. the cost of the building less deductions allowed) by a number being the lesser of the number of years in the estimated period of use of the building for timber milling purposes, or 25.

Consequences of balancing adjustment roll-over relief

The transferor

A balancing adjustment will not be made to the taxable income of the transferor on the disposal of property where capital allowance balancing adjustment roll-over relief is obtained for the disposal. [New Subsections 124JD(1)&(2)]

As occurs under the existing rules, the transferor will not be entitled to any deduction in respect of the property in the year of disposal.

The transferee

The transferee will be deemed to have acquired the property for consideration equal to the transferor's residual capital expenditure in respect of the property immediately before the disposal. This will entitle the transferee to deductions on the basis that would have been available to the transferor if the disposal had not occurred, ie. deductions will be calculated by dividing the residual capital expenditure by the lesser of the remaining number of years in the estimated period of use of the building for timber milling purposes, or 25. [New Subsection 124JD(3)]

On a future disposal of the property by the transferee where roll-over relief is not available, balancing adjustments made to the transferee's taxable income will be calculated taking into account both the transferor's and the transferee's deductions. That is, for balancing adjustment purposes, the transferee is taken to have been allowed deductions that were allowed to the transferor. [New Subsection 124JD(4)]

The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.

Industrial property

Summary of the existing law

Capital expenditure incurred in acquiring industrial property in the nature of patents, copyright, registered designs, and licences in respect of such property, is deductible over the effective life of the property.

Generally, effective life is the period of time over which owners' rights are protected by law, except that in the case of copyright, it is limited to a maximum period of 25 years. Copyright in Australian films is deductible over 2 years unless an election is made to adopt the 25 year write-off period. (Note that the amendments contained in this Bill do not apply to the provisions (Division 10BA) which confer an immediate deduction for investments in Australian films).

Annual deductions are calculated by dividing the residual value of a unit of property at the end of the year of income by the number of years remaining in its effective life. Broadly, residual value is the amount of capital expenditure incurred in respect of the unit of property, less deductions allowed.

A special feature of the industrial property capital deduction rules is that amounts received as compensation for the use of property by others, such as premiums received for the grant of a licence, are treated as a part disposal of the property. Assessable balancing adjustments will occur where the amount received for a part disposal exceeds the residual value of the property, to the extent that the aggregate of such assessable amounts does not exceed the sum of deductions allowed in respect of the property.

Consequences of balancing adjustment roll-over relief

The transferor

Where balancing adjustment roll-over relief is obtained for a disposal of a unit of industrial property, no balancing adjustment will be made to the taxable income of the transferor. [New Subsections 124PA(1)-(3)]

As occurs under the existing law, the transferor will not be entitled to any deduction in respect of the property in the year of disposal. The transferee, however, will be entitled to a full year's deduction in the same year.

The transferee

The transferee will be deemed to have acquired the property for consideration equal to its residual value immediately before disposal. The transferee will also "inherit" the remaining effective life of the property. This will enable the transferee to claim deductions on the same basis as the transferor. [New Subsection 124PA(4)]

On a future disposal or part disposal of the property by the transferee, the transferee will be deemed to have obtained deductions allowed to the transferor in respect of the property. This means that the amount of any balancing adjustment of the transferee's taxable income will take into account deductions allowed to both the transferor and the transferee.

Amounts previously assessed to the transferor as the result of the application of the balancing adjustment provisions to part disposals will also be taken into account to ensure that the aggregate amount assessable to both the transferor and transferee will not exceed the sum of deductions allowed to the transferor and transferee. [Subsection 124PA(5)]

The above rules can apply, as appropriate, to successive disposals by transferees where the conditions for roll-over relief are satisfied.

Chapter 4 Dividend Rebates: Company Beneficiaries and Partners

Clauses: 10,11,12,13,25,31,32,33,49,63 and 66

Overview

Will amend the Income Tax Assessment Act 1936 to allow a rebate of tax on dividends paid on shares that are beneficially owned by a company but are registered in the name of a trustee or partnership.

Dividend Rebates: Company Beneficiaries and Partners

Summary of the proposed amendments

4.1 The Bill will amend the Income Tax Assessment Act 1936 (the Act) so that a rebate under sections 46 and 46A is allowed to a company that is the beneficial owner of shares that are registered in the name of a trustee.

4.2 The application of sections 46 and 46A will be extended to allow the rebate where:

•

the beneficial owner of the shares has an absolute entitlement to those shares as against the trustee;

•

in the case of a partnership, the companyis a partner in the registered shareholder;

•

a dividend on the shares is paid to the trustee or partnership; and

•

an amount attributable to the dividend is included in the company's assessable income (either under section 97 in the case of dividends paid to a trustee, or under section 92 where the dividends have been paid to a partnership).

4.3 If the beneficial owner had been the shareholder but would have been denied the intercorporate dividend rebate because section 46B, 46C, 46D, 46E or 46F applied, the particular section will continue to apply to deny the rebate to the beneficial owner of the shares.

4.4 The amendments will apply to dividends paid to trustees and partnerships from 17 August 1976 which is the day the High Court handed down its decision in the Patcorp case. This will ensure that no assessments or amended assessments may be issued after the introduction of this Bill to deny the rebate in respect of a dividend paid from that date. However, in any case where the rebate has been denied prior to the introduction of the Bill a company will not be entitled to an amended assessment to allow the rebate.

Background to the legislation

4.5 The issue of the entitlement of a company shareholder to a section 46 rebate on dividends paid on shares that are registered in the name of a trustee was considered by the High Court in Patcorp Investments Ltd & Ors v FC of T
76 ATC 4225; (1976)
140 CLR 247. The High Court held that the beneficial owner of shares registered in the name of a trustee was not a "shareholder" and was therefore not entitled to the intercorporate dividend rebate under section 46.

4.6 The proposed amendments will, in contrast, extend the rebate allowable under section 46 or 46A to the beneficial owners of shares that are registered in the name of a trustee. They will also make it clear that where a partnership is the shareholder partners who are companies are entitled to the rebate.

Explanation of the proposed amendments

Present law

4.7 The present law provides a rebate to a shareholder that is an Australian resident company for dividends included in its taxable income for the year of income (section 46). If the dividends are paid as part of a dividend stripping operation a rebate is allowable for the net income from dividends (section 46A).

4.8 However, the intercompany dividend rebate is denied where the dividends are:

•

paid under a dividend stripping arrangement where the stripping dividend is paid to an entity other than the one that incurred the loss on the acquisition and the disposal of the stripped shares (section 46B);

•

regarded as debt dividends because of the manner and conditions in which they are paid (sections 46C and 46D);

•

asset revaluation dividends paid in a way that allow a company to obtain a capital tax benefit (which is a benefit arising because the arrangement is structured in such a way that the company is not taxed on the profit on the disposal of an asset, either as a capital gain (Part IIIA) or an ordinary taxable profit (section 46E);

•

unfranked and the shareholder is a private company that is not a member of the same wholly owned group of companies as the paying company (section 46F).

Trustee shareholders

4.9 If a company is the beneficial owner of shares that are registered in the name of a trustee, the company is not assessable (under section 44) on the dividends paid on those shares but the dividends form part of the net income of the trust (section 95). The company is then assessable on the dividends as its share of the net income of the trust (section 97).

4.10 Where a dividend is paid on shares that are registered in the name of a trustee and a company is absolutely entitled to those shares as against the trustee, the company will be entitled to the intercompany dividend rebate under section 46 or 46A on the amount of the trust income distributed to the company that is attributable to the dividend paid to the trustee. [New subsection 45Z(1)]

Partnership shareholders

4.11 Where shares are registered in the name of a partnership the dividends paid on those shares are included in the assessable income of the partnership as if the partnership was a taxpayer (section 90). Each partner is then assessed on their share of net income (section 92). Sections 46 to 46F are to be modified to ensure that they apply to the share of a company's net partnership income that is attributable to dividends received by the partnership in which it is a partner. [New subsection 45Z(2)]

Entitlement of beneficial owners and partners to rebate

4.12 The Bill proposes the insertion of a new provision into the Principal Act that will modify the application of sections 46 and 46A where the shares on which the dividend is paid are beneficially owned by a company but the registered holder of the shares is a trustee or partnership. [Clause 10 - new section 45Z]

4.13 As stated earlier the modification to sections 46 and 46A proposed by new section 45Z will apply to dividends paid after 17 August 1976. The rebate will not be denied in any assessment that issues on or after the day on which this Bill is introduced into Parliament. Also, a company will not be able to object against an assessment in which the rebate was denied, or obtain an amendment to that assessment, that issued before the day the Bill was introduced. [Clause 66]

4.14 The effect of new section 45Z will be that a rebate will be allowable under section 46 or 46A on a company's share of trust or partnership income that is attributable to a dividend paid to a trustee (against which the beneficial owner is absolutely entitled to the shares) or a partnership, as if:

•

the beneficial owner or partner was the registered shareholder in the company paying the dividend. Thus, for the purposes of sections 46 to 46F inclusive the beneficial owner or the partner is the shareholder; [New paragraphs 45Z(1)(d) and 45Z(2)(d)]

•

the dividend was paid directly to the beneficial owner or partner and not to the trustee or partnership; [New paragraphs 45Z(1)(e) and 45Z(2)(e)]

•

the amount of the dividend paid to the beneficial owner or partner was equal to the amount of their share of the net income of the trust or partnership that was attributable to the dividend actually paid to the trust or partnership. The relevant amount of the dividend received by a particular company partner will be the company's relevant proportion of the dividend received by the partnership. For example, if three companies are equal partners and the partnership receives a dividend of $20 and the net income of the partnership attributable to the dividend is $18, each partner will have a rebateable dividend of $6; [New paragraphs 45Z(1)(f) and 45Z(2)(f)]

•

the company's interest in the share was the share on which the dividend was paid. The effect of deeming this to be the case is that in determining when and whether the share was acquired or disposed of by the beneficial owner or partner for the purposes of sections 46 to 46F, the matter will be determined by reference to the company acquiring or disposing of its beneficial ownership of the share. The timing of the acquisition of shares by the trustee (otherwise than by way of issue) will not affect the application of sections 46 to 46F as modified by proposed section 45Z. For example, in determining whether shares have been acquired within the meaning of subsection 46A(2), or whether there has been a disposal of an asset for section 46E purposes, the relevant acquisitions and disposals will be those of the beneficial owner's interest in the share; [New paragraphs 45Z(1)(g) and 45Z(2)(g)]

•

the year of income in which the trust or partnership distribution is included in the assessable income of the company, was the year of income the dividend was (indirectly) "paid" to the beneficial owner or partner. The effect of these paragraphs is that a rebate will be allowable under subsection 46(2) or 46A(5) to the company in its assessment for the year of income in which the trust or partnership distribution containing the income attributable to the dividend is included in the company's assessable income; [New paragraphs 45Z(1)(h) and 45Z(2)(h)]

