House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

General Outline and Financial Impact

The Taxation Laws Amendment Bill (No. 2) 1992 will amend the income tax law by making the following changes:

Depreciation Amendments

•

Provide higher rates of depreciation for depreciable property with effective lives of five or more years.

•

Simplify the calculation of most depreciation rates once effective life is known.

•

Proposal announced: Economic Statement of 26 February 1992.

•

Financial impact: The following is the estimated cost to revenue:

1991-92	1992-93	1993-94	1994-95	1995-96
$M	$M	$M	$M	$M
-	30	215	360	490

Capital Gains Tax Goodwill Exemption

•

Increase the capital gains tax exemption for gains realised on the disposal of the goodwill of a business from 20% to 50%. The exemption will be available where the net business interests of the taxpayer are worth less than $2 million and the exemption threshold will be indexed annually from the 1993-94 year of income.

•

Proposal announced: Economic Statement of 26 February 1992

•

Financial impact: The estimated cost to revenue is $5.0m in 1992-93, and $10.0m per year in subsequent years.

Capital Gains Tax Amendments

•

Correct some minor deficiencies in the principal residence exemption provisions;

•

Allow companies to claim or to transfer only current year capital losses following ownership changes on satisfaction of a same-business test;

•

Overcome technical problems which could unfairly prevent some taxpayers from obtaining CGT rollover relief following the destruction of an asset;

•

Modify the anti-avoidance rules which prevent value-shifting advantages arising on the transfer of assets between companies under common ownership, by extending the effective discretions which can reduce otherwise harsh applications of the provisions;

•

Clarify the application of transitional provisions contained in section 160ZZS;

•

Provide that the consideration for disposal of an asset that expires is not deemed to be an amount greater than the actual consideration;

•

Allow CGT rollover relief following the death of a taxpayer for asset transfers that occur pursuant to deeds of family arrangement;

•

Provide that CGT is payable where non-taxable Australian assets owned by a deceased Australian resident are inherited by a non-resident beneficiary;

•

Provide that payments made to a lessee for the variation of a post-19 September 1985 lease in excess of the lessee's indexed cost base are taxed as a capital gain;

•

Ensure that the CGT exemption for motor vehicles extends to interests held in motor vehicles;

•

Overcome double tax problems for employee share trusts;

•

Ensure that the provisions which provide an (effective) rollover on the conversion of a convertible note into a share or a unit, apply only for CGT purposes;

•

Extend the rollover relief currently available on the breakdown of a marriage to the breakdown of a de facto marriage;

•

Prevent the use of rollover provisions available for share splits and consolidations as a means of avoiding the bonus share rules; and

•

Prevent the rollover of an asset which is trading stock in the hands of the transferee and therefore outside the scope of the CGT provisions of the law.

•

Proposals announced: Not previously announced

•

Financial Impact: These amendments are unlikely to have any significant impact on revenue.

Deductions for Superannuation Contributions on behalf of Employees to Three Superannuation Funds

•

Enable deductions for contributions to three superannuation funds to provide benefits for employees where one of those funds was established by a law of the Commonwealth, a State or Territory;

•

Proposal announced: 17 January 1992 (Treasurer's Press Release No. 5 of 1992)

•

Financial impact: The impact on revenue is not expected to be substantial.

Deductions for Superannuation Contributions by Substantially Self-Employed People

•

Enable substantially self-employed people with minimal employer support to receive the same level of tax deductions for personal superannuation contributions as self-employed people and employees without superannuation support.

•

Proposal announced: 1991-92 Budget.

•

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

The Taxation of Foreign Source Income

•

Correct anomalies in the calculation of a resident company's share of the net income of a partnership or trust where that net income includes foreign branch income.

•

Exclude from tainted sales income of a controlled foreign company (CFC) proceeds from the sales of goods purchased from or sold to related parties by the CFC where the goods sold were manufactured, produced or substantially altered by the directors or employees of the CFC, and removes the requirement that the CFC substantially enhance the market value of the goods sold by it before the proceeds of those sales may be excluded from tainted sales income.

•

Ensure that an election made by a CFC for capital gains tax roll-over relief for an asset disposal is binding when calculating the amount of a capital gain arising on a subsequent disposal of that asset.

•

Provide wider capital gains tax roll-over relief for an asset disposal when determining whether a CFC passes the active income test.

•

Reduce the income of a controlled foreign company that is attributed to resident taxpayers by dividends paid by the company to another company on certain transitional finance shares.

•

Eliminate the unintended double taxation on a taxpayer in respect of certain types of dividends derived by a CFC.

•

Correct an inappropriate exemption provided to a life assurance company in relation to life assurance policies issued to non-residents who are not associates of the company.

•

Proposals announced: Not previously announced.

•

Financial impact: The first, second, third and fourth amendments to the Foreign Source Income measures are likely to have negligible impact on revenue.

The fifth amendment will relieve taxpayers from an unintended * taxation liability. A reliable estimate of the cost to revenue cannot be made.

The sixth amendment will relieve taxpayers from an unintended liability to tax. The nature of this amendment is such that a reliable estimate of the cost to the revenue cannot be made.

The seventh amendment is likely to give rise to a reasonable gain to revenue. However, a reliable estimate of the impact on revenue cannot be made.

Deferral of Initial Payments of Company Tax for 1991-92

•

Defer the initial payment of income tax for the 1991-92 income year for companies, superannuation funds, approved deposit funds and pooled superannuation trusts (all referred to as companies), from the 28th day of the month following balance date to the 28th day of the third month following balance date.

•

Proposal announced : Economic Statement of 26 February 1992

•

Financial Impact : There will be no long term impact on revenue as the income tax collected under the deferral arrangements will be the same as that which would have been collected under the existing law. However, revenue of approximately $10 million from the initial payments of company tax, will be deferred from the financial year ending 30 June 1992.

Exemption from clawback provisions of grants or recoupments made under the Co-operative Research Centres Program.

•

Prevents the application of the research and development (R&D) clawback provisions to certain eligible companies where a grant or recoupment is made by the Commonwealth under the Co-operative Research Centres Program;

•

Ensure that an eligible company, which is a partner in a partnership designated as a Co-operative Research Centre (CRC), which is eligible for an R&D deduction as a result of expenditure incurred under the Program, is excluded from the application of the R&D clawback provisions; and

•

Provide that an eligible company which is a partner in a partnership not designated as a CRC, which is eligible for an R&D deduction as a result of expenditure incurred under the Program, is not excluded from the application of the clawback provisions.

•

Proposal announced : 17 January 1992 by the former Treasurer, Mr Kerin, and the Minister for Science and Technology, Mr Free.

•

Financial impact : The cost of the amendment is estimated to be $2.0m in 1991/92, $4.0m in 1992/93, $4.0m in 1993/94 and $5.0m in 1994/95.

Gift Provisions - World Wide Fund for Nature Australia

•

Reflect a change in name for the World Wildlife Fund Australia which is listed in the income tax gift provisions.

•

Proposal announced: Not previously announced.

•

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

Exemption of the Pay and Allowances of Members of the Defence Forces serving in Cambodia

•

Exempt from income tax the pay and allowances of members of the Australian Defence Forces allotted for duty with the United Nations Advance Mission in Cambodia and the United National Transitional Authority in Cambodia.

•

Proposal announced: 30 October 1991 by the Minister for Defence, Science and Personnel, Mr Gordon Bilney

•

Financial impact: $1.0m for the 1991-92 income year.

Definition of "Resident" or "Resident of Australia"

•

Amend definition of "resident" or "resident of Australia" to include as residents Commonwealth public servants who are covered by the new Public Sector Superannuation Scheme (PSS).

•

Proposal announced: Not previously announced.

•

Financial impact: Nil.

Medicare Levy Relief: Blind Pensioners and Sickness Beneficiaries

•

Amend the Income Tax Assessment Act 1936(the Act) to make that Act reflect the Government's initial intention to limit a concession on account of holding a health card to blind pensioners and recipients of sickness allowance.

•

Proposal announced: Not announced. The amendments are consequential on an earlier amendment of the Act.

•

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

Chapter 1 Depreciation Amendments

Clauses: 7,8,9,10,11,18,22 and 66

Overview

Provide higher rates of depreciation for depreciable property with effective lives of five or more years.

Simplify the calculation of most depreciation rates once effective life is known.

Depreciation Amendments

Summary of the proposed amendments

1.1. This Bill amends the income tax law to provide higher rates of depreciation for plant and equipment with effective lives of five or more years. It does this by providing new bands of depreciation rates applying to most items.

1.2. Taxpayers also benefit from a clearer statement of the depreciation rates available for plant or articles with effective lives of less than 5 years.

1.3. The amendments apply to items acquired or constructed after 26 February 1992.

Background to the legislation

1.4. Depreciation writes off the capital cost of plant and articles for use to produce assessable income. This background section describes how depreciation operated before the changes the legislation makes.

Methods of depreciation

1.5. Taxpayers use the diminishing value method to calculate annual deductions for depreciation, unless they elect to use the prime cost method for items first depreciated in a particular year.

1.6. Under the diminishing value method, deductions are a percentage of depreciated value, which is the cost less deductions already allowed. Under the prime cost method, deductions are a percentage of the original cost.

1.7. Because prime cost rates are lower than diminishing value rates, prime cost gives lower initial deductions, but diminishing value gives deductions that reduce as the cost of the items is written off.

Effective life

1.8. Rates of depreciation reduce as the effective life of property increases. Broadly, the effective life of an item is the period that it is capable of being used for income-producing purposes. Since 1 July 1991, taxpayers have had the option of either making an estimate of the effective lives of their depreciable items taking into account their particular circumstances of use or adopting the Commissioner of Taxation's published determination of effective lives.

Depreciation rates

1.9. If the cost of the property is less than $300 or the effective life is less than three years, the depreciation rate is 100%. So the cost is fully deductible when the item is first used for producing assessable income, or installed ready for use and held in reserve.

1.10. For most other property, the depreciation rate is calculated as a percentage based directly on effective life, broadbanded upward into one of seven broadbanded rates, and then increased by a loading of 20%. The rate is increased by a further 50% if the diminishing value method is adopted, because deductions under that method decline as the cost of the property is written off.

1.11. The depreciation rates for most property (ie. where both broadbanding and loading apply) are demonstrated by the following table:

1.12. These rates have been suggested as too low to encourage expenditure on items with lives of more than five, and certainly more than ten, years.

1.13. The following are exceptions:

•

"employee amenities" and "scientific research" plant are depreciable at 33 1/3% under the prime cost method and 50% under the diminishing value method, whatever their actual effective life;

•

passenger motor vehicles and derivatives, motor cycles, and other vehicles designed to carry less than either 1 tonne or nine people are not eligible for the 20% loading, eg. the prime cost rate for a motor vehicle with an effective life of 7 years would be 15% (22.5% diminishing value); and

•

"works of art" are not eligible for broadbanding but are entitled to the 20% loading, eg. a painting with an effective life of 100 years would have a prime cost rate of 1.2% and a diminishing value rate of 1.8%.

Explanation of the proposed amendments

New rate schedule

1.14. The immediate deductibility for plant either costing less than $300 or with an effective life of 3 years remains unchanged [New subsection 55(2)] . However, a new six rate schedule is to replace the existing 7 broadbanded rates for plant with effective lives of 3 years or longer [New subsection 55(5)] . The schedule increases depreciation rates items with effective lives of 5 years or longer.

1.15. The new schedule absorbs the 20% loading and is expressed as diminishing value method rates. Prime cost rates are 2/3rds of the diminishing value rates, rounded to the nearest whole number [New paragraph 56(1)(b)] .

1.16. This simplifies the ascertainment of the depreciation rate for any particular item. Once the effective life is known for items covered by the schedule, this immediately decides the depreciation rate to be used by taxpayers who have not elected to use the prime cost method. This reduces the number of steps in any calculation.

1.17. The following table summarises the new rates:

1.18. Consistent with the pre-27 February 1992 rates regime, the following exceptions are to apply:

Employee amenities and scientific research plant

1.19. "Employee amenities" and "scientific research plant" are depreciable at a minimum of 50% (diminishing value) or 33% (prime cost) [New subsections 55(3) & (4)] . Higher rates will apply where the cost is either less than $300 or effective life is less than 5 years, as the general depreciation rules, being more generous, would then apply. The previous law does not allow for higher rates if effective life was between 3 and 5 years.

Passenger motor vehicles etc.

1.20. Rates for passenger motor vehicles and derivatives, motor cycles, and other vehicles designed to carry less than either 1 tonne or nine people will be based on the pre-27 February 1992 rates regime [New subsection 55(6)] . The schedule of rates for these vehicles is as follows:

1.21. Most vehicles of this sort will have effective lives less than ten years. For some vehicles, effective lives may be much less.

Works of art

1.22. The pre-27 February 1992 rates regime will also continue to apply to "works of art" [New subsection 55(7)] . The annual depreciation percentage is calculated by dividing effective life into 1.8 and multiplying the result by 100. For example, a painting with an effective life of 100 years would have a depreciation rate of 1.8% (diminishing value) or 1% prime cost (rounding to the nearest whole number).

New rates are maximum

1.23. The new rate schedule represents the maximum rate at which depreciable property may be written-off - lower rates can be adopted at taxpayers' discretion [New subsection 55(8)] .

Commencement date

1.24. The amendments apply to depreciable property (whether new or not) either:

•

acquired under a contract entered into after 26 February 1992; or

•

constructed by the taxpayer and commenced to be constructed after 26 February 1992.