•

the date on which the dividend was paid to the beneficial owner was the date on which the dividend was paid to the trustee or partnership. Where the rebate depends on the dividend having been paid after a particular time, the relevant particular time will be the day the dividend was actually paid to the trustee or partnership; [New paragraphs 45Z(1)(i) and 45Z(2)(i)]

•

the share was issued to the company that is the beneficial owner at the time it was issued to the trustee or partnership. For example, in determining whether an issue of shares is one to which section 46C or 46D applies, the day the shares were issued is the day they were actually issued to the trustee or partnership; [New paragraphs 45Z(1)(j) and 45Z(2)(j)]

•

where entitlement to the rebate depends on shares having been issued to another person, as in subparagraph 46D(2)(b)(i), the relevant time the shares were actually issued to the other person; [New paragraphs 45Z(1)(k) and 45Z(2)(k)]

•

factors relating to the payment of a dividend that are taken into account in determining whether the dividend is a debt dividend (for the application of section 46C or 46D), were those that relate to the dividend that was actually paid to the trustee or partnership; [New paragraphs 45Z(1)(l) and 45Z(2)(l)]

•

in determining the extent to which a dividend is paid from particular profits, the dividend to be examined is the dividend actually paid to the trustee or partnership. Taking the earlier example, if $12 of the net partnership income attributable to dividends was an asset revaluation dividend for the application of section 46E, each of the three equal partners would have an asset revaluation dividend of $4; [New paragraphs 45Z(1)(m) and 45Z(2)(m)]

•

where it is necessary to determine whether the dividend is franked, the dividend was the actual dividend that was paid to the trustee or partnership. These provisions will apply where a private company receives an unfranked dividend from another private company that is not part of the same wholly owned group of companies; [New paragraphs 45Z(1)(n) and 45Z(2)(n)] and

•

where the date on which the dividend was declared is relevant for entitlement to the rebate, the relevant declaration was the date the dividend that was actually paid to the trustee or partnership was declared. [New paragraphs 45Z(1)(o) and 45Z(2)(o)]

Trustees

4.15 It has been implicit in the Principal Act that a company acting in the capacity of trustee is not entitled to the intercompany dividend rebate under section 46 or 46A. This implication can be drawn from the following factors:

•

trustees are taxed only in very limited circumstances. For example, trustees are taxed on income to which a beneficiary such as a minor is presently entitled but is under a legal disability (section 98) and on the income of a trust to which no person is presently entitled (section 99 or 99A);

•

where a trustee is liable for tax on trust income there is no difference in the way corporate and non-corporate trustees are taxed: it would be most peculiar if a trustee (particularly in the case of assessments raised under section 99 and 99A) that was a company was entitled to the rebate on dividends derived, but if the trustee was not a company the trustee was taxed on the dividends and not entitled to a rebate; and

•

rebates under section 46 or 46A are calculated on the basis of the tax assessed on the taxable income derived by the shareholder: tax is not assessed on the "taxable income" of trustees (any assessments to a trustee are raised on the net income or a share of the net income of the trust).

4.16 The amendments to sections 46 and 46A to make it clear that a company shareholder acting in a trustee capacity is not entitled to a rebate simply make explicit a status that has always been implied, ie. that a shareholder acting in a trustee capacity is not entitled to the intercompany dividend rebate. Accordingly, there is no change to the substance of the law. [Clause 11 - new 46(12)and (13) and Clause 12 - new subsection 46A(19) and (20)]

Unit trusts

4.17 The trustees of corporate unit trusts and public trading trusts that are treated as companies for tax purposes under Division 6B and 6C are the only trustees that are taxed as companies. This is the case whether the trustee is itself a company or not. In its capacity as the trustee of a corporate unit trust (Division 6B) or as the trustee of a public trading trust (Division 6C), the trustee stands in the place of the trust and is taxed as if it was a company. Entitlement to the section 46 and 46A rebates is conferred under subsection 102L(2) in the case of corporate unit trusts and subsection 102T(2) in the case of public trading trusts.

4.18 Where units in a unit trust that is taxed as a company under Division 6B or 6C are held in the name of a trustee and the beneficial owner of the units is a company that is absolutely entitled to those units as against the trustee, the company will be entitled to the rebate. Similarly, where the beneficial owner of units in a corporate unit trust or public trading trust, or shares in a company, is itself a corporate unit trust or public trading trust, the unit trust will be entitled to the rebate. [Clause 31 - new subsection 102L(2) and clause 32 - new subsection 102T(2)]

Private company dividends

4.19 Where the deductions allowable against against different classes of income are calculated under Subdivision B of Division 2A (Calculation of taxable income where disqualifying event occurs) the amount of private company dividends that are rebateable under section 46 or 46A is calculated under subsection 50N(23). Where these dividends are paid to a trustee or partnership, and the beneficial owner or partner is a company, the company will be entitled to the rebate, by virtue of the application of section 45Z as if it was the registered shareholder. [Clause 13 - new subsection 50N(24)]

Debt dividends

4.20 If a company is entitled to an allowable deduction (section 67AA) for a debt dividend paid to a registered shareholder, the company will also be entitled to a deduction if the actual recipient of the debt dividend was the trustee for a company that was the beneficial owner of the shares or a partnership of which the company was a partner. [Clause 25 - new subsection 67AA(3)]

Registered organisations

4.21 Registered organisations, even if they are companies, are not entitled to a rebate on dividends (section 116J). The rebate will not be allowable even if the dividend is actually paid to a trustee on shares that are beneficially owned by the organisation, or to a partnership in which the organisation is a partner. [Clause 33 - new subsection 116J(2)]

Frankable dividends

4.22 A dividend that is a debt dividend within the meaning of section 46D is not a frankable dividend (paragraph (f) of the definition). The dividend will retain its character as an unfrankable debt dividend where the actual recipient of the debt dividend is a trustee acting for a company that is absolutely entitled to the shares (as against the trustee). [Clause 49]

Commencement date

4.23 The amendment to allow the intercompany dividend rebate to the beneficial owners of shares registered in the name of a trustee or a partnership will apply in relation to dividends paid to the trustee or partnership after 17 August 1976.

Clauses involved in the proposed amendments

Clause 10: inserts new section 45Z which will modify the application of sections 46 and 46A where a company derives:

•

trust income attributable to a dividend paid to a trustee on a share to which the beneficial owner is absolutely entitled as against the trustee; and

•

partnership income attributable to a dividend paid to a partnership of which the company is a partner

Clause 11: amends section 46 to make it clear that a shareholder acting as a trustee is not entitled to the rebate, unless it is the trustee of a corporate unit trust or public trading trust that is taxed as a company

Clause 12: amends section 46A to make it clear that a shareholder acting as a trustee is not entitled to the rebate, unless it is the trustee of a corporate unit trust or public trading trust that is taxed as a company

Clause 13: amends section 50N to take account of proposed section 45Z

Clause 25: amends section 67AA to take account of proposed section 45Z

Clause 31: amends section 102L to extend the effect of new section 45Z to corporate unit trusts

Clause 32: amends section 102T to extend the effect of new section 45Z to public unit trusts

Clause 33: amends section 116J to take account of proposed section 45Z

Clause 49: amends the definition of "frankable dividend" in section 160APA to exclude the effect of new section 45Z

Subclause 63: is the application provision for new section 45Z

Clause 66: is a transitional provision denying companies the right to object against or obtain an amended assessment where the rebate was denied in an assessment that issued before the day the Bill was introduced into Parliament.

Chapter 5 Deferral of Deductions for Trading Stock Purchases Involving Prepayments

Clauses: 14 and 63

Overview

Ensures that deductions for expenditure on goods to be used as trading stock are not allowable until the goods actually become part of the buyer's trading stock.

Deferral of Deductions for Trading Stock Purchases Involving Prepayments

Deferral of Deductions for Trading Stock Purchases Involving Prepayments

Summary of the proposed amendments

5.1 This amendment deals with deductions under section 51 of the Act for purchases of goods to be used as trading stock in a business. It will only have an effect in cases where the goods have not become part of the buyer's trading stock by the end of a year of income. In these cases the amendment will defer the deduction, under section 51, for the cost of the goods until they become trading stock of the purchaser.

Background to the legislation

Deductions for purchasing trading stock - section 51

5.2 Section 51 of the Act contains what are often called the general deduction provisions of the income tax law. The section allows deductions for expenditure incurred in a year of income to the extent the expenditure is incurred in earning assessable income. Expenditure incurred in a year in buying trading stock for a business is deductible under section 51.

Current law defers deductions for trading stock on hand at year end - section 28

5.3 The law already defers deductions for trading stock that remains "on hand" at the end of a year of income. It does this (section 28 of the Act) by effectively requiring the value of a taxpayer's closing stock to be written back as assessable income. In doing this the tax law simply follows the ordinary accounting practice of matching costs against revenues in appropriate reporting periods.

5.4 Ordinarily, expenditure on trading stock is deductible, under subsection 51(1) of the Act, in the year in which the expenditure is incurred. Writing back the value of closing stock effectively cancels the benefit of any deduction allowable in respect of that stock. The law ensures that the benefit is not lost, though, by effectively allowing a deduction for the value of trading stock on hand at the beginning of the next year of income (section 28). If the stock remains unsold at the end of that year, section 28 would operate to defer the deduction again until the following year. Through this process the law allows deductions for expenditure on trading stock in the same year that the income from selling the stock is included in assessable income.

5.5 These provisions only apply where trading stock is "on hand" at the end of a year of income and do not apply where trading stock has not become "on hand".

When is trading stock on hand?

5.6 This is a difficult question that has come before the Courts on a number of occasions and there is no clear-cut answer. It has been held, for instance, that trading stock need not be in a taxpayer's physical possession to be on hand (see All States Frozen Foods Pty Ltd v. F.C. of T.
90 ATC 4175). Many acquisitions of trading stock (for example, of imports like those in the All States case) are very complex transactions where the correct application of the law is difficult to ascertain, both for the Tax Office and tax practitioners.

5.7 Not surprisingly then, there are instances, like that in F.C. of T. v. Raymor (NSW) Pty Ltd
90 ATC 4347, where section 28 of the Act does not achieve its aim of matching deductions for trading stock purchases against assessable income from selling that stock.

Raymor's case

5.8 In that case the taxpayer entered into forward purchase contracts, and paid, for trading stock that would not be delivered, and in some cases not even be made, until after the end of the year of income. The Federal Court held that the cost of the trading stock was fully deductible in the year in which the taxpayer bound itself as a party to the contracts and so became committed to pay for the stock. This was so even though the undelivered stock was not on hand with the taxpayer and so could not be brought to account under section 28 as trading stock on hand at the end of the year of income. The consequence of the Court's decision was that the taxpayer was able to gain a tax advantage by bringing forward a tax deduction for trading stock that would not be sold until a later year.

Explanation of the proposed amendments

Deduction for expenditure on trading stock deferred until stock is on hand

5.9 The Bill will ensure that a deduction is not allowable under section 51 for expenditure on trading stock until that stock is on hand with the taxpayer. [Clause 14]

Why amend the law?