1.25. In some circumstances, a contract entered into after 26 February 1992 will be taken to have been entered into earlier.

Transitional provisions

Subclause 66(1) defines: amended Act, associate, post-26 February 1992 property, pre-27 February 1992 property, and use (relevant for the "modification of acquisition contract date" rules).

Subclause 66(2) extends the meaning of associate to taxpayers that section 59AA treats as having disposed of or acquired property as the result of a partial change in the ownership of that property.

Subclause 66(3) treats certain contracts entered into after 26 February 1992 as entered into before 27 February 1992. That will occur if the taxpayers using the property both before and after the change in ownership are the same taxpayers or associates of each other, and the taxpayer owning the property immediately before the change in ownership had acquired it under a pre-27 February 1992 contract, or constructed it, with construction commencing before 27 February 1992.

"Associate" is based on the definition contained in existing subsection 26AAB(14) of the Income Tax Assessment Act. This includes relatives, partners and their spouses and children, and certain companies and trusts [Subclause 66(1)] . However, its meaning is extended to include persons who owned property immediately before and after a partial change in ownership of property, eg. the members of both a partnership and its reconstituted successor [Subclause 66(2)].

The effect of that "Modification of Acquisition Contract Date" rule on property is that depreciation rates will be calculated under the pre-27 February 1992 rates regime.

The following are examples of when that rule will apply:

•

after 26 February 1992, a taxpayers sells and leases back pre-27 February 1992 property;

•

a lessee of pre-27 February 1992 property acquires it after 26 February 1992;

•

after 26 February 1992, pre-27 February 1992 property is transferred where there is no real change in its ownership. This includes transfers of property to wholly-owned companies, trusts, or within commonly-owned or wholly-owned company groups;

•

disposals of pre-27 February 1992 property that are taken to occur after 26 February 1992 as the result of partial changes in ownership of the property, eg. the reconstitution of a partnership on the retirement or entry of partners;

•

after 26 February 1992, relatives transfer pre-27 February 1992 property to one another. This includes such transfers as the transfer of a family business from parents to their children.

Subclause 66(4) specifies that the amendments are to apply to post-26 February 1992 property, ie. property either:

•

acquired under a contract entered into after 26 February 1992; or

•

constructed by the taxpayer and commenced to be constructed after 26 February 1992.

Subclause 66(5) is a measure to ensure that existing provisions will continue to apply to pre-27 February 1992 property despite their repeal or amendment by these amendments.

Subclause 66(6) specifies that if depreciation balancing adjustment rollover relief under section 58 applies to a disposal of pre-27 February 1992 property by a transferor to a transferee, that property will treated as pre-27 February 1992 property in the hands of the transferee. This means that the existing rates regime, and not the new rates regime, will apply to the property. This is consistent with the general rule under balancing adjustment rollover relief that the transferor and transferee be treated as if a single taxpayer.

Subclause 66(7) proscribes pooling of pre-27 February 1992 property and post-26 February 1992 property in the same pool. It is a measure to avoid complex rules needed if such pooling was to be permitted. It should have limited impact as there is little correspondence between post-26 February 1992 rates and pre-27 February 1992 rates. A precondition for pooling is that all property in a pool has the same rate of depreciation.

Clauses involved in the proposed amendments

Clause 7: Repeals existing section 55 and inserts new section 55 which contains the steps for calculating annual depreciation percentages in respect of post-26 February 1992 plant [refer paragraph xx above].

Clause 8: Amends subsection 56(1) reflecting the change from a system which expresses annual depreciation percentages as prime cost rates to one which expresses them as diminishing value rates.

Formerly, diminishing value rates were one and one-half times annual depreciation percentages. Now that annual depreciation percentages are expressed as diminishing value rates, prime cost rates will be two thirds of annual depreciation percentages, rounded off to the nearest whole number.

Clause 9: Amends paragraph 57AK(5)(a) so that the operation of section 57AK [which deals with pre-1 July 1992 basic iron and steel property] is not affected by the replacement of existing section 55 by the new section 55.

Concessional rates of depreciation are available in respect of plant used primarily and principally in the production of basic iron and steel products. The concession applies to plant acquired under a contract entered into after 18 August 1981 and before 20 July 1982. It also applies to plant constructed by a taxpayer where construction commenced within that period. A further condition is that the plant be either used or installed ready for use and held in reserve before 1 July 1992.

The concessional rates are determined by reference to the rates that would have otherwise applied under existing section 55, which is to be repealed. The amendment ensures that the reference in paragraph 57AK(5)(a) to section 55 is to section 55 as it stood before these changes and not new section 55.

Clause 10: Makes a minor consequential amendment to section 58 [which deals with depreciation balancing adjustment rollover relief] to change a reference in paragraph 58(4)(d) to step 2A [dealing with scientific research plant] in existing section 55 to the corresponding step 2 in new section 55.

The concession for scientific research plant is due to terminate on 30 June 1995. The purpose of paragraph 58(4)(d) is to ensure that transferees of eligible plant after that date will be able to continue with the concession if they qualify for rollover relief and continue the use of the plant in scientific research.

Clause 11: Removes the 1.5 multiplier from the subsection 62AAP(1) formula for calculating pool depreciation. The purpose of the multiplier is to convert prime cost rates calculated under existing section 55 into diminishing value rates needed for calculating pool depreciation. Depreciation rates calculated under proposed new section 55 are diminishing value rates and the multiplier is no longer necessary.

Clause 18: Makes a minor consequential amendment to paragraph 82AB(5B)(b) [investment allowance] reflecting an earlier repeal of section 57AG [depreciation loading]. The amendment has little practical effect as these investment allowance provisions are broadly redundant.

Clause 22: Make a minor consequential amendment to subparagraph 159GF(1)(a)(iii) (arrangements relating to property) reflecting an earlier repeal of section 57AG (depreciation loading). The amendment ensures that a reference in that subparagraph to section 57AG is a reference to that section as if it had not been replaced.

Clause 66: Contains the application provisions.

Chapter 2 Capital Gains Tax Goodwill Exemption

Clauses: 45,46 and 67

Overview

Increase the capital gains tax exemption for gains realised on the disposal of the goodwill of a business from 20% to 50%. The exemption will be available where the net business interests of the taxpayer are worth less than $2 million and the exemption threshold will be indexed annually from the 1993-94 year of income.

Capital Gains Tax Goodwill Exemption

Capital Gains Tax Goodwill Exemption

Summary of the proposed amendments

2.1. The Bill proposes an amendment to increase from 20% to 50% the capital gains tax (CGT) exemption for a capital gain realised on the disposal of the goodwill of a business. The exemption is to apply where the net business interests of the taxpayer are worth less than $2 million and the exemption threshold is to be indexed annually from the 1993-94 year of income.

2.2. These changes will apply to disposals of goodwill after 26 February 1992.

Background to the legislation

2.3. Broadly, the CGT provisions contained in Part IIIA of the Income Tax Assessment Act 1936 apply to tax gains realised on the disposal of assets. The term "asset" is defined in section 160A and includes goodwill.

2.4. Section 160ZZR provides that on the disposal of a business, a portion of any capital gain attributable to the goodwill of the business is exempt from CGT. The exemption is only available where the total net value of the business, or the business and any associated businesses held by the taxpayer, is less than a certain amount: this amount (the exemption threshold ) is currently $1 million. The portion of the capital gain on the disposal of goodwill that is currently exempt is 20%.

2.5. Whether a business is an "associated business" of a taxpayer is determined by reference to subsection 160ZZR(2). Briefly, a business will be an associated business if it is carried on by the same individual, the same company or related company or the same trustee of a trust estate or an "associated trust estate".

2.6. Section 160F sets out the criteria for determining whether a particular trust estate will be an "associated trust estate" in relation to another trust estate. Generally, a trust estate will be an "associated trust estate" if a beneficiary of one trust estate can also be a beneficiary of the other trust estate.

2.7. In the case of related companies, section 160G provides that companies will be "related companies" if they both belong to the same 100% commonly owned company group. For example, if one company is a subsidiary of the other or both companies are subsidiaries of the same holding company.

Explanation of the proposed amendments

2.8. The Bill proposes an amendment to section 160ZZR which will increase the CGT exemption for gains realised on the disposal of the goodwill of a business.

2.9. For disposals occurring after 26 February 1992, the percentage of the gain realised on the disposal of the goodwill that is exempt from capital gains tax will increase from 20% to 50%. Also the exemption threshold (as outlined above) will increase from $1 million to $2 million [Clause 45]. This threshold will then be indexed annually from the 1993-94 year of income.

Indexation of Exemption Threshold

2.10. Indexation of the exemption threshold will occur annually from the 1993-94 year of income (new section 160ZZRAA). The new exemption threshold will be determined by reference to an indexation factor which will be calculated using the all groups consumer price index, averaged for the eight capital cities, as published by the Australian Statistician. The indexation factor will be applied to the previous years exemption threshold to determine the threshold for the following year, and the resulting figure will be rounded up or down, as the case may be, to the nearest $1,000. However, by paragraph 160ZZRAA(3)(d), the exemption threshold is never to be less than $2 million.

2.11. The Commissioner of Taxation is required to publish, by written notice, both the indexation factor and the resulting exemption threshold prior to 1 July of each year. Notification will generally be contained in a press release issued by the Commissioner (subsection 160ZZRAA(7)). [Clause 46]

Commencement date

2.12. The amendments apply to disposals of goodwill occurring on or after 27 February 1992.

Clauses involved in the proposed amendments

Clause 45 : Amends section 160ZZR to increase the CGT goodwill exemption.

Clause 46 : Inserts section 160ZZRAA dealing with the exemption threshold.

Subclause 67(10) : Provides that the amendments apply to disposals occurring after 26 February 1992.

Chapter 3 Capital Gains Tax Amendments

Clauses: 23,24,25,26,27,28,29,30,31,33,34,35,36,37,38,39,40,41,42,43,44,47,48,50,51,67,69,70,71,72 and 73

Overview

Make minor technical amendments to the Capital Gains Tax provisions.

Capital Gains Tax - Amendments

This Bill will amend the Income Tax Assessment Act 1936 to make the following minor technical amendments to the capital gains tax provisions:

•

Correct some minor deficiencies in the principal residence exemption provisions;

•

Only allow companies to claim or to transfer current year capital losses following ownership changes on satisfaction of a same-business test;

•

Overcome technical problems which could unfairly prevent some taxpayers from obtaining CGT rollover relief following the destruction of an asset;

•

Modify the anti-avoidance rules which prevent value-shifting advantages arising on the transfer of assets between companies under common ownership, by extending the effective discretions which can reduce otherwise harsh applications of the provisions;

•

Clarify the application of transitional provisions contained in section 160ZZS;

•

Provide that the consideration for disposal of an asset that expires is not deemed to be an amount greater than the actual consideration;

•

Allow CGT rollover relief following the death of a taxpayer for asset transfers that occur pursuant to deeds of family arrangement;

•

Provide that CGT is payable where non-taxable Australian assets owned by a deceased Australian resident are inherited by a non-resident beneficiary;

•

Provide that payments made to a lessee for the variation of a post-19 September 1985 lease in excess of the lessee's indexed cost base are taxed as a capital gain;

•

Ensure that the CGT exemption for motor vehicles extends to interests held in motor vehicles;

•

Overcome double tax problems for employee share trusts;

•

Ensure that the provisions which provide an (effective) rollover on the conversion of a convertible note into a share or a unit, apply only for CGT purposes;

•

Extend the rollover relief currently available on the breakdown of a marriage to the breakdown of a de facto marriage;

•

Prevent the use of rollover provisions available for share splits and consolidations as a means of avoiding the bonus share rules; and

•

Prevent the rollover of an asset which is trading stock in the hands of the transferee and therefore outside the scope of the CGT provisions of the law.

A detailed explanation of each of the amendments is contained in the Appendix to this Chapter.

Principal Residence Exemption

Summary of proposed amendments

Relevant period

The Bill will amend the definition of "relevant period" contained in subsection 160ZZQ(1) of the principal residence exemption (PRE) provisions to make it clear that the "relevant period" commences at the time when the taxpayer acquires a legal interest in the land on which a dwelling is situated.

Renovation or repair

The Bill also proposes amendments to the CGT PRE provisions which will allow a taxpayer to retain the benefit of the PRE during a period in which a dwelling is unoccupied due to renovations or repairs.

Part A - Relevant Period

Background to the legislation

Some or all capital gains realised on the disposal of a taxpayer's sole or principal residence are exempt from CGT by section 160ZZQ. The availability of this exemption is determined by reference to the part of the "relevant period" (as defined) in which the dwelling was occupied by the taxpayer as a sole or principal residence.

For this purpose, the "relevant period" is the period after 19 September 1985 during which the dwelling was owned by the taxpayer. The Commissioner of Taxation has accepted in the past that the "relevant period" is the period of legal ownership of the dwelling; that is, the period between the settlement of the contracts for purchase and sale. This covers situations where a purchaser of a dwelling is not entitled to occupy the dwelling prior to acquiring legal ownership on settlement of the purchase contract. If the relevant period included a period prior to legal ownership, a taxpayer would lose that part of the exemption relating to the period between the execution and settlement of the contract for purchase during which he or she was unable to satisfy the PRE occupancy requirement.

Explanation to the proposed amendments

New subsection 160ZZQ(1AA) clarifies the definition of "relevant period". For the purpose of the PRE the "relevant period" will be the period of legal ownership of the dwelling, ie. the period between settlement of the contracts for purchase and sale.

This amendment will clarify the operation of the section and confirm the approach which has been previously adopted by the Commissioner of Taxation.