5.10 In some instances the present law does not achieve its aim of matching trading stock expenses against trading stock income. An example of an instance where this may happen was highlighted in the Federal Court's decision in F.C. of T. v. Raymor (NSW) Pty Ltd
90 ATC 4347 already discussed in the background notes. The amendment proposed by clause 14 will ensure appropriate matching of deductions for expenditure on trading stock against income derived from selling the stock. This will change the operation of the law, in cases like Raymor, but also clarify it in other instances where it might be argued that there would be a mismatch between the timing of deductions for, and recognition of income from, trading stock, e.g., where goods are in transit at year end.

How will the amendment work?

5.11 We have already noted that section 28 overrides section 51 in the sense that it defers deductions for trading stock on hand at the end of a year of income. New subsection 51(2A) will bolster the operation of the law by deferring deductions under section 51 for expenditure on trading stock where section 28 cannot apply, because the stock is not on hand, but a deduction should not be allowed, because the stock has not been sold. New subsection 51(2A) [clause 14] will override the ordinary operation of section 51 of the Act where the three conditions set down in new paragraphs 51(2A) (a), (b) and (c) are met. In short, subsection 51(2A) will apply if a deduction would otherwise be available under subsection 51(1) for the cost of acquiring anything that is to be used as trading stock, where any part of that stock has not yet become trading stock on hand of the taxpayer.

5.12 In these circumstances, subsection 51(2A) will deny the deduction otherwise allowable under subsection 51(1) in the year the expenditure was incurred. Instead, subsection 51(2A) will allow a deduction for that expenditure under subsection 51(1) only when the stock first becomes trading stock on hand of the taxpayer. In practical terms, a deduction for trading stock will be available under section 51 in the year it is first on hand, for the purposes of section 28 of the Act, at year end or, if it is sold before the end of the year it first becomes stock on hand, in that year. This means a deduction for expenditure on trading stock under section 51 may be spread over more than one year of income.

5.13 For instance, a taxpayer might enter into a contract on 30 April 1992 to buy 1,000 widgets at a cost of $1 per widget. Under the present law, the taxpayer would be entitled to a deduction of $1,000 under section 51 in the 1991-92 income year. At 30 June 1992, 500 widgets have been delivered to the taxpayer but the remaining 500 are still in production. The taxpayer has sold 100 of the widgets delivered. There are 400 widgets on hand at the end of the 1991-92 year. They are sold in 1992-93. The other 500 widgets are delivered in the 1992-93 income year and are held unsold at 30 June 1993. They are then sold in 1993-94.

5.14 To match the cost of trading stock in this example against income from selling that stock, the law should only allow a deduction in 1991-92 for the cost ($100) of the 100 widgets sold in that year. This means that a deduction for the cost of the remaining 900 widgets needs to be deferred until a later year. The present law would fail because only $400 (400 widgets on hand at $1 each) could be written back as assessable income under section 28 (assuming closing stock is valued at cost). This means there would be a mismatch in 1991-92, and in the year or years the stock is sold, in respect of the 500 undelivered widgets.

5.15 In these circumstances, new subsection 51(2A) will deny the deduction otherwise allowable under section 51. In the 1991-92 year, subsection 51(2A) will instead allow a deduction for the expenditure attributable to the stock that first became trading stock on hand in that year, i.e., the 100 widgets sold and the 400 widgets on hand at 30 June 1992.

5.16 In our example, the deduction for 1991-92 under section 51 would be $500 and $400 would still be written back under section 28. The effective deduction for expenditure on trading stock in 1991-92 would be $100 (i.e., $500, less $400 written back). The $400 written back would be deductible, through the operation of section 28, when it becomes opening stock in 1992-93 and is sold in that year.

5.17 In the following year subsection 51(2A) would allow a deduction for the cost of the other 500 widgets on hand at the end of that year, i.e., another $500 deduction would be available under section 51 in 1992-93 and that $500 would be written back under section 28 as the stock is on hand at the end of that year. A deduction for this $500 would effectively be allowed when the relevant stock is sold. The table below illustrates how the provisions work.

Commencement Date

5.18 The amendment affecting deductions for trading stock purchases will apply to expenditure incurred after the date of introduction of this Bill.

Clauses involved in the proposed amendments

Clause 14: inserts new subsection 51(2A) in the Act. Subsection 51(2A) will defer deductions under section 51 for expenditure on stock until the stock first becomes trading stock on hand of the taxpayer.

Subclause 63(4): sets out the application date for the amendment made by clause 14.

Chapter 6 Tax File Number (TFN) Amendments

Clauses: 2,52,53,54,55 and 65

Overview

Streamlines the application of the TFN arrangements to securities lending arrangements and unregistered "cum-dividend" and "cum-interest" sales of securities.

Requires investors in securities having a "books closing time" to quote their TFN before that time.

Prevents certain nominee companies (entrepot nominee companies) used by securities dealers from being treated as investment bodies for TFN purposes.

Corrects a technical deficiency in the law which prevented the proper application of the TFN application of the TFN arrangements to unit trusts.

Tax File Number (TFN) Amendments

Tax File Number (TFN) Amendments

Summary of proposed amendments

6.1 This Bill will amend the Income Tax Assessment Act 1936 (the Act) to streamline and simplify the administration of the tax file number (TFN) arrangements. The Bill will also correct a technical deficiency in the law which prevents the proper application of the TFN arrangements to unit trusts.

6.2 The proposed amendments will ensure:

I. Cum-Dividend and Cum-Interest Security Sales and Securities Lending Arrangements

•

The seller of an unregistered cum-dividend or cum-interest security, or the investor in a security that is the subject of a securities lending arrangement will:

•

either retain the credit for any amounts deducted because a TFN was not quoted; or

•

be able to claim a refund of the amounts withheld from income on the security from the Commissioner of Taxation.

II. TFNs to be Quoted by Books Closing Time

•

Investors in investments having a "books closing time" will be required to quote their TFN before that time if they do not want 48.25% deducted from income payments made by the investment body.

III. Securities Dealers' Entrepot Nominee Companies will be Excluded from the TFN Arrangements

•

Certain nominee companies (entrepot nominee companies) owned by securities dealers which make investments to facilitate securities transactions will not be treated as investment bodies for the purposes of the TFN arrangements.

IV. Trustees of Unit Trusts are to be Investment Bodies for the Purposes of Making TFN Deductions

•

The correction of a technical deficiency in the existing TFN legislation which excludes most unit trusts from the requirement to deduct 48.25% from income paid when a TFN is not quoted. This deficiency is to be rectified, with effect from 1 July 1991 (the commencement of the TFN arrangements).

Background to the legislation

6.3. In 1988, the Government expanded the first phase of the 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.

6.4. The TFN arrangements apply to certain investments, including shares in a public company, units in a unit trust, and loans to a Government body or body corporate (for example, a bond or debenture).

6.5. If a TFN is not quoted on an investment, the investment body must deduct an amount from any income earned on the investment equal to the top marginal rate of tax plus medicare levy (currently 48.25%). The deducted amount is then paid to the Commissioner and can be applied as a credit against any tax which the investor must pay. Investment bodies must also report, annually, to the Commissioner details of income paid to investors (Income Tax Regulation 56).

6.6. In most cases, these arrangements allow the Commissioner to obtain information to assist him in ensuring that all income earned by investors is declared in their income tax returns.

Explanation of the proposed amendments

I. Cum-Dividend or Cum-Interest Security Sales and Securities Lending Arrangements

Why change the law?

6.7. Some investment bodies, nominee companies, and the Australian Stock Exchange are having difficulties applying the TFN arrangements to investments such as shares in public companies, units in a unit trust, or loans to bodies corporate or government bodies. These investments are transferable, and may be sold on a "cum-dividend" or "cum-interest" basis.

6.8. In a small number of cases, it is possible that a cum-dividend or cum-interest contract will not have the sale recorded by the investment body by the books closing time. These transactions are referred to as unregistered cum-dividend or cum-interest sales.

6.9. In these cases, arrangements are in place which provide that the income paid to the registered owner of the security (the seller) is passed on to the buyer. The buyer of the security is required to declare the income in their income tax return.

6.10. Similarly, when a security has been lent to a person (the borrower) under a securities lending arrangement the borrower becomes the registered owner of the security. If the books closing time was reached during the period of the securities lending arrangement, the borrowing arrangement will provide that the lender is entitled to any dividends or interest on the lent security. The borrower will pass on that income to the lender.

6.11. In both cases the investment body will report to the Commissioner income paid to the registered owner of the security (ie., the seller or, in the case of a securities lending arrangement, the borrower of the security). The income that is ultimately passed on to the buyer or the lender of the security, will not be included in any reports to the Commissioner of Taxation.

6.12. In addition, depending on the type of investment, the credit for an amount deducted because a TFN was not quoted may pass on to the buyer of the security or the lender of the security (see subsection 221YHZK(5)).

What is a "cum-dividend or cum-interest" sale?

6.13. Broadly, a security is sold under a cum-dividend or cum-interest contract if it is sold before the date on which the investment body closes its books (this date is known as the "ex-date"). In these cases, the buyer is entitled to any impending dividend or interest on the security.

What is a securities lending arrangement?

6.14. A securities lending arrangement arises when a person (lender) lends securities to another person (borrower) under an agreement which requires the borrower to return either the borrowed securities or identical securities to the lender at the end of the borrowing period. The borrower becomes the registered owner of the securities.

6.15. The new TFN arrangements will only apply to securities lending arrangements which satisfy the requirements of subsection 26BC(3) of the Act. [Clause 55 - new subsection 221YHZLA(1)]

6.16. Broadly, the main conditions that must be satisfied to be a securities lending arrangement within subsection 26BC(3) are that:

•

the agreement is in writing;

•

the agreement was entered into after 9 May 1990; and

•

the security is returned to the lender no later than 12 months after it was borrowed.

What is the "books closing time"?

6.17. The books closing time is defined as the time a person must be the registered owner of an investment to be entitled to receive a payment of income from the investment. Accordingly, if income is paid on shares in a public company, units in a unit trust or debentures, to investors who were the registered owners at a particular time, that time is the books closing time for that income. [Clause 53 - new subsection 221YHZA(5)]

Example:

6.18. Mary Smith is the registered owner of shares in Woddy Limited. She owns those shares for the period 1 July 1992 to 30 June 1993.

6.19. On 1 September 1992 Woddy Limited announced a dividend that would be payable to all shareholders registered in the company's records at 4.00pm on 22 September 1992.

6.20. Because the dividend is payable to shareholders registered at 4.00pm on 22 September 1992, that time is the "books closing time".

When will the new rules apply?

6.21. The new rules will apply when a person has received income on a relevant Part VA investment which:

•

has been sold under an unregistered cum-dividend or cum-interest contract, or [Clause 55 - new paragraph 221YHZLA(2)(a) & subparagraph 221YHZLA(2)(c)(i)]

•

at the books closing time, the investment was subject to a securities lending arrangement which obliges the registered owner of the security (the borrower) to pass the income on to the lender. [Clause 55 - new paragraph 221YHZLA(2)(a) & subparagraph 221YHZLA(2)(c)(ii)]

What is a "relevant Part VA investment"?