Commencement date

New subsection 160ZZQ(1AA) will apply to disposals made after 19 September 1985.

Clauses involved in the proposed amendments

Paragraph 44(1)(a) : Inserts new subsection 160ZZQ(1AA).

Subclause 67(3) : Provides that the amendment will apply to disposals made after 19 September 1985.

Part B - Renovation or Repair

Background to the legislation

The CGT exemption for a taxpayer's sole or principal residence is generally only available where a dwelling is occupied by a taxpayer and is not used for income producing purposes.

By subsection 160ZZQ(5) this exemption has been extended to include a period (up to 4 years) prior to the actual occupation of the dwelling by the taxpayer during which a new dwelling is being constructed. Similarly, a taxpayer may demolish an existing dwelling and construct a replacement dwelling while retaining the PRE during the period that the dwelling (or the land) is unoccupied.

However, the existing PRE provisions do not provide an exemption in the situation where a taxpayer only partially demolishes an existing dwelling, or undertakes renovations or repairs to an existing dwelling, and during this time the taxpayer is unable to occupy the dwelling.

Explanation of the proposed amendments

The proposed amendment to subsection 160ZZQ(5) will extend the CGT exemption for a taxpayer's sole or principal residence to include a period during which the taxpayer does not occupy an existing dwelling but carries out renovations or repairs to it.

The extended period of exemption will only be available where the dwelling is subsequently occupied by the taxpayer for a period of at least 3 months following the completion of the renovations or repairs. The exemption will also be available if the taxpayer dies prior to completion of the renovations or repairs, or prior to the completion of the 3 month occupancy period.

As with the existing concessions contained in subsection 160ZZQ(5), it will be necessary for the taxpayer to lodge an election with the Commissioner of Taxation, in the year of income in which the dwelling first became his or her sole or principal residence, to the effect that the principal residence exemption is to apply to that dwelling. Furthermore, in order for the dwelling to qualify for exemption, no other dwelling can be taken to be a taxpayer's principal residence. Where a taxpayer has elected for subsection 160ZZQ(5) to apply to a particular dwelling, any other dwelling owned by the taxpayer will be subject to the general capital gains and losses provisions.

Consequential Amendment

An amendment proposed by new subparagraph 160ZZQ(5AA)(a)(ia) will ensure that if a dwelling is vacated for the purpose of carrying out repairs or renovations, the period between the time when the dwelling ceased to be occupied by the taxpayer (or another person) and the time when the taxpayer re-occupied the dwelling (up to a maximum of 4 years) may be included in the period that the dwelling was the taxpayer's principal residence for CGT purposes.

Where the taxpayer acquires the legal interest in the land on which a dwelling is situated but the dwelling is never occupied by the taxpayer or another person, by subparagraph 160ZZQ(5AA)(a)(ii), the period from the time that the taxpayer acquired the interest in the land until the completion of the repairs or renovations (up to a maximum of 4 years) will be included in the period that the dwelling was the taxpayer's sole or principal residence.

In addition, new paragraph 160ZZQ(5AA)(c) specifies the time when repairs or renovations to a dwelling are taken to have commenced: if a contract was entered into for the repairs or renovations, they will be taken to have commenced at the time of making the contract; or if there was no contract (for example, if the taxpayers carried out the repairs or renovations themselves), the commencement time will be the time when the work actually began. This new provision clarifies the time when repairs or renovations are taken to have commenced for the purposes of applying new sub-subparagraph 160ZZQ(5)(b)(iv)(B), ie. in working out whether the repairs or renovations commenced prior to the death of a taxpayer.

Commencement date

These amendments will apply to disposals after 19 September 1985.

Clauses involved in the proposed amendments

Paragraphs 44(1)(b) - (h) : Extends the principal residence exemption to cover periods where a dwelling is being renovated or repaired.

Subclause 67(3) : Provides the amendments apply to disposals after 19 September 1985.

Capital Losses of Companies

Summary of the proposed amendments

Broadly, the amendment will ensure that a capital loss incurred by a company in a year of income in which there is a change in the majority underlying ownership of the company is only allowable if, at all times during the year that the loss is incurred, the company carries on the same business as it carried on immediately before the change in underlying ownership occurred.

The provisions of the tax law which enable transfers of net capital losses between member companies of a 100% commonly-owned company group will also be amended to only allow companies to transfer a net capital loss following a change in majority underlying ownership if, throughout the year in which the change occurs, the company transferring the loss carries on the same business as it carried on immediately before the change occurred.

Background to the legislation

Under the ordinary income provisions of the tax law a company is not allowed a deduction against its assessable income for a current year income loss or for a carried forward (prior year) income loss, unless the company satisfies either a "continuity of ownership test" (ie continuity of 50% or more of the underlying beneficial ownership of the company) or a "continuity of business test". Similarly, the transfer of income losses between member companies of a 100% commonly-owned company group is also dependent on the satisfaction of one of these two tests.

This principle of denying company losses unless the company satisfies either the continuity of ownership or the continuity of business test should also apply for current year capital losses, carried forward (prior year) capital losses or intra-group transfers of capital losses. Under the existing CGT provisions, carried forward (prior year) capital losses are only allowable, under subsection 160ZC(5), if the company satisfies one of these tests. However, due to a deficiency in the CGT legislation, capital losses may be allowable, under paragraph 160Z(9)(b), and intra-group transfers of capital losses may be allowable, under subsection 160ZP(9), even if neither of these tests is satisfied. The reason for this is that the mechanism in paragraph 160Z(9)(b) and subsection 160ZP(9) for determining whether a loss is allowable or transferable is not appropriate.

Under paragraph 160Z(9)(b) a capital loss is not allowable in the year it is incurred if the current year income loss provisions (dealing with losses on revenue account) apply to the company in that year. The current year income loss provisions, comprising sections 50A to 50N of the Act, are designed to prevent assessable income derived by a company in one part of a year of income under the ownership of one set of shareholders from being offset by a deduction for a revenue loss incurred by a company during another part of the income year when the company is (or was) owned by a different set of shareholders. The provisions apply to preclude a current year income loss incurred in one part of an income year from being taken into account in calculating the company's taxable income for the year unless the company satisfies the continuity of ownership test or the continuity of business test.

Although a capital loss is disallowed if the current year income loss provisions apply to reduce an income loss incurred by the company, if the company does not incur an income loss then the provisions of sections 50A to 50N never apply. In this situation, even though the company may not have satisfied the continuity of ownership or the continuity of business test, because the current year income loss provisions do not apply, the capital loss cannot be disallowed.

The same difficulty is experienced with the transfer of net capital losses between member companies of a 100% commonly-owned company group under section 160ZP; ie. the transfer of capital losses is also dependent on whether the current year income loss provisions apply to the company in the year the net capital loss is incurred. If there is no current year income loss, then the transfer of net capital losses cannot be denied.

To overcome this problem, an amendment will be made to paragraph 160Z(9)(b) and subsection 160ZP(9) of the CGT legislation to ensure that current year capital losses are only allowable, and net capital losses are only transferable, where the company incurring or transferring the loss satisfies either the continuity of ownership or the continuity of business test.

Explanation of the proposed amendments

The Bill will amend existing paragraph 160Z(9)(b) to deem a capital loss not to have been incurred by a company during a year of income where:

•

section 50H of Subdivision B of Division 2A of Part III applies to deem a disqualifying event to have occurred in relation to the company in relation to the year of income; and

•

the company does not pass the continuity of business test in relation to that year of income.

Broadly, section 50H deems a disqualifying event to have occurred in the following situations:

•

a change in the beneficial ownership of shares carrying the right to exercise 50% or more of the voting power in the company;

•

a change in the beneficial ownership of shares carrying the right to receive 50% or more of any dividend that might be paid by the company;

•

a change in the beneficial ownership of shares carrying the right to receive 50% or more of any capital distribution that might be made by the company;

•

the acquisition of the control of the voting power of the company where one purpose of that acquisition is to receive or obtain a fiscal benefit or advantage;

•

the management or conduct of the affairs or business operations of the company without proper regard to the rights, etc.,of natural persons who control or are capable of controlling the voting power;

•

the company has a loss available at a particular time during a year of income and the company subsequently derives income which would not have been derived but for the loss, ie. income is in some way channelled into the company to obtain the benefit of a tax deduction for losses incurred in the earlier part of the same year; or vice versa, ie. the company has a profit at a particular time and then subsequently incurs a loss in order to reduce the tax that would otherwise have been payable.

Where a disqualifying event has occurred, a capital loss will be disallowed unless the company passes the continuity of business test set out in new subsection 160Z(9A) in relation to the year of income. Subsection 160Z(9A) provides that a company will be taken to have passed the continuity of business test in relation to a year of income if throughout that year:

•

the company carries on the same business as it carried on immediately before the disqualifying event occurred; and

•

the company does not derive income from a business, or a transaction, of a kind that it had not carried on, or entered into, immediately before the disqualifying event occurred.

Essentially, the amendment to paragraph 160Z(9)(b) means that a capital loss incurred in a year of income by a company will only be allowable following a change in ownership if, at all times during that year, the company carries on the same business it carried on immediately before the change in ownership occurred.

The Bill will make the same amendment to section 160ZP [Clause 29] . That is, if section 50H of the current year loss provisions applies to deem a disqualifying event to have occurred in relation to a company in relation to a year of income, the net capital loss incurred by the company in respect of that year is able to be transferred under section 160ZP if the company passes the continuity of business test referred to above.

Commencement date

These amendments apply generally to assessments for the 1991/92 and subsequent years of income. However, in the case of companies which, due to a substituted accounting period, have balanced prior to 3 April 1992, the amendments will apply to assessments for the 1992/93 and subsequent years of income.

Clauses involved in the proposed amendments

Subclause 27(1) : Inserts new paragraph 160Z(9)(b) and subsection 160Z(9A) dealing with the disallowance of current year capital losses of companies.

Clause 29 : Inserts new subsection 160ZP(9) and subsection 160ZP(9A) dealing with circumstances where a company cannot transfer a net capital loss to another group company.

Subclause 67(2) : Provides that the amendments apply in relation to the 1991/92 and subsequent years of income for companies balancing after 2 April 1992.

Involuntary Disposals

Summary of the proposed amendments

The Bill proposes an amendment to section 160ZZK which will give the Commissioner of Taxation a discretion to extend the period during which a taxpayer may obtain a CGT rollover for an asset acquired in place of an asset which was lost, destroyed or compulsorily acquired by a government or a government authority.

Background to the legislation

Under section 160ZZK, CGT rollover relief is available for an asset acquired by a taxpayer in place of an (original) asset which was lost or destroyed (for example by a fire or natural disaster) or disposed of as a result of it being compulsorily acquired by a government or government authority. Rollover relief provides for the deferral of the tax that would otherwise have been payable on the disposal of the original asset or, in the case where the original asset was acquired prior to 20 September 1985, allows pre-CGT status for the replacement asset.

To qualify for the rollover the taxpayer must receive compensation or insurance monies as a consequence of the loss, destruction or compulsory acquisition of the original asset and these funds must be used to acquire a replacement asset within a period of 12 months prior to the disposal of the original asset and one year after the end of the year of income in which the disposal of the original asset occurred.

In the situation where a taxpayer receives a compensation award or money under a policy of insurance to compensate for the loss of the asset, subsection 160U(9) deems the date of disposal of the asset for CGT purposes to be the date that the compensation or insurance money was received. In some circumstances it is possible for a taxpayer to have acquired a replacement asset more than 12 months prior to receipt of the compensation payment or insurance money.

Section 160ZZK allows the Commissioner of Taxation a discretion to extend the period in which a replacement asset must be acquired, beyond 12 months after the end of the year of income in which the disposal of the original asset occurred. However, there appears to be no similar discretion allowing the Commissioner to extend the period for more than 12 months prior to the loss of the original asset.

Explanation of the proposed amendments

Paragraph 160ZZK(1)(b) will be amended to specifically allow the Commissioner of Taxation a discretion to extend the period in which a taxpayer must acquire a replacement asset beyond the 12 months prior to the date that the disposal of the original asset is deemed to have occurred for CGT purposes.

Commencement date

The amendment to section 160ZZK applies to involuntary disposals of assets after 19 September 1985.

Clauses involved in the proposed amendments

Subclause 36(1) : Extends the circumstances in which the Commissioner of Taxation may exercise his or her discretion.

Subclause 67(3) : Provides that the amendment applies to disposals of assets after 19 September 1985.

Value Shifting - Division 19A

Summary of proposed amendments

The proposed amendment will:

•

extend the discretions which apply to reduce the otherwise harsh application of section 160ZZRE (ie. the section of Division 19A which determines the cost base adjustments to be made to particular shares or loans where there is a transfer of assets between companies under common ownership); and

•

clarify the meaning of the terms "consideration" and "subsidiary" as used in Division 19A.

Background to the legislation

Cost Base Adjustments to Shares and Loans

Division 19A is designed to prevent unintended CGT advantages that may result from the transfer of assets acquired after 19 September 1985 between companies under common ownership. The Division operates where an asset is transferred between companies under common ownership for consideration less than its indexed cost base or, if less, its market value. In such cases, Division 19A enables adjustments to be made to the cost bases of shares and loans held in the respective companies to reflect the resultant shift in values, and to prevent CGT timing advantages from arising.

The main operative provisions of the Divisions are contained in sections 160ZZRE to 160ZZRH. These sections enable cost base reductions and increases to be made to reflect the effective shifts in value that may occur. For the most part, the adjustments are to be made by an amount that is "reasonable". The exception to this is section 160ZZRE, which applies in relation to shares and loans held directly in the transferor, and which contains formulae for calculating the amount of cost base reductions to be made. However, situations can occur where the operation of that section can be adverse to taxpayers, especially where a mix of pre and post CGT shares or pre CGT shares and post CGT loans are owned in the company, because cost base adjustments are made first to the post CGT shares or post CGT loans. This may be harsh where, as a result of an asset's transfer, the value of both pre and post CGT shares or pre CGT shares and post CGT loans is reduced.

This point can be illustrated by example. Assume Company A is the sole shareholder in Company B. To simplify the example, assume A owns 200 $1 shares in B, each of which cost $1 and is still worth $1. However, assume that 100 of the shares were acquired before 20 September 1985 (and are CGT exempt) and the other 100 shares were acquired on or after that date. Also assume that B owns two assets, each of which cost and is still worth $100, with one being a pre CGT asset and the other a post CGT asset. Finally, assume that B transfers its post CGT asset to Company X, another subsidiary of A, for no consideration.

Under subsection 160ZZRE(3), in this scenario the indexed cost base of the post CGT shares held by A would be reduced by $100 to nil; this is because under the formula contained in paragraph (3)(b), only the cost base of post CGT shares is reduced. This is clearly an inequitable result, as B still owns an asset worth $100, so that the 50% interest owned by A represented by the post CGT shares would still be worth $50.

The same problem can arise where the taxpayer holds pre CGT shares and post CGT loans. Again the cost base adjustments are made only to the post CGT loans (under subsection 160ZZRE(4)). However, where as a result of an asset's transfer there is a fall in value of the pre CGT shares and the post CGT loans, making cost base adjustments under the existing formula in subsection 160ZZRE(4) produces an unfair result. Moreover, the problem would be worse if, for example, the post CGT loans were secured and as a result of an asset's transfer only the pre CGT shares fell in value; in this case the application of the formula produces an even harsher outcome.

Another situation in which the cost base adjustments made by the formula in section 160ZZRE would be unfair are where a taxpayer holds interests in a company which comprise shares of different classes, (for example, post CGT ordinary shares and post CGT preference shares) and, as a result of the transfer of an asset out of the company, the value of the taxpayer's shares is reduced, but not proportionally. For example, the ordinary shares may fall in value while the value of the preference shares is not significantly reduced. In this situation even though all the shares are post CGT shares, making the proportional cost base adjustment to both the ordinary and preference shares under the section 160ZZRE formula is inappropriate.

Similarly, a problem may arise where a taxpayer holds loans in a company which comprise 2 or more loans with differing security (for example, a post CGT secured loan and a post CGT unsecured loan), or one of the loans is a pre CGT loan, and as a result of the transfer of an asset out of the company, the taxpayer's post CGT loans are not proportionally reduced in value (ie. the unsecured loan may fall in value while the value of the secured loan remains the same), or the fall in value is also spread over the pre CGT loan. The cost base adjustments which are made to the post CGT loans only under the section 160ZZRE formula will again produce unreasonable results.

To develop a formula for cost base reductions to deal with all these different cases specifically would be extremely difficult and complicated. It was for this reason that the other operative provisions of Division 19A were drafted on a "reasonableness" basis. However, the existing structure of section 160ZZRE which specifies a formula for making adjustments is still useful: it provides certainty in the way the section is to operate in the most common situations and it also provides a type of statutory example of the way in which Division 19A cost base adjustments generally are to be made. However, in view of the unfair results that can occur because of the strictness of the section 160ZZRE formula, it is necessary to modify the section's operation to take account of the situation outlined above where, clearly, it would be unreasonable to make the full cost base adjustment pursuant to the existing section 160ZZRE formula.

Meaning of "Subsidiary" and "Consideration"

There are two further minor difficulties with Division 19A which are to be redressed by an amendment.

Firstly, there has been some concern and uncertainty about the meaning of the term "consideration" as used in Division 19A, in particular having regard to the general CGT definition of "consideration" on the disposal of an asset. If the consideration actually paid is less than the asset's market value and the disposal is not an arm's length transaction, the market value of the asset is deemed to be the disposal consideration (subsection 160ZD(2)). It has been argued that Division 19A has no practical application, because it only applies to non-arm's length asset transfers which in turn are generally treated as being for consideration equal to the asset's market value. If this were the case it would always be impossible to cross the threshold for the Division's application - that consideration less than the lesser of indexed cost base or market value be paid on the transfer.

The Government does not accept that this view is correct. The explanatory memorandum to Division 19A makes it clear that the Division's operation is determined by reference to the actual consideration paid, and not some other notional amount. Nevertheless, to remove any uncertainty on this point the Government has decided to amend Division 19A by specifically providing that its potential application is determined by reference to the actual consideration paid on an asset's transfer.

Another area of uncertainty in relation to the application of the Division is that it contains no definition of the term "subsidiary". This is potentially significant, because the Division does not apply to asset transfers to subsidiaries. Again this is unlikely to cause practical problems; at general law a company is treated as a subsidiary of another if it is more than 50% owned by that other company. Because Division 19A only applies to companies under 100% common ownership, there is no difficulty in determining whether one company is a subsidiary of another. However, to remove any uncertainty, an amendment will be made to incorporate the general tax law definition of "subsidiary", which is a company effectively owned 100% by another.

Explanation of the proposed amendments

Cost Base Adjustment to Shares and Loans

The Bill will amend section 160ZZRE to include new subsection 160ZZRE(6) which will modify the application of subsections 160ZZRE(3) and (4) in circumstances where, at the time of disposal of an asset (called the "first asset" in section 160ZZRE) by a company, the taxpayer holds:

•

shares or loans in the company that were acquired after 19 September 1985 and shares in the company that were acquired before 20 September 1985; or

•

shares of 2 or more classes in the company where one or more shares was acquired after 19 September 1985; or

•

2 or more loans in the company where one of the loans was acquired after 19 September 1985;

and, in these circumstances, it would be unreasonable to make the proportional cost base adjustment to the post CGT shares or loans that is required by 160ZZRE(3) and (4) because:

•

the fall in value of the shares or the loans in the company is spread (in whole or in part) over the pre CGT shares rather than spread entirely over the post CGT shares or the post CGT loans; and/or

•

the fall in value of the post CGT shares is not spread evenly over all of the post CGT shares of the company, eg. shares of particular classes are reduced in value more than shares of another class; and/or

•

the fall in value of the post CGT loans is not proportional, eg. the value of an unsecured loan falls significantly while the value of a secured loan is not reduced at all; and/or the fall in value of the loans is spread (in whole or in part) over pre CGT loans rather than spread entirely over the post CGT loans.

In these situations if the cost base adjustment made by the formula in subsections 160ZZRE(3) or (4) does not reflect the true reduction in value of the post CGT shares or loans (either because it is too high or too low for a particular asset) then subsections 160ZZRE(3) and (4) will not apply and the cost base adjustments will be made under subsection 160ZZRE(6) having regard to:

•

the extent to which the market value of the post CGT shares or the post CGT loans held by the taxpayer in the company were reduced as a result of the disposal of the first asset (mentioned in subsection 160ZZRD(1)) by the company; and

•

the circumstances in which the post CGT shares or the post CGT loans were acquired by the taxpayer.

Definition of "Subsidiary" and "Consideration"

The other difficulties with the Division which are mentioned in the background to the amendments are overcome by two further amendments to section 160ZZRA. The first amendment defines the term "subsidiary" (referred to in paragraph 160ZZRD(1)(c)) for the purposes of Division 19A. The definition is the same as the definition in subsection 160ZZO(4), ie:

A company is a subsidiary of another company (the holding company) at a time if all the shares in the subsidiary company are beneficially owned by:

a)

the holding company;

b)

a company that is, or two or more companies each of which is, a subsidiary of the holding company; or

c)

the holding and a company that is, or two or more companies each of which is, a subsidiary of the holding company;

and no person was in a position at the time to affect the rights of the holding company (or of a subsidiary of the holding company) in relation to the subsidiary company.

The second amendment defines the term "consideration" in relation to the disposal of the first asset mentioned in subsection 160ZZRD(2) to mean the actual consideration given in respect of the asset, ie the consideration is worked out as if subsection 160ZD(2) (deemed market value rules) in Part IIIA did not apply. The effect of this is that the consideration referred to in Division 19A is the actual consideration given on the disposal of the asset rather than the market value of the asset.

Commencement date

All these amendments to Division 19A will apply in relation to disposals of assets after the date of introduction of the amendments. This means that shares or loans held in the transferor at the time of introduction which are subsequently disposed of after that date, will be subject to the new modified cost base adjustments of subsection 160ZZRE(6).

Transitional provisions contained in Clause 72 will ensure that the amendments made to section 160ZZRA to include a definition of "subsidiary" and to clarify the term "consideration" will be disregarded in determining the meaning of these expressions when used in relation to a disposal up to and including the date of introduction of the amendments. Essentially, the fact that the amendments were made is not to be taken as an indication that the terms did not have that meaning from the time Division 19A was introduced.

Clauses involved in the proposed amendments

Clause 47 : Inserts definition of "consideration and "subsidiary" in section 160ZZRA.

Clause 48 : Inserts new subsection 160ZZRE(6) dealing with shares and loans in a transferor company.

Subclause 67(5) : Provides that the amendments apply to disposals of assets after 2 April 1992.

Clause 72 : Transitional provision dealing with the meaning of "consideration" and "subsidiary".

Section 160ZZS

Summary of the proposed amendments

Deemed date of acquisition and consideration given for acquisition of an asset

The Bill proposes an amendment to section 160ZZS which will set out the deemed date of acquisition of an asset and the deemed consideration given for the asset when existing subsection 160ZZS(1) applies to deemed an asset to have been acquired after 19 September 1985.

Application to the Crown, foreign Governments and non-profit organisations

An amendment is also proposed to deem the Crown, a foreign government and non-profit organisations to be natural persons for the purpose of section 160ZZS.

Part A - Deemed Date of Acquisition and Consideration given for Acquisition of an Asset

Background to the legislation

The CGT provisions operate to tax gains made on the disposal of assets acquired on or after 20 September 1985. A transitional provision contained in section 160ZZS ensures that, if no change occurs after 19 September 1985 in the direct ownership of an asset but after that date there is a change in the majority underlying beneficial interests held by natural persons in the asset, then the pre-CGT status of the asset is not maintained. In these circumstances, by subsection 160ZZS(1), the asset is deemed to have been acquired after 19 September 1985 and is therefore subject to the CGT provisions on its disposal.

Where section 160ZZS has deemed an asset to have been acquired on or after 20 September 1985 due to a change in the majority underlying interests held in the asset, it does not specify the deemed date of acquisition of the asset or the deemed consideration for its acquisition..

Explanation of the proposed amendments

Proposed subsection 160ZZS(1A) will clarify the operation of section 160ZZS by specifying that where there has been a change in the majority underlying interest in an asset, the deemed date of acquisition of the asset will be the first date after 19 September 1985 that the change in majority underlying interests occurred.

For example, if a 40% change in the underlying interests held by natural persons in an asset occurred on 31 December 1991 and then a further 10% occurs on 1 July 1992, the deemed date of acquisition will be 1 July 1992, notwithstanding that the largest part of the change in underlying interests occurred on 31 December 1991.

For the purpose of determining the cost base of the asset for CGT purposes, the deemed consideration given for the asset will be its market value at the deemed date of acquisition.

Commencement date

New subsection 160ZZS(1A) will apply to disposals made after 19 September 1985.

Clauses involved in the proposed amendments

Paragraph 50(a) : Inserts new subsection 160ZZS(1A).

Subclause 67(3) : Provides that the amendment applies to disposals made after 19 September 1985.

Part B - Application to the Crown, Foreign Governments and Non-Profit Organisations

Section 160ZZS operates by reference to the underlying interests in an asset which are held by natural persons. Interests in assets may be held by the Crown, foreign governments or non-profit organisations with constitutions which do not allow natural persons to hold an interest in capital or income from any property owned by the organisation. An argument has been raised that interests held by such bodies are not interests held by natural persons and so cannot be taken into account, under section 160ZZS, in determining whether there has been a continuity in majority underlying interests held in an asset since 19 September 1985. The amendment made by subsection 160ZZS(2A) will ensure that interests held by these bodies are treated as interests held by natural persons and therefore can be taken into account for the purposes of section 160ZZS.

Explanation of the proposed amendments

New subsection 160ZZS(2A) will deem bodies politic (eg. the Crown or a foreign government) and companies which are prohibited by their constitutions from making distributions (whether money, property or otherwise) to their members to be natural persons for the purposes of the application of section 160ZZS.

This will have the effect that when such entities dispose of underlying interests in assets, the result will be the same as if all of the interests in the asset had been held by natural persons.

Transitional Provision

New subsection 160ZZS(2A) will apply in relation to disposals of assets after 19 September 1985. However, due to the backdating of the new provision, the Bill includes a transitional provision to provide relief for taxpayers who may otherwise be disadvantaged by the operation of subsection 160ZZS(2A) during the period 19 September 1985 up to 3 April 1992.

The transitional provision applies if, on the disposal of an asset subsection 160ZZS(1) operates to deem the asset to have been acquired by the taxpayer between 19 September 1985 and 3 April 1992 and, but for the enactment of subsection 160ZZS(2A), subsection 160ZZS(1) would not have applied at all during this period.