6.22. A "relevant Part VA investment" is defined as one of the following investments within the table contained in subsection 202D(1) of the Act:

•

loans to companies and government bodies under item 3;

•

investments in units in a unit trust under item 5; or

•

investments in shares in public companies under item 6. [Clause 55 - new subsection 221YHZLA(1)]

What happens under the current law?

6.23. When a security has been sold under an unregistered cum-dividend or cum-interest contract or at the books closing time, the investment was subject to a securities lending arrangement which obliges the registered owner of the security (the borrower) to pass the income on to lender, the current law will operate as follows:

•

If the dividend on the investment is a partially franked dividend to which section 160AQUA applies, subsection 221YHZC(1D) provides that 48.25% of the unfranked part of the dividend will be deducted. Subsection 221YHZK(5) will then apply to transfer the credit for the amount deducted to the buyer of the cum-dividend security.

•

If the income on the security is not a franked dividend (eg., an unfranked dividend, or interest from a company debenture or Government security) subsection 221YHZK(5) will not apply because the income paid on the security is not subject to section 160AQUA of the Act.

•

If a TFN has been quoted for the investment, no TFN amount will be deducted from payments of income. However, the investment body will report to the Commissioner that the seller of the security or, in the case of a securities lending arrangement, the borrower of the security has received the income, where in fact, the income has passed on to the buyer or, in the case of a securities lending arrangement, the lender of the security.

How will the new arrangements operate?

6.24. Under the new arrangements, where the conditions of new subsection 221YHZLA(2) are satisfied, the seller of the security or, in the case of a securities lending arrangement, the borrower of the investment will keep the entitlement to the credit for any TFN amounts deducted by the investment body. This result is achieved by repealing subsection 221YHZK(5) of the Act. [Clause 54]

Can the seller or borrower obtain a refund of the credit?

6.25. Yes. The seller of an unregistered cum-dividend or cum-interest security, or the borrower of a security under a securities lending arrangement, may apply to the Commissioner of Taxation for a refund of the amounts withheld from income on the security. The Commissioner will be authorised to refund amounts deducted from income paid on an investment if he is satisfied that the security was sold cum-dividend or cum-interest (and the transfer was not registered before the books closing time), or that the security was, at the books closing time, subject to a securities lending arrangement requiring the income received by the borrower to be passed on to the lender of the security. [Clause 55 - new subsection 221YHZLA(2)]

How is a request for refund to be made?

6.26. Applications for a refund must be made in a form approved by the Commissioner. In most cases, the application will be endorsed by the applicant's securities dealer (if applicable) to the effect that the security was transferred on a cum-dividend or cum-interest basis or that the income was passed on to the lender of the security under a securities lending arrangement.

6.27. If there is no securities dealer involved in the transfer or securities lending arrangement, other evidence, such as the share transfer or lending agreement, will be required. [Clause 55 - new subsection 221YHZLA(3)]

Can the investor claim the TFN credit in his or her income tax return?

6.28. Yes. If the seller of the security, or the borrower of the security wishes, they will be able claim the TFN credit in their income tax return. Investors will not be able to claim the credit in their income tax return, however, if they have claimed (or are seeking to claim) a refund directly from the Commissioner under proposed new subsection 221YHZLA(2). [Clause 55 - new subsection 221YHZLA(4)]

6.29. Similarly, where the TFN credit is claimed by the investor in his or her income tax return, that person cannot apply for a refund from the Commissioner under the proposed new subsection 221YHZLA(2). [Clause 55 - new subsection 221YHZLA(5)]

Will subsection 202D(3) apply?

6.30. Under the existing TFN arrangements, subsection 202D(3) may treat a body corporate as an investment body if it makes an investment in a security which is subject to the TFN arrangements, but another person is entitled to the income from that security.

6.31. It is possible that the seller of a security or, in the case of a securities lending arrangement, the borrower of a security is a body corporate. In such cases, subsection 202D(3) could apply to treat that company as an investment body and require it to obtain a TFN from the buyer or lender of the security. This would result in significant disruption to the securities market and a large compliance cost on the body corporate concerned.

6.32. Subsection 202D(3) of the Act will be amended to ensure that it will not apply to bodies corporate which have received income under a relevant Part VA investment, if the security was transferred on a cum-dividend or cum-interest basis or that the income was passed on to the lender of the security under a securities lending arrangement. [Subclause 52(b) - new subsection 202D(3A)]

What reporting will be required?

6.33. The Income Tax Regulations will be amended to require suitable information to be given to the Commissioner of Taxation so that the ultimate recipient of the income earned on these transactions can be identified. [Clause 55 - new subsection 221YHZLA(6)]

6.34. Any notice, report or copy of a notice or report, required under the proposed regulations, will be a record for the purposes of section 262A of the Act. Accordingly, the notices or reports must be kept for the same time other records are kept for income tax purposes. [Clause 55 - new subsection 221YHZLA(7)]

II. TFNs to be Quoted by Books Closing Time

What happens now?

6.35. Under the current TFN arrangements, an investment body must deduct an amount from income paid on an investment if a TFN has not been quoted (subsection 221YHZC(1A)). This income is defined as "unattributed income". Investors are currently able to quote a TFN at any time until the income is actually paid by the investment body.

6.36. Income is paid on transferable investments, such as shares, debentures, or units in a unit trust to investors who were registered as investors at a particular time. This time is called the books closing time. [Clause 53 - new subsection 221YHZA(5)]

6.37. Allowing investors to quote their TFN for investments after the books closing time is causing significant administrative difficulties to those investment bodies. When an investor quotes a TFN after the books closing time it is often impossible for the investment body to record that TFN as being quoted. Accordingly, many investment bodies are required to make time consuming adjustments after the payment of the income to the investor to refund the amount incorrectly deducted.

When should a TFN be quoted?

6.38. This Bill will amend the TFN arrangements so that investors in transferable securities, such as shares in public companies, debentures, or units in a unit trust, will have to quote their TFN to the investment body before the books closing time if they are to avoid having 48.25% deducted from the income paid. [Clause 53 - new definition of "unattributed income" in section 221YHZA and new subsection 221YHZA(5)]

III. Securities Dealers' Entrepot Nominee Companies to be Excluded from TFN Arrangements

What is an entrepot nominee company?

6.39. An entrepot nominee company is nominee company controlled and operated solely by a securities dealer (or dealers) which is only used to facilitate the settlement of security transactions. [Clause 52 - New subsection 202D(8)]

Are "Entrepot Nominee Companies" Investment Bodies?

6.40. Entrepot nominee companies are not intended to be treated as investment bodies for the purposes of the TFN arrangements. However, because entrepot nominee companies may become the registered owners of securities such as shares, debentures or units in a unit trust in the course of completing a transaction, subsections 202D(3) and (4) may apply to treat a dealer's entrepot nominee company as an investment body.

6.41. This Bill amends the Act to ensure that entrepot nominee companies are excluded from the operation from the TFN arrangements. [Subclause 52(a)]

6.42. Investments made by nominee companies operated by securities dealers which are not made solely for the purpose of facilitating securities transactions will remain subject to the ordinary TFN arrangements. In such cases, the nominee company will have all the obligations of an investment body. [Subclause 52(c) - new subsection 202D(8)]

When will this apply?

6.43. Entrepot nominee companies were not intended to be investment bodies. Accordingly, the amendment excluding them from the TFN arrangements will apply to a persons right to receive income from an entrepot nominee company which arises on or after 1 July 1991. [Subclause 65(3)]

IV. Trustees of unit trusts will be investment bodies for the purposes of making TFN deductions

What is the current law?

6.44. Distributions from unit trusts are subject to the existing TFN provisions which require, if a TFN has not been quoted by the investor, that 48.25% be deducted from any payments of income from the investment.

6.45. The table in subsection 202D(1) defines the investment body for an investment in a unit trust as "the manager of the unit trust" . The obligation to deduct TFN amounts from unit trust income distributions falls on the investment body when the investment body is liable to pay income, in respect of the investment (paragraph 221YHZC(1A)(a)).

Why change the current law?

6.46. In most unit trusts the trustee is liable to pay the income for an investment, not the manager. The investment body in relation to a unit trust (the manager) is currently not required to make deductions if a TFN is not quoted because he or she is not the person liable to pay the income to the investor.

How will the new rules operate?

6.47. The proposed amendments rectify the technical deficiency in the current law by treating the person liable to pay income in respect of the unit trust investment (usually the trustee) as the investment body for the purposes of deducting amounts from income paid to investors who have not quoted a TFN. [Clause 53 - New subsection 221YHZA(4)]

6.48. The manager of the unit trust, who has day to day management responsibility for the unit trust, will remain the person to whom the TFN must be quoted.

When will the amendment apply from?

6.49. The proposed amendment will generally apply from 1 July 1991 (the commencement of the TFN arrangements).

6.50. However, any actions of the person liable to pay income for a unit trust (the trustee) on or after that date will be treated as if that person was an investment body [subclause 65(2)]. As a result, if a trustee had deducted an amount, because a TFN was not quoted (technically in breach of the current law) the proposed amendment will ratify the trustee's actions by treating him or her as an investment body. [Subclause 65(4)]

What happens if a TFN amount was not deducted?

6.51. If the person liable to pay the income for the unit trust has not deducted a TFN amount from payments of income, where no TFN has been quoted, (in observance of the current law), he or she will not be disadvantaged by the new law.

6.52. The new arrangements will not apply to a person liable to pay income for the unit trust if the application of the new rules would result in an offence arising under subsection 221YHZC(1A) in respect of a payment of income made before the date of the Royal Assent to the new law. [Subclause 65(5)]

Commencement date

6.53. The amendments affecting the TFN arrangements will, with the exception of proposed subsection 202D(8) and subsection 221YHZA(4), apply from the date of the Royal Assent to this Bill.

6.54. Proposed subsection 221YHZA(4) will apply to income to which an investor becomes presently entitled on or after 1 July 1991. However, where, the application of that subsection would result in the person liable to pay the income for a unit trust becoming liable for an offence under subsection 221YHZC(1A), the new rules will only apply to income paid on or after the date of the Royal Assent to the Bill.

6.55. Proposed section 202D(8) will apply to a persons right to receive income from an entrepot nominee company which arises on or after 1 July 1991.

Clauses involved in the proposed amendments

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

Clause 52: amends section 202D of the Act by preventing the application of subsection 202D(3) to entrepot nominee companies. The clause also prevents subsection 202D(3) applying to companies which receive income from investments which have either been sold under an unregistered cum-dividend or cum-interest contract , or where at the books closing time, the investment was subject to a securities lending arrangement.

Clause 53: makes it clear what is meant by the terms, unattributed income, investment body (in relation to unit trusts) and books closing time.

Clause 54: repeals subsection 221YHZK(5).

Clause 55: provides for the refund of TFN amounts deducted from income paid on an investment which has either been sold under an unregistered cum-dividend or cum-interest contract , or where at the books closing time, the investment was subject to a securities lending arrangement. This clause also provides for the making of regulations concerning the reporting of income from such investments.