Where these conditions are satisfied, the transitional provision provides that if:

•

the taxpayer disposes of the asset before 3 April 1992; or

•

the taxpayer disposes of the asset after 2 April 1992,and at all times from 3 April 1992up to the time of the disposal, majority underlying interests in the asset were held by natural persons who, immediately before 3 April 1992, held majority underlying interests in the asset;

then section 160ZZS does not apply to deem the asset to have been acquired after 19 September 1985.

However, where the taxpayer disposes of the asset after 2 April 1992 and at the time of the disposal the natural persons, who immediately before 3 April 1992 held majority underlying interests in the asset, no longer hold those interests, section 160ZZS will apply. In this situation, the transitional provision provides that the asset is deemed to have been acquired at the time after 2 April 1992 when those natural persons first ceased to hold majority underlying interests. The market value of the asset at that time will form the cost base of the asset for CGT purposes.

Clauses involved in the proposed amendments

Paragraph 50(b) : Inserts new subsection 160ZZS(2A).

Subclause 67(3) : Provides that the amendment applies to disposals made after 19 September 1985.

Clause 73: Contains transitional provisions.

Disposal of Consideration on the Expiry of an Asset

Summary of the proposed amendments

An amendment to section 160ZD will ensure that where an asset expires, unless the taxpayer receives some consideration for the disposal, the asset will be taken to have been disposed of for nil consideration.

Background to the legislation

If a taxpayer disposes of an asset and either there is no consideration for the disposal, the consideration cannot be valued, or the consideration received is greater or less than the market value of the asset and the parties are not dealing at arms-length, then for CGT purposes subsections 160ZD(2) and 160ZD(2A) deem the consideration for the disposal to be equal to the market value of the asset having no regard to its impending disposal. This provision operates correctly in situations where the market value of the asset will be affected by its disposal, for example where a debt is forgiven or a share is cancelled.

However, the section does not operate correctly where there has been a disposal of an asset for CGT purposes due to the expiry of the asset. For example, if the asset is an asset that would be expected to expire in the normal course of events (such as a lease or an option) at the point when the asset expires the actual market value of the asset is nil. However, by subsection 160ZD(2A), the market value of the asset must be determined without regard to its expiry. Obviously in these circumstances, the market value of the asset assuming the expiry is not to occur, will exceed the actual market value of the expired asset (ie. nil).

Explanation of the proposed amendments

The Bill proposes an amendment to section 160ZD to ensure that where an asset expires, unless the taxpayer receives some consideration for the disposal, the asset will be taken to have been disposed of for nil consideration.

Commencement date

The amendment to section 160ZD applies to disposals of assets after 2 April 1992.

Clauses involved in the proposed amendments

Clause 28 : Amends subsection 160ZD(2) so that it does not apply on the expiry of an asset.

Subclause 67(5) : Provides that the amendment applies to disposals of assets after 2 April 1992.

Deeds of Family Arrangement

Summary of the proposed amendments

The Bill proposes an amendment to extend the CGT rollover relief available (under section 160X) for assets that pass to the beneficiaries of a deceased estate, to include assets which pass to beneficiaries named in a deed of arrangement executed in settlement of a claim to share in the estate of a deceased person.

Consequential amendments to the principal residence exemption contained in section 160ZZQ will ensure that beneficiaries under a deed of arrangement are not disadvantaged in comparison to other beneficiaries (eg. beneficiaries under a will).

Background to the legislation

Generally, section 160X provides a modified CGT rollover for assets which pass to the legal administrators of deceased estates and through them to beneficiaries. The effect of the rollover is that no CGT is payable on assets passing to beneficiaries of a deceased estate (unless the asset passes to a tax exempt beneficiary, in which case section 160Y deems the rollover provided by section 160X to be inapplicable). The accrued capital gains and losses on assets which form part of the estate of the deceased person (where the deceased person died after 19 September 1985) are deferred until the eventual disposal of the asset by the beneficiary.

By section 160J, the rollover under section 160X is only available for assets passing to beneficiaries under the terms of a will, an order of the court varying a will, or the operation of the laws of intestacy.

In some cases a dispute may arise between claimants to the assets of a deceased estate. The dispute may lead to litigation which eventually results in an order of the court to vary the will. Alternatively, the parties to the dispute may reach a compromise agreement, which binds the parties to an agreement setting out their respective entitlements to assets. This agreement is reached without recourse to litigation and results in the execution of a deed of settlement; alternatively known as a deed of family arrangement or a deed of compromise. Because such a deed does not constitute an order of a court in terms of section 160J, the rollover under section 160X does not apply.

Explanation of the proposed amendments

The Bill will amend section 160J to provide that a reference in the CGT provisions to an asset passing to a beneficiary of a deceased estate will include an asset passing to a person identified in a deed of settlement or deed of family arrangement as having a right to share in the distribution of the estate of the deceased person. [Clause 24]

What consideration is allowable?

For the section 160X rollover to apply to deeds of family arrangement, new sub-subparagraph 160J(b)(iii)(B) requires the consideration, if any, given by the beneficiary for the asset, to consist solely of the variation or waiver of the beneficiary's claims to the assets of the estate. However, it is not necessary for the beneficiary to give any consideration in order to obtain the benefit of the rollover.

Consequential Amendment - Section 160ZZQ Principal Residence Exemption

A proposed amendment to subsection 160ZZQ(6) of the principal residence exemption (PRE) provisions provides that a reference in section 160ZZQ to a taxpayer acquiring a dwelling as a beneficiary in the estate of a deceased person will include a reference to a taxpayer acquiring a dwelling under a deed of arrangement as described above. [Subclause 44(2)]

Is there a requirement that a dwelling be occupied for a certain period by the taxpayer?

In order to qualify for the PRE under section 160ZZQ, the taxpayer is generally required to occupy the dwelling (although there are some exceptions to this rule). If a dwelling is acquired by a taxpayer as a beneficiary of a deceased estate, the rules concerning occupation of the dwelling usually apply both to the beneficiary and the deceased person (see for example, subsections 160ZZQ(13) and (13A)). This will also be the case for a taxpayer who acquires a dwelling as a beneficiary under a deed of arrangement.

Transitional Provision

The amendment to section 160J will apply generally to deeds of arrangement executed after 2 April 1992. However, by a transitional provision, beneficiary taxpayers who have entered into deeds of arrangement on or prior to 2 April 1992 may lodge an election with the Commissioner of Taxation to have section 160J (as amended) applied retrospectively. Where a taxpayer makes the election, the assets transferred to the taxpayer under that deed of arrangement will be covered by this amendment.

Transitional Provision - Section 160ZZQ

The transitional provisions will also affect section 160ZZQ so that if a deed of arrangement has been executed on or prior to 2 April 1992, and as a consequence it cannot be said that for the purposes of the PRE the dwelling passed to a taxpayer as a beneficiary under the terms of a will, an order of a court varying a will, or by the operation of the laws of intestacy, the taxpayer may elect that subsection 160ZZQ(6) (as amended) applies at the time of the execution of the deed.

Commencement date

The amendments to section 160J and 160ZZQ made by [Clause 24 and Subclause 44(2)] apply in relation to deeds executed after 2 April 1992.

The transitional provisions made by [Clause 69] apply to deeds executed before 3 April 1992.

Clauses involved in the proposed amendments

Clause 24 : Inserts new subparagraph 160J(b)(iii) dealing with deeds of arrangement.

Subclause 44(2) : Inserts new paragraph 160ZZQ(6)(c) dealing with deeds of arrangement and the principal residence exemption.

Subclause 67(4) : Provides that the amendments apply to deeds of arrangement executed after 2 April 1992.

Clause 69 : Transitional arrangements - allow election to be lodged to have the amendments apply to deeds of arrangement executed before 3 April 1992.

Non-Resident Beneficiaries

Summary of the proposed amendments

The proposed amendment to section 160Y will ensure that accrued capital gains and losses on assets that form part of the estate of a deceased person who was a resident of Australia are subject to CGT if the assets are not "taxable Australian assets" and they pass to a non-resident beneficiary of the estate.

Background to the legislation

Broadly, on the death of a taxpayer section 160X provides a rollover for any accrued capital gains and losses on assets held by the deceased person at the time of death. The CGT liability is deferred until the subsequent disposal of the asset by the beneficiary (or where the asset does not pass to a beneficiary, the disposal by the legal personal representative). The rollover applies to any asset passing to a beneficiary of a deceased estate with the exception, under section 160Y, of assets bequeathed to tax advantaged persons, ie. a person who is exempt from tax. Where the beneficiary is exempt from tax, the estate of the deceased person is subject to the CGT provisions because any capital gain that had accrued on the asset while it was owned by the deceased person would otherwise not be taxed on the subsequent disposal of the asset by the tax exempt beneficiary.

Where an asset passes to a non-resident beneficiary the rollover provisions of section 160X may apply. If the asset falls within the category of a "taxable Australian asset", as set out in section 160T, the non-resident beneficiary is subject to capital gains tax on its subsequent disposal. However this is not the case if the asset is not a "taxable Australian asset"; a non-resident is not subject to CGT on the disposal of an asset which is not a "taxable Australian asset". In this latter case, any capital gain that had accrued on the asset in the hands of the deceased Australian resident (and his or her legal personal representative) would not be taxed.

Explanation of the proposed amendments

The Bill proposes an amendment to section 160Y which provides that where an asset, which is not a "taxable Australian asset" as set out in section 160T, passes to a non-resident beneficiary, the rollover provided under section 160X will not apply. By subsection 160Y(3), the asset will be deemed to have been disposed of by the deceased person immediately prior to death, and the deemed consideration for the disposal will be the market value of the asset at that date. Essentially, this will mean that capital gains and losses which accrued on the assets of the deceased person up to the time of death will be subject to CGT; the estate of the deceased person will bear any CGT liability.

Commencement date

The amendment to section 160Y applies to assets forming part of the estate of a person who died after 2 April 1992.

Clauses involved in the proposed amendments

Clause 26 : Inserts new subsection 160Y(2A) dealing with assets that are not taxable Australian assets passing to a non-resident beneficiary in the estate of a deceased person.

Payments for the Variation of a Lease

Summary of the proposed amendments

The Bill proposes an amendment to section 160ZT which will ensure that where a lessee receives an amount as consideration for agreeing to the variation or waiver of the terms of a lease, the amount by which that consideration exceeds the consideration given by the lessee for the acquisition of the lease, will be deemed to be a capital gain.

Background to the legislation

Section 160ZT contains specific rules governing the CGT treatment of payments made or received by a taxpayer for agreeing to the variation or waiver of the terms of a lease. Under the existing provisions of section 160ZT, if a lessor incurs expenditure in obtaining the agreement of a lessee to waive or vary the terms of the lease, the lessor is deemed to have incurred a capital loss equal to the amount of the expenditure. In addition, the cost base of the lease to the lessee is reduced by an amount equal to the consideration received by the lessee for agreeing to waive or vary the terms of the lease.

A deficiency has been identified in this provision as presently drafted. That is, if the payment to the lessee exceeds the consideration given by the lessee for the grant of the lease, although the lessee's cost base is reduced to nil, there is no mechanism for bringing the excess consideration to tax under the CGT provisions.

Explanation of the proposed amendments

The Bill will amend section 160ZT to ensure that where a payment is made by a lessor to a lessee as consideration for the lessee agreeing to the variation or waiver of the terms of the lease and the payment exceeds the indexed cost base of the lease, any excess will be deemed to be a capital gain to the lessee. This is achieved by deeming the lessee to have disposed of the lease at the time of the payment for consideration equal to the amount of the payment, and then to have immediately re-acquired the lease for nil consideration (paragraph 160ZT(1A)(d)).

If the amount received by the lessee for agreeing to the variation or waiver of the terms of the lease does not exceed the original amount given by the lessee to acquire the lease, then the cost base of the lease will be adjusted when the lessee subsequently disposes of the lease. The adjustments made to the cost base will depend on whether the lessee makes a capital gain or a capital loss on that disposal (paragraph 160ZT(1A)(e)).

In determining the capital gain (if applicable) on the disposal of the lease, the lessee will be deemed to have disposed of the lease at the time the variation or waiver was made for an amount equal to what would have been the indexed cost base of the lease at that time (ie. for no capital gain or loss). The lessee is then taken to have immediately re-acquired the lease for an amount equal to the excess of the indexed cost base over the payment received for agreeing to the variation or waiver. This reduced amount forms the new cost base of the lease in working out the capital gain on disposal.

In determining the capital loss (if applicable) on disposal of the lease, the lessee will be taken to have disposed of the lease at the time the variation or waiver was made for an amount equal to what would have been the indexed cost base of the lease at that time (ie. for no capital gain or loss). The lessee is then taken to have immediately re-acquired the lease for an amount equal to the excess of what would have been the reduced cost base at that time over the amount received by the lessee for agreeing to vary or waive the terms of the lease. Essentially, this means that on disposal the lessee's capital loss is reduced to take account of the earlier payment received by the lessee for agreeing to vary or waive the terms of the lease.

New subsection 160ZT(1B) ensures that if a lease is actually held for less than 12 months, and during this period the lessee receives a payment to which subsection 160ZT(1A) applies, then the lessee will not receive the benefit of indexation on the disposal of the lease.

Consequential Amendment - Section 160ZSA

Broadly, section 160ZSA allows a taxpayer to elect that the grant of a lease for a period of 50 years or more will be treated for CGT purposes in a similar way to a disposal of the freehold interest in the land (or the long term head lease if applicable). Existing sections 160ZS and 160ZT do not apply to disposals to which section 160ZSA applies.

Amendments to paragraphs 160ZSA(1)(e) and (f) will ensure that new subsections 160ZT(1A) and (1B) also do not apply to leases which are the subject of an election under section 160ZSA.

Commencement date

The amendments to sections 160ZT and 160ZSA apply to payments made to a lessee after 2 April 1992 to obtain the lessee's consent to the variation or waiver of the terms of the lease.

Clauses involved in the proposed amendments

Subclause 27(2) : Makes consequential amendments to subsection 160Z(5).

Clause 30 : Makes consequential amendments to section 160ZSA.

Clause 31 : Inserts new subsections 160ZT(1), (1A) and (1B).

Subclause 67(6) : Provides that the amendments apply in relation to payments made after 2 April 1992.

Motor Vehicles

Summary of the proposed amendments

The amendment will ensure that if a taxpayer owns an interest in a motor vehicle mentioned in section 160A, ie a motor vehicle which is not subject to CGT, the taxpayer's interest in the motor vehicle will also be excluded from CGT.

Background to the legislation

Section 160A excludes certain motor vehicles (broadly, motor cars, motor cycles and other vehicles designed to carry loads of less than 1 tonne or fewer than 9 passengers) from the CGT definition of the term "asset". This means that they will never be subject to the application of CGT. However, a problem may arise where the taxpayer does not own a motor vehicle directly, but owns an interest in the motor vehicle. Such an interest is itself an asset in terms of section 160A but under the existing provisions it may not be exempt from CGT.

Explanation of the proposed amendments

Existing section 160A is amended to specifically extend the exclusion from CGT for certain types of motor vehicles, to include an interest held in such a motor vehicle.

Commencement date

The amendment is backdated to 19 September 1985 and therefore applies to an interest in a motor vehicle disposed of after that date.

Clauses involved in the proposed amendments

Clause 23 : Amends the definition of asset in section 160A to exclude an interest in certain motor vehicles.

Subclause 67(3) : Provides that the amendment applies to disposals of assets after 19 September 1985.

Employee Share Schemes

Summary of the proposed amendments

The Bill will amend the CGT legislation to overcome the problems of double taxation that can arise where employees acquire shares or rights under an employee share acquisition scheme that is operated via an employee share trust.

Background to the legislation

Under the existing law problems are experienced in the interaction of the CGT provisions of the law with the employee share acquisition scheme provisions in section 26AAC. The problem arises where shares (or rights to acquire shares - these are discussed separately below) are first allotted by an employer to an employee share trust rather that by direct allotment to participating employees. For CGT purposes, the trustee of the scheme acquires the shares on allotment, generally for the lesser of the consideration given by the trustee for the shares or their market value at that time. On the subsequent distribution of the shares from the trust to an employee beneficiary, the trustee is usually treated as having disposed of the shares for consideration equal to their market value. If their value has increased during the period they were held by the trustee, the trustee may be liable to CGT on the accrued gain.

The problem arises because the employee beneficiary is also taxed under section 26AAC at the time the shares are distributed by the trustee. The value of the taxable benefit is the difference between the market value of the shares and the consideration (if any) paid by the employee to acquire them. In effect, the employee may be liable to tax on the same gain that has accrued on the shares during the period in which they were owned by the trustee and on which CGT has been paid. An example helps to illustrate the situation:

Assume XYZ Ltd has established an employee share scheme in which Ms A is to participate. The company allots 2000 shares to the XYZ Employee Share Trust, to be transferred to Ms A on completion of two years of further service with the company. On allotment of the shares to the trust, the shares are worth $10000 in total. The trustee pays XYZ Ltd $8000 to acquire them. Two years later, the shares are distributed by the trustee to Ms A. Under the terms of the share scheme, Ms A repays the $8000 incurred by the trustee in acquiring the shares. However, at that time, the shares are worth $20000. The discount received by Ms A is therefore $12000. Under section 26AAC, Ms A will pay tax on that discount.

The problem is that the trustee is treated like any other taxpayer which acquires and disposes of assets. When the 2000 shares were allotted to it by the company, the trustee acquired an asset with a cost base of $8000. When the trustee subsequently disposes of the shares to Ms A, the trustee is deemed to have disposed of them for consideration equal to their market value at that time, $20000. The trustee is therefore taken to have made a capital gain of approximately $12000 (calculated as $20000 less $8000 (indexed)) on which CGT is payable. However, that gain has also been taxed to Ms. A under s.26AAC.

The CGT provisions which are intended to prevent double tax arising on disposal of an asset (under both CGT and income tax) would not apply in these cases because different taxpayers are taxed on the income and the capital gain.

Essentially, the problem can be overcome by deeming ownership of the shares by the trustee to be ignored for CGT purposes if the shares are subsequently distributed to an employee who is taxed under s.26AAC on receipt of the shares. If the employee elects not to participate in the scheme and the trustee decides to sell the shares, then the trustee remains liable to CGT.

Although this discussion has concentrated on shares issued by a company to its employees via an employee share trust, similar difficulties arise where the company issues rights to acquire shares through such a trust. Accordingly, the amendment will operate to eliminate any double taxation which might arise where rights are issued instead of shares.

Explanation of the proposed amendments

Shares

The Bill will amend the CGT legislation to incorporate new section 160ZYJA dealing with employee shares trusts. Subsection 160ZYJA(1) provides that where:

•

taxpayer acquires a share from the trustee of an employee share trust (ie, a trust where the terms of the trust deed require or authorise the trustee to sell or transfer shares in a company to employees of the company or of another company or to relatives of those employees);

•

the consideration given by the taxpayer for the share is less than or equal to the indexed cost base (or cost base in the first 12 months) of the share to the trustee; and

•

an amount is included in the taxpayer's assessable income under section 26AAC (or would have been but for subsection 26AAC(4F)) as a result of the acquisition of the share;

then in these circumstances the trustee is not subject to CGT on the disposal of the share to the taxpayer.

The effect of the amendment is to ignore the disposal by the trustee for CGT purposes. Any increase in market value and the resulting capital gain that has accrued while the share was held by the trustee is not subject to CGT provided the employee is assessed under section 26AAC (generally on the market value of the share less any consideration given by the employee for the share).

Rights

Subsections 160ZYJA(2) and (3) deal specifically with rights to acquire shares which are distributed to taxpayers by the trustee of an employee share trust. The amendment operates in the same way as the amendment for shares. That is, the trustee is not subject to CGT on the disposal of rights to acquire shares to a taxpayer where:

•

the taxpayer acquires the right from the trustee of an employee share trust (ie, a trust where the terms of the trust deed require or authorise the trustee to sell or transfer shares in a company to employees of the company or of another company or to relatives of those employees);

•

the consideration given by the taxpayer for the right is less than or equal to the indexed cost base (or cost base in the first 12 months) of the right to the trustee; and

•

any one of the following applies:

(a)

an amount is included in the taxpayer's assessable income under subsection 26AAC(8C) (or would have been but for subsection 26AAC(4F)) as a result of the acquisition of the right; or

(b)

an amount is included in the taxpayer's assessable income under subsections 26AAC(7) or (8) as a result of the disposal of the right; or

(c)

an amount is included in the assessable income of the taxpayer under section 26AAC as a result of the acquisition by the taxpayer (or an associate) of shares in the company that were acquired by the exercise of the right; or

(d)

the taxpayer dies, the trustee of the estate of the deceased person exercises the right and acquires a share in the company and an amount is included in the assessable income of the trust estate of the deceased person under subsection 26AAC(9).

The overall effect of the amendment is to ignore, for CGT purposes, the disposal of a right to acquire shares by the trustee of an employee share trust to a taxpayer where the accrued increase in the value of the right, or the shares acquired by the exercise of the right, has been included in the taxpayer's assessable income (or, in the case of a deceased taxpayer, has been included in the assessable income of the trust estate).

Commencement date

The amendment inserting section 160ZYJA will apply to shares or rights to acquire shares disposed of by the trustee of an employee share trust after the date of introduction of this Bill.

Clauses involved in the proposed amendments

Clause 33 : Inserts new section 160ZYJA dealing with employee share trusts.

Subclause 67(7) : Provides that the amendments apply to shares or rights disposed of by a trustee after 2 April 1992.

Convertible Notes

Summary of the proposed amendments

This amendment makes clear that the provisions in the CGT legislation which deem the conversion of a convertible note into shares of a company or units of a unit trust not to constitute a disposal of the convertible note, apply only for the purposes of the CGT provisions of the Act.

Background to the legislation

Sections 16ZYZ and 160ZZBB of Part IIIA specifically provide that the conversion of a convertible note into shares or units does not result in the disposal of the convertible note. An argument has been raised that the operation of these sections is not confined to the CGT provisions of the law, but that they apply to the tax law generally. The Government believes that this is not the case. However, to put the position beyond doubt the Government has decided to amend the law to expressly provide that the application of sections 160ZYZ and 160ZZBB is confined solely to the CGT provisions of the law.

Explanation of the proposed amendments

Sections 160ZYZ and 160ZZBB are amended to expressly state that they operate only for the purposes of the CGT provisions of Part IIIA of the Act.

Commencement Date

The amendment applies to the conversion of a convertible note after the date of introduction of this Bill. As the amendment does not change the operation of the law but merely clarifies it, it only needs to apply from introduction.

The transitional provisions in [Clauses 70 and 71] ensure that in determining the meaning of section 160ZYZ and 160ZZBB up to introduction date, the new amendments are to be ignored. That is, the fact that these amendments have been made to clarify the operation of these sections, does not mean that prior to the amendments the sections did not operate in the same way as they operate after the amendment.

Clauses involved in the proposed amendments

Clause 34 - 35 : Amends sections 160ZYZ and 160ZZBB to provide that these sections only apply for the purposes of Part IIIA.

Subclause 67(8) : Provides that the amendments apply to conversions after 2 April 1992.

Clauses 70 - 71 : Transitional provisions which provide that these amendments are to be disregarded when determining the meaning of sections 160ZYZ and 160ZZBB to conversions before 3 April 1992.

De Facto Marriage Breakdown

Summary of the proposed amendments

The Bill proposes amendments to sections 160ZZM and 160ZZMA to allow CGT rollover for assets transferred pursuant to a court order following the breakdown of a de facto marriage.

Background to the legislation

Section 160ZZM provides a capital gains tax rollover for assets which are transferred from one spouse to another following the breakdown of a marriage. Section 160ZZMA provides a similar rollover where an asset is transferred from a company or trust to a spouse following the breakdown of a marriage. The effect of these rollovers is to provide for the deferral of CGT that would otherwise have been payable on the transfer of the asset, or in the case where the asset was acquired before 20 September 1985, to retain the asset's pre-CGT status.

These rollovers for marriage breakdowns are only available where the transfer of an asset is pursuant to a court order or registered maintenance agreement made under the Commonwealth Family Law Act or a comparable law of a foreign country. This has the effect that rollover relief is confined to the breakdown of legal marriages.

Some States have enacted legislation which provides for the transfer of property between defacto spouses on their separation. The Defacto Relationship Act 1984 (NSW) and amendments to the Property Law Act 1958 (Vic) empower courts in these States to determine fair entitlement to the property of defacto spouses and to order transfers of property between the defacto spouses on their separation. (In other States or Territories the role of the court is to merely determine the actual ownership of property. In these circumstances, each spouse will always have owned the asset and, since there is no transfer of property, there will be no resulting CGT consequences).

Explanation of the proposed amendments

The Bill will amend sections 160ZZM and 160ZZMA to extend the CGT rollover presently available to assets transferred following the breakdown of a legal marriage, to include the transfer of assets on the breakdown of defacto marriages where a State or Territory or foreign country has legislated to allow the court to order such a transfer.

Commencement date

The amendment will apply to transfers of property pursuant to court orders made after 2 April 1992.

Clauses involved in the proposed amendments

Clauses 38 - 39: Amends sections 160ZZM and 160ZZMA to apply to an order of a court relating to the breakdown of a de facto marriage.

Subclause 67(9) : Provides the amendments apply to court orders made after 2 April 1992.

Avoidance of Bonus Shares Rules

Summary of the proposed amendments

The amendment will ensure that rollover relief is not available for share exchanges (often referred to as share splits or share consolidations) under section 160ZZP unless the paid-up share capital of the company remains unchanged before and after the share exchange.

Background to the legislation

Broadly, Division 8A of the CGT legislation applies to partly or fully paid bonus shares issued after 30 June 1987 (other than bonus shares issued from a share premium account). The Division ensures that the bonus shares are treated as having been acquired by the shareholder at the time of their issue. Accordingly, if a company increases its paid-up capital by issuing bonus shares, the shares representing that additional capital will be subject to CGT, regardless of the acquisition date of the shareholder's original shareholding.

Section 160ZZP provides for rollover relief where there is a reorganisation of share capital within a company and as part of the reorganisation a shareholder has all of his or her shares of a particular class in the company cancelled or redeemed in exchange for other shares of the company. A rollover is available provided the shareholder receives no consideration for the original shares other than the new shares and the market value of the new shares immediately after their issue is not less than that of the original shares.

Where these conditions are satisfied and the shareholder makes the necessary election, the effect of the rollover is to provide for a deferral of tax on accrued gains or losses that would otherwise have been assessable or allowable as a result of the disposal of the original shares or, in the case where the original shares were acquired before 20 September 1985, the retention of their pre-CGT status.