Clause 65: provides for the application of the amendments affecting the TFN arrangements which do not apply from the date the Act proposed by the Bill is given the Royal Assent to the new provisions.

Chapter 7 Capital Gains Tax Roll-over Relief for Partnerships

Clauses: 51 and 63

Overview

Corrects a deficiency in the CGT roll-over provisions for transfers of partnership assets to wholly-owned companies, by ensuring that the cost bases of shares received as consideration for such transfers reflect the amount of partnership liabilities assumed by the company.

Applies to transfers of assets after 6 December 1990.

Capital Gains Tax Roll-over Relief for Partnerships

Summary of the proposed amendments

7.1 The Bill will amend the CGT roll-over provisions for transfers of partnership assets to wholly-owned companies. It will require the amount of partnership liabilities assumed by the company to be reflected in the cost bases of shares received for the transfer.

Background to the legislation

7.2 The broad purpose of the roll-over provisions is to ensure that adverse CGT consequences do not follow from asset disposals occurring in circumstances where it is considered unreasonable for the usual rules to apply. The consequence of roll-over relief for an asset disposal is that assets acquired before the introduction of CGT transfer their exempt status, and accrued capital gains in respect of assets acquired after the introduction of CGT are deferred.

7.3 Circumstances where it is considered unreasonable for CGT to apply is on a disposal of an asset without any change in its underlying ownership, as occurs when an asset is transferred to a company wholly-owned by the person(s) transferring the asset. Roll-over relief will mean that, for example, taxpayers can reorganise their business affairs in this way without adverse CGT consequences.

7.4 Accordingly CGT roll-over relief is available for the transfer of partnership assets to a company wholly-owned by the partners (section 160ZZNA allows such roll-over relief for disposals of assets after 6 December 1990). A requirement is that each partner must only receive "replacement" shares in the company - comparable in value to their respective interest in the transferred asset - as consideration for the transfer.

7.5 To ensure that CGT operates appropriately if partners subsequently sell replacement shares, those shares inherit the CGT characteristics of the asset for which they were received in exchange. This means that shares received in exchange for pre CGT interests in a partnership asset will be treated as acquired pre CGT. Similarly, shares received in exchange for post CGT interests in a partnership will be treated as acquired post CGT, for consideration equal to the cost bases of those interests.

Explanation of the proposed amendments

7.6 The partnership roll-over provisions described above (section 160ZZNA) contemplate the transfer of a partnership asset encumbered by an attached partnership liability. Where this occurs, the market value of shares received in exchange for the asset's transfer would reflect the amount of assumed liability. Correspondingly, the cost bases attributable to those shares should also reflect the assumed liability.

7.7 Under the existing rules, the cost bases of replacement shares cannot be reduced to reflect the amount of the assumed liabilities. This is an unintended outcome. Accordingly, the proposed amendments will require the cost bases of replacement shares to reflect the amount of the assumed liability that is attributable to those shares. [Clause 51]

Example of the deficiency to be remedied (for convenience, cost base indexation is ignored)

7.8 A partnership has a post CGT asset with a market value of $10000 and a cost base of $8000. A capital gain of $2000 (ie. $10000 - $8000) would accrue if the asset was sold.

7.9 The asset, together with an attached partnership liability of $6000, is transferred to a wholly-owned company and CGT roll-over relief is obtained. Under the rules described above, the partners would receive replacement shares in the company to the value of $4000, ie. the market value of the asset ($10000) less the assumed liability ($6000).

7.10 Under the existing rules, the replacement shares would be deemed to have a cost base of $8000 (ie. equal to the cost base of the transferred asset) for the purposes of calculating any capital gain or loss from their disposal. The partners could immediately sell the shares and realise a capital loss of $4000 (ie. sale proceeds of $4000 less cost base of $8000).

7.11 The law is to be changed so that the replacement shares in the above example would have a cost base of $2000 (ie. cost base of the asset of $8000, minus the assumed liability of $6000). A capital gain of $2000 would then accrue if the partners were to immediately sell the shares.

Commencement date

7.12 As the amendments correct an unintended outcome, it is proposed that they apply to disposals of assets after 6 December 1990, the application date for section 160ZZNA.

Clauses involved in the amendments.

Clause 51: amends subsection 160ZZNA(10) and inserts subsection 160ZZNA(10A).

Subclause 63(13): contains the application provisions.

Chapter 8 Capital Gains Tax (Publishing Indexation Factors)

Clauses: 18 and 50

Overview

Replaces the requirement that the Treasurer publish the indexation factors to be applied in calculating the motor vehicle depreciation limit and the Capital Gains Tax (CGT) cost base limit for major capital improvements with a requirement that the Commissioner of Taxation publish the relevant factors.

Capital Gains Tax (Publishing Indexation Factors)

Summary of the proposed amendments

8.1. The amendments will amend the Income Tax Assessment Act (the Principal Act) to:

•

replace the requirement that the Treasurer publish the indexation factors to be applied in calculating the motor vehicle depreciation limit and the Capital Gains Tax (CGT) cost base limit for major capital improvements with a requirement that the Commissioner of Taxation publish the relevant factors.

Background to the legislation

8.2. Section 57AF of the Principal Act requires that, for depreciation purposes, the cost limit applicable to motor vehicles for an income year will be determined by reference to an indexation factor.

8.3. Section 160P deals with the treatment of composite assets for Capital Gains Tax purposes. By subsection 160P(6), where a major capital improvement is made to an asset originally acquired prior to 20 September 1985, it may be deemed to be a separate asset. Whether a capital improvement will be a separate asset is determined by the cost base of the improvement. The amount of the cost base limit for each year of income is indexed by reference to an indexation factor determined under section 160Q.

8.4. By subsections 57AF(10) and 160Q(7) the Treasurer is required to publish the relevant indexation factor in the Gazette prior to the commencement of each income year. It has been the practice in previous years for the Treasurer to also issue a press release containing the relevant information.

8.5. The Gazettal requirement is considered to be administratively cumbersome, and duplicated information that is able to be made available to the public more quickly by other means.

Explanation of the proposed amendments

8.6. The amendment to subsection 57AF(10) removes the requirement that the Treasurer publish the motor vehicle depreciation limit indexation factor in the Gazette, and replaces it with a requirement that the Commissioner of Taxation publish the indexation factor in writing prior to the commencement of an income year. [Clause 18]

8.7. The amendment to the subsection 160Q(7) will also remove the requirement that the Treasurer publish in the Gazette the indexation factor applicable to capital improvements for section 160P purposes, and substitute a requirement that the Commissioner of Taxation publish the indexation factor in writing prior to the commencement of an income year. [Clause 50]

Commencement date

8.8. The amendments will take effect from 1992-93 income year.

Clauses involved in the proposed amendments

Clause 18: removes the requirement that the Treasurer publish the motor vehicle depreciation limit indexation factor in the Gazette.

Clause 50: removes the requirement that the Treasurer publish the indexation factor applicable to capital improvements in the Gazette.

Chapter 9 The Taxation of Foreign Source Income

Clauses: 57,58,59,60,61,62,63 and 74

Overview

Reduces the income of a controlled foreign company that is attributed to resident taxpayers by dividends paid by the company to unrelated parties on certain widely distributed finance shares.

The Taxation of Foreign Source Income

Summary of the proposed amendments

9.1 The proposed amendment relates to the foreign source income measures in Part X of the Income Tax Assessment Act 1936. The amendment will modify the attribution rules under which income is attributed to certain Australian "attributable taxpayers". This will have the effect that the attributable income will be calculated after deducting dividends paid by the company to arm's-length holders of widely distributed finance shares.

Background to the legislation

9.2 The existing foreign source income measures require taxpayers to include in their assessable income a share of the attributable income of a controlled foreign company (CFC). The attributable income is generally calculated without regard to dividends that may be paid by the CFC. One of the exceptions provided is for dividends paid on "eligible finance shares" issued to a subsidiary of an Australian Financial Intermediary. Dividends paid on these shares are a substitute for interest on loans made in the ordinary course of (generally banking) business. The proposed amendments will provide a similar exception for widely distributed finance shares.

Why are the changes required?

9.3 Unless dividends paid by the CFC on widely distributed finance shares are excluded in the calculation of its attributable income, the attributable taxpayers (usually those of the ordinary shareholders who are Australian residents) would be attributed a share of all of the income of the CFC. This attributed income would include the income required to be paid out as dividends (usually preference dividends) to the shareholders of widely distributed finance shares.

9.4 These holders of widely distributed finance shares, who have provided finance on arm's length terms, generally have no interest in the company apart from ensuring repayment of the funds and regular payment of dividends in a form which is, in effect, a substitute for interest on a loan.

What will the changes do?

9.5 Exclusion of the dividends paid on widely distributed finance shares will ensure that the attributable taxpayers are not attributed income that they will never receive. These shares are to be excluded from the calculation of a direct attribution interest in a CFC or a controlled foreign trust (CFT) (section 356 of the Principal Act) and a direct attribution account interest in a company (section 366 of the Principal Act). In addition, in calculating the attributable income of a company, under sections 384 or 385 of the Principal Act, a deduction is to be allowed under section 394 for dividends paid out on widely distributed finance shares.

Explanation of the proposed amendments

What are widely distributed finance shares ?

9.6 The conditions required for a share to qualify as a widely distributed finance share are set out in new section 327A. They include requirements about the company that issues the shares, and in some cases, its parent company, the shares that are issued and requirements about the shareholder who receives the shares. [Clause 58]

The company

9.7 There are a number of tests for the company that issues the shares. These are similar to the tests in section 103A of the Principal Act which are used for determining whether a company is treated for taxation purposes as a public company, or as a subsidiary of a public company.

9.8 The tests are applied to the company's shares, other than shares entitled to a fixed rate of dividend, usually the ordinary shares.

9.9 The first requirement in section 327A will be that the company's shares are listed on an official list of a stock exchange either in Australia or elsewhere. A second board listing would not satisfy the listing requirement of this section.

9.10 Alternatively, where the company being tested is not itself the listed company then the listed company will be required to have a direct or indirect interest of 90% or more in the test company. If each subsidiary is not 100% owned, an apportionment is to be made in tracing through subsidiaries of the listed company to measure the listed company's percentage interest in the test company.

9.11 There are further tests to determine whether any of the rights attached to the listed company's shares are concentrated in the hands of a small number of its shareholders. If a company fails any of the tests in relation to the shares then none of its shares will qualify as widely distributed finance shares.

9.12 These tests are designed to ensure that 75% or more of the shares (other than shares entitled to a fixed rate of dividend) are not closely held by a single entity or by a group of less than 21 entities. In testing for close holdings regard is to be had to voting, dividend and capital rights, or the entitlement to acquire such rights, at any time in the company's statutory accounting period.

The shareholder

9.13 If a shareholder is associated with the company, then the shares to which that relationship applies cannot be widely distributed finance shares.