There is no requirement in existing section 160ZZP for the paid-up capital of the company to remain unchanged before and after the share exchange. As a result, a company with shareholders who acquired their shareholdings before 20 September 1985 could use section 160ZZP to obtain an inappropriate advantage. That is, the company could increase its paid-up capital but, by virtue of section 160ZZP, the shares which represent that additional paid-up capital are taken to be pre-CGT assets. An example helps to illustrate this point. Assume a company has paid-up capital of $100 represented by 100 $1 shares, which were acquired by existing shareholders before 20 September 1985 and which are now worth $2 each. Under a share reorganisation, the company cancels the existing 100 shares and in exchange issues 100 fully paid $2 shares. The $100 additional capital is obtained, for example, by debiting the company's retained earnings. By section 160ZZP, the new shares are taken to be pre-CGT assets. Thus, the company has increased its paid-up capital (after 19 September 1985) yet the shares representing the additional capital have pre-CGT status.

This result is not consistent with the bonus share provisions of Division 8A. Essentially, the existing rollover provisions in section 160ZZP provide a mechanism for a company to avoid the consequences contemplated by the introduction of Division 8A. To prevent Division 8A from being circumvented in this way, the proposed amendment will limit the rollover relief available under section 160ZZP to situations where the paid-up capital of the company remains the same before and after the reorganisation.

Explanation of the proposed amendments

Section 160ZZP is amended to disallow rollover relief if the total paid-up share capital of the company immediately after the issue of the new shares is not equal to the total paid-up share capital of the company immediately before the redemption or cancellation of the original shares.

This amendment will ensure that the operation of section 160ZZP is consistent with the operation of the Bonus Share rules in Division 8A of the CGT legislation.

Commencement date

This amendment will apply to share exchanges, ie cancellations or redemptions of shares, after the date of introduction of this Bill.

Clauses involved in the proposed amendments

Clause 43: Inserts new paragraph 160ZZP(1)(fa).

Subclause 67(5) : Provides that the amendments apply to assets disposed of after 2 April 1992.

Rollover of Assets that are Trading Stock of Transferee

Summary of the proposed amendments

The amendment will ensure that rollover relief is not available if the asset transferred constitutes trading stock of the transferee.

Background to the legislation

Broadly, sections 160ZZN, 160ZZNA and 160ZZO provide rollover relief where an asset is disposed of by an individual, a trustee or a partnership to a company that is wholly owned by the transferor, or where one company disposes of an asset to another company and both companies are members of a 100% commonly-owned company group. The effect of the rollover is to provide for a deferral of tax on accrued gains that would otherwise have been assessable as a result of the disposal of the asset (or, in the situation where the asset was acquired before 20 September 1985, the retention of its pre-CGT status). Rollover relief is granted on the basis that the deferred gain will eventually be picked up on the subsequent disposal of the asset by the transferee company. On the rollover of the asset the transferee company is deemed to have acquired the asset for consideration equal to the (indexed) cost base of the asset in the hands of the transferor and, therefore, on the subsequent disposal of the asset by the transferee the full accrued capital gain would be subject to CGT.

However, in a case where the transferor disposes of an asset with an accrued capital gain under these rollover provisions and the asset becomes trading stock of the transferee, CGT may be avoided (subject to any application of the anti-avoidance provisions in Part IVA of the Income Tax Assessment Act). This is because the CGT provisions provide an exemption for trading stock and so on the subsequent disposal of the asset by the transferee company there is no CGT liability, ie. the accrued capital gain escapes tax. Nor is the gain picked up as assessable income under the trading stock provisions of the income tax law. Provided the transferee has paid market value for the asset, either in cash or by issuing shares to the transferor as consideration for the asset, the trading stock is brought into account at its market value. This means that the capital gain that had accrued on the asset up to the time of the rollover may escape tax altogether; only subsequent increases in market value would be included in assessable income (under the trading stock or ordinary income provisions of the law).

A similar problem can arise where, on the disposal of an asset as a result of a compulsory acquisition of the asset or as a result of the loss or destruction of the asset, rollover relief is granted for a replacement asset (under sections 160ZZK or 160ZZL). If the replacement asset constitutes trading stock of the taxpayer, the asset is again outside the scope of the CGT provisions. Any accrued capital gain on the original asset, which would ordinarily have been picked up on the disposal of the replacement asset, may not be taxed.

To overcome these problems the CGT rollover provisions are to be amended to incorporate a further requirement that must be satisfied before rollover relief is available; namely, the asset disposed of must not constitute trading stock of the transferee. That is the rollover asset must remain subject to CGT in the hands of the transferee.

Explanation of the proposed amendments

The Bill will amend the rollover provisions in:

•

sections 160ZZN, 160ZZNA and 160ZZO to disallow rollover relief where the asset disposed of (ie. the rollover asset) constitutes trading stock of the transferee immediately after its acquisition by the transferee; and

•

sections 160ZZK and 160ZZL to disallow rollover relief where the replacement asset acquired by the taxpayer on the disposal of the original asset constitutes trading stock of the taxpayer immediately after its acquisition by the taxpayer.

In the context of the amendment to sections 160ZZN, 160ZZNA and 160ZZO it will also be necessary to ensure that if the asset that is rolled over is an option (or a right or a convertible note) which is not trading stock of the transferee, but the exercise of the option results in the acquisition of a new asset which is trading stock of the transferee, rollover is not allowed on the disposal of the option. This additional amendment is required because the exercise of the option is not a disposal for CGT purposes; essentially any accrued capital gain on the option is deferred until the subsequent disposal of the new asset which was acquired as a result of the exercise of the option. If the new asset is trading stock, and therefore outside the scope of CGT provisions, the accrued gain may, once again, be lost.

The amendment will overcome this problem by disallowing rollover relief on the disposal of an option if the exercise of the option results in the acquisition of trading stock by the transferee. The amendment will also apply where the rollover asset is a right or a convertible note and the exercise of the right or the conversion of the convertible note results in the acquisition of trading stock by the taxpayer (ie. the transferee).

It is necessary that the asset acquired by the transferee under the rollover provisions remains subject to CGT on its subsequent disposal. Accordingly, the provisions of paragraph 160L(3)(a), 160L(4)(a) and 160L(5)(a) are amended to provide that the CGT exemption for trading stock only applies if the asset disposed of constitutes trading stock of the taxpayer throughout the period that the asset was owned by the taxpayer. This will ensure that the asset cannot be brought to account as trading stock at a subsequent date in order to escape CGT. [Clause 25]

Finally, consequential amendments are made to the record keeping requirements in subsections 160ZZU(3) and 160ZZU(3A) of the CGT legislation. Basically, these amendments will ensure that if a taxpayer disposes of an asset, which is an option, right or convertible note under the rollover provisions, and the exercise of the option or right or the conversion of the convertible note results in the acquisition of an asset (called the derived asset) which is trading stock in the hands of the transferee then, because the rollover is not allowed, records of the transaction, the company's group status etc., need only be kept for a maximum of 5 years after the time when the derived asset was acquired by the transferee.

Commencement date

These amendments apply to assets acquired by the transferee after the commencement of this Bill.

Clauses involved in the proposed amendments

Clause 25 : Amends section 160L in relation to trading stock.

Subclause 36(2) : Amends section 160ZZK.

Clause37 : Amends section 160ZZL.

Clauses 40 - 42: Amend sections 160ZZN, 160ZZNA, 160ZZO.

Clause 51 : Amends section 160ZZU in relation to records that are required to be kept.

Subclause 67(5) : Provides that the amendments apply to assets disposed of after 2 April 1992.

Subclause 67(11) : Provides that the record keeping changes apply to assets acquired after the commencement of the Bill.

Chapter 4 Deductions for Contributions to Superannuation Funds

Clauses: 16, 17 and 65

Overview

Enable deductions for contributions to three superannuation funds to provide benefits for employees where one of those funds was established by a law of the Commonwealth, a State or Territory; and

Enable substantially self-employed people with minimal employer support to receive the same level tax deductions for personal superannuation contributions as self-employed people and employees without superannuation support.

Deductions for Contributions to Superannuation Funds

Deductions for Contributions to Superannuation Funds

Summary of the proposed amendments

4.1. The Bill will make two changes to the provisions which allow deductions for contributions to superannuation funds.

Contributions on behalf of employees to three eligible superannuation funds

4.2. This Bill will amend the income tax law with effect from 1 July 1990 to enable taxpayers to claim a deduction for contributions to three eligible superannuation funds for employees where one of those funds was established by a law of the Commonwealth, a State or Territory.

Contributions by substantially self-employed people

4.3. The Bill will also amend the income tax law to enable substantially self-employed people with minimal other (usually employer) superannuation support to receive the same level of tax deductions for personal superannuation contributions as self-employed people and employees without superannuation support. The proposed amendment applies to contributions made on or after 1 July 1991.

Part A: Contributions on Behalf of Employees to Three Eligible Superannuation Funds

Background to the legislation

4.4. Section 82AAC of the Income Tax Assessment Act 1936 allows a deduction for contributions to eligible superannuation funds (within the meaning of Part IX) to provide superannuation benefits for employees or their dependants.

4.5. Subsection 82AAC(2) of the Act imposes a two fund limit on claims for deduction under section 82AAC. The subsection was introduced with effect from 1 July 1990 to limit the scope for abuse under the new reasonable benefit limit arrangements. The limit of two funds was intended to accommodate arrangements where employers top up benefits through a second fund or provide benefits through both industry schemes and company schemes.

4.6. In some cases, employers may be required to contribute to a statutory fund in addition to the industry and company funds. Under the existing law, the employers can only claim a deduction for contributions to two of those funds.

Explanation of the proposed amendments

4.7. Section 82AAC will be amended to insert a further subsection so that subsection 82AAC(2) is taken never to have applied if the taxpayer claims deductions for contributions to three funds only and one of those funds was a fund which was in existence at 1 July 1990 and was established by a law of the Commonwealth, a State or Territory. In this regard, a statutory fund is not a fund to which contributions are made under a productivity award agreement.

4.8. This change will enable employers to claim a deduction for contributions to three funds where those conditions are met. If required, assessments can be amended to give effect to this change. [Clause 75]

Commencement date

4.9. The change proposed by this Bill to section 82AAC operates so that subsection 82AAC(2) is taken never to have applied where certain conditions are met. Subsection 82AAC(2) has been effective since 1 July 1990.

Clauses involved in the proposed amendment

Clause 16: inserts subsection 82AAC(2A) which provides for this change.

Part B: Contributions by substantially self-employed people

Background to the legislation

4.10. Income tax deductions are available under Subdivision AB of Division 3 of Part III of the Income Tax Assessment Act 1936 to eligible persons, as defined in subsection 82AAS(2), for their personal superannuation contributions to complying superannuation funds.

4.11. Prior to the 1990-91 financial year, the maximum annual deduction available was $3,000. From 1 July 1990, subsection 82AAT(2) provides for the deductibility of superannuation contributions as follows:

•

Unsupported eligible persons (defined in subsection 82AAS(1) to mean, broadly speaking, self-employed people and employees without employer superannuation support) are entitled to a maximum deduction in the income year of the lesser of:

-

3,000 plus 75% of contributions in excess of $3,000; and

-

the amount of contribution necessary to fund the reasonable benefit limit for the individual concerned (i.e. the maximum deductible contributions specified in regulation 12A of the Income Tax Regulations).

•

Eligible persons who are not "unsupported eligible persons" (broadly, employees whose only superannuation support is under an award based superannuation agreement) are entitled to a maximum deduction of $3,000.

4.12. Under the existing law, people who are substantially self-employed, but who undertake part-time employment through which they receive only superannuation support under an award based superannuation agreement, are not "unsupported eligible persons". Consequently they are restricted to a maximum deduction of $3,000 for their personal superannuation contributions, even though the amount of employer support received may be very small.

4.13. In such cases, the tax concessions forgone, because of the reduction in the maximum level of deductible contributions to $3,000, may exceed the benefit received from the employer superannuation support.

4.14. Examples of people who may fall into this situation are medical practitioners working in public hospitals, professionals working part-time as teachers at TAFE colleges or universities, and part-time statutory officers.

Explanation of the proposed amendments

4.15. The definition of "unsupported eligible person" in subsection 82AAS(1) will be extended to include a person who is substantially self-employed.

Who is a substantially self-employed person?

4.16. A substantially self-employed person is someone who derives less than 10% of their assessable income during the year from employment providing award based superannuation support (i.e. superannuation agreement contributions as defined in subsection 82AAS(1)). Also, if the person has no assessable income during the year from an employer who provides award based superannuation support, they will be a substantially self-employed person.

What are amounts derived from "that employment or those services"?

4.17. Amounts derived from "that employment or those services" (sub-subparagraph (b)(i)(A) and subparagraph (b)(ii) of the new definition of "unsupported eligible person") are salary and wages and any other payments, including eligible termination payments, paid by the employer providing the award based superannuation support. They do not include payments from other sources, such as eligible termination payments from superannuation funds (including the fund to which the employer makes award based superannuation contributions) or approved deposit funds.

Example 1

4.18. Consider a doctor who works one day a fortnight in a public hospital. Her income from that employment during the year is $10,000. The hospital contributes $300 to a superannuation scheme on behalf of the doctor in accordance with a productivity award agreement. The doctor's total assessable income is $120,000 - the balance being derived from her private practice. As the doctor derives less than 10% of her total assessable income from the hospital, she will qualify as a substantially self-employed person and will be able to claim a deduction for her own superannuation contributions in excess of $3,000. [Subject to the deduction limit under subsection 82AAT(2)].

Example 2

4.19. A person resigns from his job in June 1992 in order to start his own business. His former employer makes a contribution to a superannuation fund in accordance with a productivity award agreement but not until July. As the person derives no assessable income during the 1992-93 income year from an employer providing award based or other superannuation support, he will qualify as a substantially self-employed person and will be able to claim a deduction for his own superannuation contributions in excess of $3,000 in the 1992-93 year. [Subject to the deduction limit under subsection 82AAT(2)].