The shares

9.14 Only shares that are issued to the public may qualify as widely distributed finance shares. In deciding whether it is reasonable to consider that the shares have been issued with a view to public subscription, purchase or other wide distribution, regard will be had to the manner in which the shares were offered for public subscription, the way that applications for subscription were handled and whether the practices employed by brokers, agents and other persons associated with the issue of the shares were in accordance with ordinary business practices of brokers, agents, underwriters etc. Consideration is also to be given to any arrangements between persons associated either with the company or with each other in relation to any of the shares to be offered for public subscription or purchase or arrangements, direct or indirect, in relation to the monies raised by the subscription.

Direct attribution interest in a CFC or CFT

9.15 Section 356 of the Principal Act contains the rules for determining an entity's direct attribution interest in a CFC or a CFT. The amendment made by [clause 59] will include in section 356 a reference to widely distributed finance shares to ensure that such shares are ignored for the calculation of a direct attribution interest.

Direct attribution account interest in a company

9.16 Section 366 of the Principal Act defines a direct attribution account interest in a company. This is relevant for determining attribution debits and credits to eliminate double taxation when a company pays a dividend out of previously attributed income. The amendment made by [clause 60] will include in section 366 a reference to widely distributed finance shares to ensure that such shares are not included in a direct attribution account interest. Relief from taxation in relation to dividends on widely distributed finance shares is to be provided by way of a notional allowable deduction in section 394 of the Principal Act.

Notional allowable deduction for eligible finance share dividends and widely distributed finance share dividends

9.17 Section 394 of the Principal Act allows a notional allowable deduction from the notional assessable income for eligible finance share dividends paid by a CFC during a specified time. This notional deduction ensures that the attributable taxpayers in relation to the CFC are not subject to attribution on income that they do not receive because it is paid out by the CFC as a dividend on the eligible finance shares.

9.18 The amendment made by [clause 61] will allow a similar notional allowable deduction for dividends paid on widely distributed finance shares.

9.19 Definitions of "widely distributed finance share" and "widely distributed finance share dividend" are to be inserted in existing section 317 by [clause 57].

Additional notional exempt income - unlisted or listed country CFC.

9.20 Section 402 of the Principal Act treats certain amounts as notional exempt income, including specified non-portfolio dividends. To ensure that a widely distributed finance share dividend is not exempt, an amendment to section 402 is to be made. A widely distributed finance share dividend will be excluded from the classes of non-portfolio dividends referred to in section 402. [Clause 62]

Commencement date

9.21 The amendments in relation to widely distributed finance shares will generally take effect from the date on which the foreign source income measures took effect, generally the 1990/91 income year.

9.22 With one exception, the foreign source income measures in Part X of the Principal Act will, therefore, always be read in their amended form. However, in determining whether a person has committed an offence against the record keeping requirements in Division 11 of Part X before the date of Royal Assent in relation to the amendments made by [clauses 59, 60 and 61] those amendments are to be disregarded. This will avoid any possibility of a retrospective offence. [Clause 74]

Clauses involved in the proposed amendments

Clause 57: amends section 317 of the Principal Act - the general definition section of Part X - to insert new definitions of 'widely distributed finance share' and ' widely distributed finance share dividend'.

Clause 58: inserts new section 327A after section 327 of the Principal Act. It sets out the requirements for a share to qualify as a widely distributed finance share.

Clause 59: includes reference to widely distributed finance shares in section 356 of the Principal Act - direct attribution interest in a CFC or CFT.

Clause 60: includes reference to widely distributed finance shares in section 366 of the Principal Act - direct attribution account interest in a company.

Clause 61: includes reference to widely distributed finance shares in section 394 of the Principal Act - notional allowable deduction for eligible finance share dividends and widely distributed finance share dividends.

Clause 62: will amend section 402 of the Principal Act so that a widely distributed finance share dividend will not be treated as notional exempt income.

Chapter 10 Foreign Exchange Gains and Losses

Clauses: 30 and 63

Overview

Ensures that a deduction for a foreign exchange loss of a capital nature on a contract will be reduced by a gain on an underlying, hedging, or other contract if that gain is not included in assessable income.

Foreign Exchange Gains and Losses

Summary of the proposed amendments

10.1 The amendments will ensure that a deduction for a foreign exchange (forex) loss of a capital nature on a contract will be reduced by a gain on an underlying, hedging, or other contract if that gain is not included in assessable income.

Background to the legislation

10.2 In broad terms, the provisions of Division 3B apply to foreign exchange gains made and losses incurred on capital account on contracts entered into after 18 February 1986. They require such gains and losses, when realised, to be brought to account for tax purposes on a contract by contract basis.

Division 3B includes section 82Z.

What is the effect of current subsection 82Z(3)?

10.3 Subsection 82Z(3) provides that a deduction claimable by a taxpayer for a foreign exchange loss of a capital nature on a contract, called the "primary contract", will be reduced in certain circumstances. These are where:

•

foreign exchange gains have been made by the taxpayer or an associate on a hedging or other contract that would not have been entered into but for the primary contract; and

•

those gains are not included in the assessable income of the taxpayer or of an associate of the taxpayer.

10.4 For example, a forex loss incurred by a resident company on a contract will be reduced by a gain made by its offshore associate on a hedge contract where that gain is not included in assessable income.

10.5 The loss will also be reduced where an unrelated party enters into that hedging or other contract. In this case the loss will be reduced by the lesser of:

•

the amount paid, or the value of any compensation provided, by the unrelated party to the taxpayer or an associate; and

•

the amount of the gain on the hedging or other contract that is not included in assessable income.

Explanation of the proposed amendments

The need for change

10.6 Subsection 82Z(3) provides that a foreign exchange loss on a "primary" contract can be reduced by a gain on a hedging or other contract if the conditions set out in that subsection are satisfied.

10.7 However, a taxpayer may incur a foreign exchange loss on the hedging or other contract while an associate or an unrelated party may derive a gain from the primary contract. In this case, there is no corresponding provision to reduce the deduction for that loss by the amount of any gain on the primary contract.

What do the amendments do?

10.8 The amendments correct this anomaly. They omit the references in subsection 82Z(3) to the primary contract and the hedging or other contract. These references are replaced by references to the "loss contract" and the "gain contract". [Clause 30]

10.9 The effect of the amendment is to enable a deduction for a foreign exchange loss on a contract to be reduced whether that contract is the underlying or primary contract or a hedging or other related contract.

Commencement date

10.10 These amendments will apply to any foreign exchange loss incurred on or after the date of introduction of this Bill.

Clauses involved in the proposed amendments

Clause 30: substitutes:

(i)

the word "loss" for "primary" in paragraph 82Z(3)(a); and

(ii)

new paragraphs 82Z(3)(b) and (ba) for old paragraph 82Z(3)(b).

Clause 63(10): provides that the amendments made to section 82Z will apply to currency exchange losses incurred on or after the date of introduction of this Bill.

Chapter 11 Rehabilitation of Mining, Quarrying and Petroleum Sites

Clauses: 42,43,44 and 63

Overview

Clarifies the operation of the rehabilitation provisions in respect of partial restoration and expenditure on plant or articles. The amendments make it clear that the rehabilitation provisions apply to partial restoration, including restoration of part only of a site, and apply to revenue expenditures on plant or articles such as repairs.

Rehabilitation of Mining, Quarrying and Petroleum Sites

Summary of the proposed amendments

11.1 Two minor amendments will be made to the rehabilitation provisions to clarify their operation in respect of partial restoration and in respect of revenue expenditure on plant or articles.

Background to the legislation

11.2 Division 10AB, which allows a deduction for costs incurred on or after 1 July 1991 in rehabilitating mining, quarrying and petroleum sites, was introduced by Taxation Laws Amendment Act (No. 2) 1991 with effect from 27 June 1991. Two aspects of the operation of that Division are to be addressed by this Bill.

11.3 Firstly, the Division allows a deduction for costs incurred in restoring a mine, quarry or petroleum site to either its pre-mining condition or to a reasonable approximation of its pre-mining condition. This includes work going only part way to full restoration of the site, and work that restores (or partly restores) only part of a site.

11.4 Concerns have been raised that the Division may be misinterpreted. Industry representatives fear that the provision could be read so as not to allow a deduction if restoration only goes part way to a full restoration of the site or if only part of the site is restored. They also fear that the Division could be read as requiring all mining work to have ended before any deduction for rehabilitation work will be allowed.

11.5 The Division will be amended to put beyond doubt that deductions are available for partial restoration and for restoration of part of the site. No specific amendment need specify that the deductions are available even if mining work continues on some part of the site; once it is clear that restoration of part of the site is deductible, the Division will clearly apply even if mining work is not over.

11.6 Secondly, the cost of plant or articles used in restoring a site is depreciable, rather than immediately deductible, under the Division. A specific provision excludes those depreciable costs from the deduction. However, a technical concern was raised that the exclusion provision, which is expressed in fairly broad terms, might also exclude other costs, including revenue costs such as repairs, relating to plant or articles used in the rehabilitation of a site.

11.7 An amendment will also be made to make it clear that it is the depreciable costs of plant or articles that are excluded from immediate deduction under the Division.

Explanation of the proposed amendments

Partial restoration

11.8 Subsection 124BA(1) allows a deduction to the extent to which any expenditure is in respect of rehabilitation related activities.

11.9 The definition of rehabilitation related activity was always intended to apply to both restoration of a part of a site and any act of rehabilitation on the site even though it would not necessarily completely restore the site to its pre-mining condition.

11.10 The fear that deductions might be denied where some mining work on a site continues depended on the mistaken view that the Division relates only to the restoration of the whole site. Of course, restoration of the whole site cannot be completed until mining work ends.

11.11 The use of the word "site" was not to be read as limiting the rehabilitation deduction only to a restoration of the entire site. To make this clear, section 124B will be amended to define site to include a part of a site. This also makes it clear that the Division applies to rehabilitation work even before mining work ends. [Clause 42]

11.12 The use of the words to, or to a reasonable approximation of, the pre-mining condition of the site was intended to have a threefold effect:

•

the words "pre-mining condition of the site" ensure that expenses incurred in improving the site beyond its pre-mining condition are not deductible;

•

the expression "reasonable approximation" of the pre-mining condition is intended to acknowledge that rehabilitation is not expected to replicate exactly the pre-mining condition of the site; and

•

the expression "reasonable approximation" of the pre-mining condition is also used to ensure that a deduction is allowable for expenses incurred in restoring the site only partly towards its pre-mining condition.

11.13 The third of these effects has been doubted. A new subsection will be inserted in section 124BB to ensure that it applies. The subsection expressly states that a partial restoration of a site will amount to the restoration of the site as that expression is used in subsection 124BB(1). And the new subsection makes it clear that such a partial restoration will qualify for the deduction even though the taxpayer may have no intention of rehabilitating a site completely to its pre-mining condition. [Clause 43]

11.14 For example, it is widely accepted that the partial removal of offshore oil rig structures by the petroleum mining industry is a sound environmental practice. Therefore, if a company removes only part of its platform structures to a depth of, say, 70 metres below sea level, rather than remove the structure entirely, the cost of that partial removal will still qualify for the deduction. The result would also be the same if, say, the company simply collapsed the platform on site without removing the debris from the sea bed.

Expenditure in respect of plant or articles

11.15 The cost of plant or articles used in the rehabilitation of a mine, quarry or petroleum site qualifies for deduction under the depreciation provisions rather than for the outright deduction available under Division 10AB.

11.16 As presently worded, paragraph 124BC(1)(a) excludes from the deduction any expenditure "in respect of property, being plant or articles for the purposes of section 54". It has been suggested that the effect of this expression is to exclude not only the actual cost of acquiring the plant or articles themselves but perhaps also any revenue costs, such as money expended on repairs to them. This argument is based on the very broad meaning generally given to the phrase "in respect of".

11.17 Paragraph 124BC(1)(a) will be deleted and a new subsection will be inserted to ensure that this unintended result does not arise. This new subsection will ensure that only those expenses which are eligible for a depreciation deduction will be excluded from the Division. [Clause 44]

Commencement date

11.18 The amendments made by this Bill will apply to expenditure on rehabilitation related activities on or after 1 July 1991.

Clauses involved in the proposed amendments

Clause 42: Amends section 124B to provide a definition of site.

Clause 43: Amends section 124BB to allow a deduction for partial restoration of a site.

Clause 44: Amends section 124BC to clarify its operation in respect of expenditure on plant or articles.

Subclause 63(12): Commencement date.

Chapter 12 Research and Development

Clauses: 28,29 and 63

Overview

Allows a maximum deduction of upto 150% of expenditure, for qualifying plant expenditure claimed over three years in three equal instalments, for each year if that plant is first used prior to 30 June 1993.

Limits deductions in respect of core technology expenditure to an arm's length amount.

Excludes expenditure on core technology from the calculation of the deduction to be allowed in the case where there are guaranteed returns to investors. This modification will ensure that the calculation of the reduced deduction is not diluted by the inclusion of core technology which already only attracts a deduction of 100%.

Research and Development

Summary of the proposed amendments

12.1 This Bill will amend the income tax law in regard to the research and development (R&D) tax concession in the following manner:

(a)

For qualifying plant expenditure claimed over three years in three equal instalments, a maximum deduction of up to 150% of expenditure is to be allowed for each year if that plant was first used prior to 30 June 1993.

(b)

Subsection 73B(31) is to be extended to include core technology. This provision restricts the deduction allowed in respect of specific expenditure to what is considered to be an arm's length amount.

(c)

Amounts incurred on core technology are to be excluded from the formula in subsection 73CA(4). This formula provides a calculation for the amount a deduction is to be reduced by where there are guaranteed returns to investors.

12.2 The amendment at point (a) is to take effect from the date of Royal Assent. The amendments listed at points (b) and (c) are to take effect from the date of introduction.

Background to the legislation

12.3 The R&D concession is available to an eligible company for expenditure incurred, on or after 1 July 1985, on qualifying research and development in Australia. The concession is in the form of a deduction against assessable income, of up to 150% (125% after 30 June 1993) of the expenditure incurred.

12.4 The deduction allowable to a company depends on the purpose of the expenditure. For expenditure on the acquisition or construction of plant for use by the company exclusively on R&D activities there is a deduction in equal instalments over three years at the appropriate deduction acceleration factor if the following criteria are met:

•

The aggregate R&D amount must exceed $20 000 in a year.

•

Where this amount is between $20 000 and $50 000 in a year, a formula provides a graduated rate of deduction of between 100% and 150% (or 125% after 30 June 1993).

•

A maximum rate of deduction of 150% (or 125% after 30 June 1993) is allowed where the aggregate R&D amount is $50 000 or more.

12.5 Core technology expenditure is deductible at only 100%.

12.6 Where a taxpayer has a guaranteed return from the results of the research the deduction that would otherwise be allowable is reduced by a formula to reflect the reduction in the risk to which the taxpayer is exposed.

Explanation of the proposed amendments

12.7 A maximum deduction of up to 150% is to be allowed in respect of expenditure incurred on eligible plant written off over three years where that plant was first used for R&D prior to 30 June 1993.

12.8 Where eligible expenditure is incurred on qualifying plant, in the year that the plant is first used exclusively for the purposes of carrying on by or on behalf of the company for R&D activities, one third of that expenditure may be claimed as a deduction under subsection 73B(15). Provided that the plant continues to be used as described above, one third of the expenditure may be claimed in each of the two subsequent years.

12.9 In any of the three years, where the aggregate R&D amount exceeds $20 000, the deduction will be calculated as one third of the eligible expenditure multiplied by the relevant deduction acceleration factor as defined in subsection 73B(1).

12.10 For years ended 30 June 1993 or an earlier year of income, the deduction acceleration factor is 1.5 if the aggregate R&D expenditure is over $50 000 (subparagraph (a) (ii)). Where the amount is less than $50 000, the deduction acceleration factor is to be reduced based on the formula provided in the definition at subparagraph (a)(i).

12.11 For years subsequent to 30 June 1993, the deduction acceleration factor is 1.25 if the aggregate expenditure is over $50 000 (subparagraph (b)(ii)), or if less than $50 000, then calculated using the formula at subparagraph (b)(i) of the definition.

Example of the current law

12.12 Assume that the aggregate R&D amount exceeds $50 000 in each year. If plant was first eligible to be claimed in the year ended 30 June 1993 the rate of deduction will be 150% of the expenditure. However, in the two subsequent years the rate of the deduction will be 125%.

12.13 The current provisions are to be amended so that expenditure incurred on plant that is first eligible to be claimed in the year ended 30 June 1993 or earlier, may be deductible at the same deduction acceleration factor formula for each of the three years of write off [subsection 73B(15B)]. This is provided that the aggregate R&D amount is greater than $20 000 in relation to the year of income as required by subsection 73B(15).

Example of the effect of the amendment

12.14 Assume that the aggregate R&D amount exceeds $50 000 in each year. If the plant was first eligible to be claimed in the year ended 30 June 1993 the rate of deduction will be 150%. Now in the next two years the rate of deduction will also be 150%.

12.15 This means expenditure will be written off on the basis of the maximum rate available when the plant was first used, rather than the maximum rate for plant first used in some later year.

Deductions in respect of core technology expenditure to be limited to an arm's length amount

12.16 Subsection 73B(31) reduces the deduction for certain expenditure claimed under section 73B to what is considered by the Commissioner of Taxation to be an "arm's length amount". That is an amount that is not artificially inflated.

12.17 This provision currently applies to: R&D expenditure (as defined in subsection 73B(1)); an amount of expenditure incurred in the acquisition or construction of plant; the acquisition or construction of a building or an extension, or alteration or improvement to a building. It does not currently include "core technology".

12.18 Paragraph 73B(31)(a) is to be amended to include core technology. That is, the Commissioner will be able to restrict deductions in respect of core technology to reasonable amounts. Although deductions claimed for core technology that are artificially inflated (not arm's length) may already attract the operation of Part IVA, this amendment will ensure that the valuation of core technology must be at arm's length. [Clause 28]

Expenditure on core technology is to be excluded from the calculation of the reduced deduction that is available in the case of guaranteed returns

12.19 In 1990, a new section (section 73CA) was inserted under which the deduction otherwise allowable for R&D is reduced in proportion to the reduced risk where the company is entitled to a guaranteed return on any of its R&D expenditure. The section applies to all R&D expenditure, including core technology expenditure.

12.20 Currently, where the Commissioner of Taxation is satisfied that part of the amount being claimed under section 73B is not at risk to the investor, the amount of the deduction is to be reduced by an amount calculated according to the formula prescribed in subsection 73CA(4):

Excess * (Part of expenditure not at risk / The amount of the expenditure)


•

"Excess" refers to the difference between the deduction allowed under the R&D provisions and the total expenditure incurred.

•

"Part of expenditure not at risk" means the part of the expenditure in respect of which the Commissioner is satisfied that the company was not at risk when the expenditure was incurred.

•

"The amount of the expenditure" means the total expenditure claimed.

12.21 Broadly, the intention of this provision is to reduce the maximum deduction to 100% where the expenditure is not at risk. This reduction is only to apply to that part which is not at risk.

12.22 The expenditure in this formula includes core technology expenditure which is already only deductible at the rate of 100% - see subsection 73B(12).

12.23 Core technology is to be removed from the expenditure referred to in the formula by defining expenditure in section 73CA as not including core technology expenditure. This is because the inclusion of core technology in the total expenditure component of the formula dilutes the effect of the provision. In addition, it may attract arrangements which involve artificially contrived core technology transfers and further reduce the intended impact of the provision. [Clause 29]

12.24 The following example illustrates this point:

Example

12.25 Assume total expenditure of $9 million made up of:

•

core technology expenditure of $3 million - deduction (100%) of $3 million;

•

expenditure deductible under section 73B (other than core technology expenditure) of $6 million - deduction (150%) of $9 million; and

•

a guaranteed return (i.e. expenditure not at risk) of $3 million

12.26 If there was no guaranteed return, the deduction available would be $12 million. However, as there is a guaranteed return, the deduction has to be reduced by applying the above formula:

(a)

As the law currently operates - core technology expenditure and other expenditure included in the calculation - the deduction would be reduced by:

$(12m - 9m) x (3m/9m) = $1 million


The allowable deduction is therefore reduced to $11 million.

(b)

Under the amendment, where core technology is excluded, the deduction would be reduced by:

$(9m - 6m) x (3m / 6m) = $1.5 million


The allowable deduction would therefore be $10.5 million.

Commencement date

12.27 The amendment that will enable qualifying plant expenditure to be deductible up to a maximum rate of 150% after 30 June 1993 rather than up to a maximum rate of 125% if the plant is used before or on 30 June 1993 is to take effect from the date of royal assent.

12.28 The amendment that will limit the deduction allowed in respect of core technology to an arm's length amount will take effect from the date of introduction of the legislation.

12.29 Similarly, the amendment that will exclude core technology expenditure from the operation of the formula which reduces the R&D deduction otherwise allowable where there are guaranteed returns to investors will also take effect from the date of introduction.

Clauses involved in the proposed amendments

Clause 28: Amends section 73B to insert new subsection (15A) to amend the existing provisions in relation to plant so that plant can be written off up to a maximum of 150% if used prior to 1 July 1993. It also amends paragraph (31)(a) so as to include "core technology".

Clause 29: Amends section 73CA by inserting in subsection (6) a definition of "expenditure" which excludes core technology.

Chapter 13 Fringe Benefits Tax - Substantiation Discretion

Clauses: 3,4 and 5

Overview

Provides the Commissioner with a discretion, in certain circumstances, to accept something less than the strict level of substantiation required under the fringe benefits law.

Fringe Benefits Tax - Substantiation Discretion

Summary of the proposed amendment

13.1 Part 2 of the Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to allow the Commissioner of Taxation a discretion when applying the substantiation requirements relating to particular benefits.

13.2 The proposed amendment will provide that the Commissioner may give relief after a review of a taxpayers affairs, or after review or reconsideration of an assessment. The relief will be provided in circumstances where the requirements would otherwise operate to either disallow a reduction in taxable value or disallow the exempting of a benefit. The relief is to be available where the Commissioner of Taxation, having regard to certain matters, is satisfied that the benefit has been provided and it would be unreasonable for the substantiation requirements to apply.

Background to the legislation

13.3 Under the present fringe benefits tax legislation, substantiation is required in order to either reduce the taxable value of certain fringe benefits or to ensure that certain other benefits are exempt from fringe benefits tax. For example, the value of a car fringe benefit is reduced by the amount of any employee contribution, on the condition that the employee provides to the employer the necessary documentary evidence covering that expenditure. In the case of a car fringe benefit, the expenditure could reflect employee expenses in operating the car or amounts paid to the employer for the use of the car.

13.4 Substantiation provisions also appear in the income tax legislation. Those provisions require a high degree of detail, the harshness of which was highlighted in the so called "Minister's Case" ( Case W124
89 ATC 975), where deductions were disallowed because of minor defects in the supporting documents. That case resulted in section 82KZAA being inserted into the Income Tax Assessment Act 1936 . The new section was effective from 8 January 1991 and gives the Commissioner of Taxation a discretion to grant relief to taxpayers from the strict substantiation requirements in certain special circumstances.

13.5 To ensure consistent treatment of taxpayers, the proposed amendment will allow the Commissioner a similar discretion when considering the substantiation requirements of the FBTAA.

Explanation of the proposed amendment

13.6 The amendment proposes to insert a new section, section 123B, in Part X of the FBTAA. [Clause 4]

When will the substantiation requirements be waived?

13.7 The amendment provides that the substantiation requirements will not apply to a benefit where the Commissioner is satisfied that the benefit has been provided and it would be unreasonable to apply the substantiation requirements. Where the Commissioner is so satisfied, the substantiation requirements will not operate to deny a reduction or exemption. [New Subsection 123B(1)]

What are the substantiation requirements?

13.8 The substantiation requirements are those provisions which require the obtaining or retention of substantiation evidence, (including diaries and log books) and the giving of that evidence to the employer.

When will the discretion be exercised?

13.9 The amendment proposed provides that the Commissioner's discretion can only be exercised:

(a)

on the Commissioner's own motion while reviewing the affairs of the taxpayer (e.g., an audit);

(b)

in considering an objection against an assessment; or

(c)

in considering a request for an amendment of an assessment where the request was made before new section 123B commences to operate. [New subsection 123B(3)]

Discretion will not apply to certain requests for amendment

13.10 The section will not apply in situations where:

•

there has been a reduction in taxable value disallowed or an exemption disallowed before new section 123B commenced operation; and

•

the employer has not acted to have the matter reviewed or considered. [New paragraph 123B(3)(c)]

What must the Commissioner have regard to?

13.11 In making a decision under new subsection 123B(1), in respect of a benefit provided, the Commissioner must have regard to the nature and quality of the evidence and to any special circumstances affecting the employer.

13.12 The requirement to consider special circumstances affecting the employer allows the Commissioner to consider whether the employer should obtain the relief. These circumstances include the extent to which the substantiation requirements were complied with and whether the failure to comply was inadvertent or deliberate. Circumstances affecting other parties such as associates, providers and recipients will necessarily affect the employer. [New paragraph 123B(2)(b)]

13.13 As to the extent to which the requirements were complied with, this goes both to obtaining the relevant document or the recording of details in the log book or diary and the giving of it to the employer. The provision is concerned with the extent of compliance of all relevant parties.

Requests for extension of time for objection or reference

13.14 Where the period for lodging objections and referrals has ended before the commencement of new section 123B, the discretion under new subsection 123B(1) is not available to the Commissioner . This will ensure that employers cannot use new section 123B as a basis for objecting against assessments where avenues of challenge had been exhausted before the section commenced. [New paragraph 123B(5)(c)]

13.15 Further, the discretion is also not available where an application for an extension of time is granted for lodging objections and referrals. [New paragraph 123B(5)(d)]

13.16 The legislative provisions governing referrals are proposed to be transferred from the FBTAA to the Taxation Administration Act 1953 in Taxation Laws Amendment Bill (No.3) 1991.

Benefits affected

13.17 New section 123B will apply to a benefit provided before, at or after the commencement of the section. This provision will advantage taxpayers by allowing the Commissioner to apply the discretion when investigating the affairs of employers in prior years. [New subsection 123B(6)]

Discretion not to apply to Declarations

13.18 New section 123B will not apply to a declaration made under the Act. The various requirements to provide declarations already represent significant softening of the substantiation requirements and the necessity that the declarations be in a form approved by the Commissioner removes any need for concessional treatment under this section. [New subsection 123B(4)]

Amendment of assessments

13.19 The Commissioner may amend assessments made before the commencement of the section, which were made on the basis of the existing law, to give effect to these amendments. [Clause 5]

Commencement date

13.20 New section 123B will apply from the date the Royal Assent is given to the Bill.

Clauses involved in the proposed amendment

Clause 3: will facilitate references to the Fringe Benefits Tax Assessment Act 1986 for the purposes of the amendment to the Act made by this Bill.

Clause 4: will amend the FBTAA by inserting section 123B to provide a discretion for the Commissioner to accept substantiation which may fall short of the detail required by the Act.

Clause 5: allows for assessments made to be amended to give effect to the amendment being proposed.

Chapter 14 Education Entry Payment

Clauses: 7,8,9 and 63

Overview

Ensures that the education entry payment to be paid to sole parent pensioners from 1 January 1992 will be taxed.

Education Entry Payment

Summary of the proposed amendments

14.1 This Bill proposes to amend various provisions of the Income Tax Assessment Act 1936 (the Act), to ensure that the education entry payment paid to sole parent pensioners, is included in assessable income.

14.2 It is proposed that the amendments take effect from 1 January 1992, the commencement date for the education entry payment.

Background to the legislation

14.3 In the August 1991 Budget the Government announced that from 1 January 1992 an amount of $200 would be paid to sole parent pensioners commencing or continuing full-time or part-time education courses which attract payment of AUSTUDY. AUSTUDY payments are subject to tax.

14.4 This Bill proposes amendments to the Act, to ensure that the education entry payment is not exempt from income tax.

14.5 The provisions of the Act which are affected by the proposed amendments contained in the Bill include:

Paragraph 23(z)

14.6 Paragraph 23(z): exempts from tax certain scholarships, educational allowances or assistance payments paid to students receiving full-time education at a school, college or university. This exemption does not extend to certain payments listed under paragraph 23(z), including AUSTUDY allowances.

Paragraph 23(zaa)

14.7 Paragraph 23(zaa): operates to exempt from income tax certain payments made under a Commonwealth scheme for secondary educational assistance. The exemption does not extend to AUSTUDY payments made in connection with secondary education.

Division 1AA

14.8 Division 1AA: specifies which payments under the Social Security Act 1991 and the Veteran's Entitlements Act 1986 are exempt from tax.

Explanation of the proposed amendments

14.9 The Social Security legislation allows an education entry payment to be paid to sole parent pensioners commencing or continuing full-time or part-time education courses which attract payment of AUSTUDY. Such a payment is payable under Part 2.13A of the Social Security Act 1991 . Part 2.13A was included in that Act by the Social Security Legislation Amendment Act (No.3) 1991.

14.10 Amendments to paragraphs 23(z) and 23(zaa) ensure that the education entry payment is not exempt from income tax. [Clause 7]

14.11 The Bill also proposes to amend Division 1AA of the Act to state that the education entry payment is not exempt from income tax. [Clause 9 - new Section 24ABNA]

14.12 These amendments mean that the education entry payment is included in the assessable income of the recipient and is not exempt from tax.

Commencement date

14.13 The amendments relating to the education entry payment will take effect from the commencement date for the payments, 1 January 1992.

Clauses involved in the proposed amendments

Clause 7: proposes to insert new subparagraph 23(z)(x) into the Act to ensure that the education entry payment is not exempt from income tax.

Clause 7: proposes to insert new subparagraph 23(zaa)(vii) into the Act to ensure that the education entry payment is not exempt from income tax.

Clause 8: proposes to amend the section 24AB Social Security Payments table to include the education entry payment.

Clause 9: proposes to insert new section 24ABNA into the Act to state that education entry payments are not exempt from income tax.

Subclause 63(2): provides that these amendments apply to payments received on or after 1 January 1992.

Chapter 15 Miscellaneous Technical Amendments

Clauses: 73,76,77 and 78

Overview

A.

Carry Forward of Excess Foreign Tax Credits

B.

Part 4 - Amendment of the Income Tax (International Agreements) Act 1953

Miscellaneous Technical Amendments

A. Carry forward of Excess Foreign Tax Credits

Summary of proposed amendment

15.1 A technical amendment to clarify the operation of the provisions that deal with the carry forward of excess foreign tax credits.

Background to the legislation

15.2 A taxpayer whose assessable income includes foreign income is entitled to a credit against the Australian tax payable on that income for the foreign tax paid. The amount of foreign tax paid that can be utilised in a particular year cannot exceed, for each class of foreign income, the Australian tax payable on the foreign income of that year.

15.3 For the income years 1987-88, 1988-89, 1989-90, the first three years in which the foreign tax credit system operated, a taxpayer was not able to carry forward an excess of foreign tax credits for an income year to a later income year. With the introduction of the Foreign Source Income legislation with general effect from the 1990-91 income year, the law was amended to allow the taxpayer to carry forward an excess credit in relation to a class of foreign income for five succeeding years.

Explanation of the proposed amendment

15.4 It was intended that only excess credits that arose for the 1990-91 and subsequent years could be carried forward. This was clearly stated in the Explanatory Memorandum to the Taxation Laws Amendment (Foreign Income) Act 1990.

15.5 However, section 160AFE which deals with the carry forward of excess foreign tax credits could be interpreted as allowing a taxpayer to carry forward to the 1990-91 income year excess credits of prior income years.

15.6 Subsection 160AFE(1C) deals with the calculation of an excess foreign tax credit of an income year. Clause 370 will provide that subsection 160AFE(1C) will have the effect that an excess credit can arise only for the 1990-91 or a later year of income. That subsection is to be read as always having had that effect.

Clauses involved in the proposed amendment

Clause 73: Clarifies the operation of subsection 160AFE(I1C).

B. Part 4- Amendment of the Income Tax (International Agreements) Act 1953

15.7 This Bill will make a technical correction to Schedule 32 of the Income Tax (International Agreements) Act 1953 to accurately reflect the text of the Australia-Fiji comprehensive taxation agreement. The amendment will insert in paragraph 1(a) of Article 14 the word "other" before "Contracting State".

Commencement date

15.8 This amendment will apply to assessments in respect of income of the 1991-92 income year and subsequent income years.

Clauses involved in the proposed amendment

Clause 76: states that the Principal Act is the Income Tax (International Agreements) Act 1953.

Clause 77: amends paragraph 1(a) of Article 14 of Schedule 32 of the Income Tax (International Agreements) Act 1953 by inserting "other" before "Contracting State".

Clause 78: states the date of effect of the amendment.