Example 3

4.20. An employee resigns from her job. She derived $5,000 assessable income from that employment during the year. Her employer contributed $150 to an award based superannuation fund. She immediately commenced employment with another employer who also made contributions to an award based superannuation fund during the year. Her total assessable income was $55,000. As she received award based superannuation support in relation to 100% of her employment income, she does not qualify as an "unsupported eligible person" and is therefore limited to a maximum deduction of $3,000 for her own superannuation contributions in the income year.

Commencement date

4.21. This amendment will apply to contributions made to superannuation funds on or after 1 July 1991.

Clauses involved in the proposed amendments

Clause 17: inserts a new definition of "unsupported eligible person" in subsection 82AAS(1) which provides for this change.

Clause 65(7): provides that the amendment will apply to contributions made on or after 1 July 1991.

Chapter 5 Taxation of Foreign Source Income - Amendments

Clauses: 6,19,20,21,54,55,56,57

Overview

Amends several provisions relating to the taxation of foreign source income.

Taxation of Foreign Source Income - Amendments

Introduction

This Bill proposes several amendments to the provisions relating to the taxation of foreign source income. They are to:

•

correct anomalies in the calculation of a resident company's share of the net income of a partnership or trust where that net income includes foreign branch income.

•

exclude from tainted sales income of a controlled foreign company (CFC) proceeds from the sales of goods purchased from or sold to related parties by the CFC where the goods sold were manufactured, produced or substantially altered by the directors or employees of the CFC, and removes the requirement that the CFC substantially enhance the market value of the goods sold by it before the proceeds of those sales may be excluded from tainted sales income.

•

ensure that an election made by a CFC for capital gains tax roll-over relief for an asset disposal is binding when calculating the amount of a capital gain arising on a subsequent disposal of that asset.

•

provide wider capital gains tax roll-over relief for an asset disposal when determining whether a CFC passes the active income test.

•

eliminate unintended double taxation on a taxpayer in respect of certain types of dividends derived by a CFC.

•

reduce the income of a controlled foreign company that is attributed to resident taxpayers by dividends paid by the company to another company on certain transitional finance shares.

•

correct an inappropriate exemption provided to a life assurance company in relation to life assurance policies issued to non-residents who are not associates of the company.

They relate mainly to the provisions of the Act that deal with the accruals tax system introduced with general effect from the 1990-91 income year.

A detailed explanation of each of the amendments together with an overview of the Taxation of Foreign Source Income is contained in the Appendix to this Chapter.

Appendix to Taxation of Foreign Source Income

Taxation of Foreign Source Income : Overview of the Existing Law

Brief outline of the basic concepts in the taxation of Foreign Source Income.

The accruals tax system - controlled foreign companies

If Australian residents have specified interests in a non-resident company, then the accruals tax system may include certain income and gains derived by that company in the residents' assessable income. A non-resident company that is subject to these measures is called a controlled foreign company (CFC).

Attributable income

The income and gains of a CFC that may be included in the assessable income of resident taxpayers is called attributable income. That income is calculated, subject to some modifications, as if the CFC were a resident of Australia.

The active income test

The CFC's income will generally not be included in the assessable income of resident taxpayers if the CFC is predominantly engaged in active business operations. An active income test determines whether a CFC is to be treated as predominantly engaged in active business operations.

A CFC fails that test if, in broad terms, 5 per cent or more of the gross turnover of the CFC consists of tainted income. Tainted income includes passive income and income from certain related party transactions.

Listed and unlisted country CFCs

A listed country is a country that is treated as having a tax system that is generally comparable to Australia's. A list of these countries is contained in the Income Tax Regulations. An unlisted country is a country that is not listed in the Regulations.

Attributable income of a listed country CFC

The attributable income of a CFC that is a resident of a listed country will include :

•

certain tainted income that is taxed at concessional rates in the listed country. This type of income, called designated concession income, will be included in attributable income only if the CFC fails the active income test. A list of the income that is treated as taxed at concessional rates is contained in the Income Tax Regulations;

•

income from an unlisted country that is not taxed in the listed country; and

•

certain low taxed income that is derived, or treated as derived, from trusts.

Attributable income of an unlisted country CFC

5.1. The attributable income of a CFC that is a resident of an unlisted country includes :

•

certain tainted income, if the CFC fails the active income test; and

•

certain income that is derived, or treated as derived, from trusts.

Dividends paid by a CFC

The accruals tax measures will also include in the assessable income of a resident taxpayer amounts of dividends paid by an unlisted country CFC to a:

•

listed country CFC; or

•

controlled foreign trust (CFT).

The amount that is included in the assessable income of a resident taxpayer is the proportion that relates to the taxpayer's interest in the CFC or CFT that receives the dividend.

Definitions of Key Terms in the Taxation of Foreign Source Income

Certain terms that are used in this chapter are explained below.

'An associate'

In broad terms, an associate is any related party.

'An associate with an Australian connection'

This terms refers to an associate who is either:

•

a Part X Australian resident; or

•

or a non-resident who carries on business in Australia through a permanent establishment.

'CGT roll-over provisions'

In broad terms, this expression is defined to mean the roll-over relief measures contained in the capital gains provisions of the Act.

'Controlled foreign company' (CFC)

A controlled foreign company is, in broad terms, a non-resident company in which resident individuals, partnerships, companies or trusts hold specified interests. The meaning of the term controlled foreign company is set out in section 340 of the Act.

'Controlled foreign trust'

A controlled foreign trust is a non-resident trust in which resident individuals, partnerships, companies or trusts hold specified interests. The term includes a non-resident trust to which a resident person has transferred property or services in certain circumstances. The meaning of the term controlled foreign trust is set out in section 342 of the Act.

'Designated concession income'

This expression is discussed above under the heading 'Attributable income of a listed country CFC'.

'Eligible designated concession income'

Broadly, this expression is defined to mean income or profits which are designated concession income in relation to a particular listed country which are not subject to tax in another listed country.

'Non-portfolio dividends'

'Non-portfolio dividends' are dividends paid to a company with at least a 10% voting interest in the company paying the dividend.

'Part X Australian resident'

A Part X Australian resident is a resident of Australia other than one who is treated solely as a resident of a treaty partner country under a double taxation agreement between Australia and that country.

'Passive income'

In broad terms, passive income includes items of income such as:

•

interest;

•

annuities;

•

royalties;

•

receipts from the assignment of intellectual property; and

•

capital gains on the disposal of certain assets.

The term passive income is defined in section 446 of the Act.

'Statutory accounting period'

A statutory accounting period of a CFC is a period of 12 months, ending on 30 June unless the CFC has elected a 12 month period ending on another day (section 319).

'Tainted income'

Tainted income of a CFC is, broadly, income that is prone to tax minimisation. It includes passive income and income from related party transactions.

'Tainted sales income'

In broad terms, tainted sales income of a CFC is its income from transactions (concerning the sales of goods) with associates who also have an Australian connection. It forms part of the tainted income of a CFC which is used in the formulae applying the active income test to the CFC. The term tainted sales income is defined in section 447 of the Act.

Exemption of Foreign Branch Profits of Australian Companies

Summary of the proposed amendments

The proposed amendments will provide that a resident company's share of the net income of a partnership or trust is to be calculated on the basis that the foreign branch profits of the partnership or trust, which would have been exempt from tax under section 23AH if those profits had been derived directly by the company, are exempt income of the partnership or trust.

Background to the legislation

The profits derived by an Australian company from a business carried on through a branch in a listed country (i.e., a comparably taxing country) are exempt from Australian tax to the extent that those profits:

•

have been subject to tax in a listed country; and

•

are not eligible designated concession income (section 23AH).

This exemption also extends to a resident company's share of the net income of a partnership or trust to the extent that it is comprised of foreign branch profits including where that income has passed through a number of interposed partnerships or trusts.

Presently, in calculating its net income, an interposed partnership or trust has to include foreign branch profits in its assessable income and can claim expenses incurred in deriving those profits. This is so even though a resident company partner or beneficiary, as the actual taxpayer, can exclude so much of its share of the partnership's or trust's net income which relates to those foreign branch profits. This treatment results in certain anomalies which may operate to the detriment of either the revenue or the taxpayer.

The revenue may be disadvantaged in instances where a partnership or trust has incurred an overall loss in respect of its listed country foreign branch. This is because, in calculating its net income, the partnership or trust can deduct an income loss from its other foreign income of the same class or a capital loss from a capital gain. That is, the partnership or trust is able to claim a deduction against its other foreign profits for losses incurred in deriving listed country branch profits even if it has a resident company as a partner or beneficiary. The reduction of the net income of the partnership or trust has the effect that the assessable portion of the company partner's or beneficiary's share of that income is also reduced.

A taxpayer may be disadvantaged in instances where a partnership or trust has derived listed country branch profits. This is because, in calculating its net income, the partnership or trust must deduct from those profits any losses incurred in relation to its other foreign income of the same class or, in the case of a capital gain, capital losses. Hence, the partnership or trust is forced to offset its losses against profits which would have been exempt it they were received by a resident company partner or beneficiary. Consequently, the partnership or trust cannot carry forward those losses to be offset against income derived in future years.

The same issues arise in relation to the manner in which foreign branch capital losses incurred by a trust are treated. It is intended that a company beneficiary should not obtain the benefit of a capital loss incurred by a trust where, had a capital profit been made instead, no Australian tax would have been payable by the company on the profit. However, a trust is presently able to deduct that loss from other capital profits derived by the trust.

Explanation of the proposed amendments

The amendment will apply where a resident company is a partner of a partnership or the beneficiary of a trust that derives comparably taxed listed country branch income. The amendment will also apply where a series of partnerships or trusts are interposed between the resident company and the partnership or trust that derives the comparably taxed listed country branch income (paragraphs 23AH(3)(a) and (b)).

The Bill makes two basic assumptions to identify the cases to which the amendments apply (paragraph 23AH(3)(c)). These are that:

•

comparably taxed listed country branch profits were the only income of the trust or partnership which derived those profits and that the profits are not exempt from tax; and

•

there are no allowable deductions from that income.

If, in these circumstances, an amount of the net income of the partnership or trust would be included in a resident company's assessable income, the amendment will treat the comparably taxed listed country branch income as exempt income of the partnership or trust (paragraphs 23AH(3)(c) and (d)). Because the income is exempt, the partnership or trust cannot claim a deduction for expenses incurred in deriving that income or carry forward a loss in that regard (paragraphs 23AH(3)(d) and (e)). This treatment of the income of the partnership or trust will be solely for the purpose of determining the share of the net income of a resident company that is a partner or beneficiary of that partnership or trust.

The amendment will apply where an amount of the partnership or trust income would, on the basis of the assumptions stated above, be included in the assessable income of a resident company partner or beneficiary under certain specified provisions of the tax law. These are:

(i)

subsection 92(1) - this subsection sets out the amounts to be included in the assessable income of a partner of a partnership;

(ii)

section 97 - this section sets out the amounts to included in the assessable income of a beneficiary of a trust who is not under a legal disability;

(iii)

section 98A - this section prescribes the amounts to be included in the assessable income of a non-resident beneficiary of a trust. (This section may be relevant in instances where an Australian resident company changes residence); and

(iv)

section 100 - this section sets out the amounts to be included in the assessable income of a beneficiary of a trust who is under a legal disability or is considered to have a vested and indefeasible interest in any income of a trust estate but is not presently entitled to that income.

Example

A partnership has derived comparably taxed income of $15,000 from a branch in a listed country. It has deductions amounting to $30,000 in respect of that income. The partnership has also derived $5,000 income (of the same class of foreign income) through a branch in an unlisted country. A resident company is a partner of that partnership.

In determining the resident company's share of the net income of the partnership, the assessable income of the partnership would not include the $15,000 branch income and no deduction would be available for the $30,000 expenses relating to that income. That is, in determining the company partner's share of the net income of the partnership, that net income would be $5,000 (the income from the PE in the unlisted country).

Provisions corresponding to those relating to the taxation treatment of comparably taxed listed country branch profits will also be inserted to deal with a capital gain made or a capital loss incurred by a listed country branch of a trust of which a resident company is a beneficiary (subsections 23AH(9) and (9A)). These provisions also extend to cases where a series of partnerships or trusts are interposed between the trust that derives the capital gain or incurs the capital loss and the resident company concerned.

The amendment will also ensure that a company beneficiary does not obtain the benefit of a capital loss incurred by a trust where, had a capital profit been made instead, no Australian tax would have been payable. It will also extend this treatment to instances where trusts or partnerships are interposed between the beneficiary and the relevant trust (subsection 23AH(9A)).

Commencement date

These amendments will apply from the 1992-93 year of income.

Clauses involved in the proposed amendments

Clause 6 will replace former subsections 23AH(3), 23AH(9) and 23AH(9A) with corresponding provisions that will ensure that a resident company's share of the net income of a partnership or trust is to be calculated on the basis that the foreign branch profits of the partnership or trust, which would have been exempt from tax under section 23AH if those profits had been derived directly by the company, are exempt income of the partnership or trust.

Subclause 65(3) provides that the amendments will apply from the 1992-93 year of income.

Tainted Sales Income

Summary of the proposed amendments

The amendment will exclude from tainted sales income of a CFC amounts received from the sales of goods purchased by the CFC from related parties, or sold by the CFC to related parties only where the goods sold were manufactured, produced or substantially altered by the directors or employees of the CFC.

The amendment will also have the effect that, for amounts received from the sale of goods to be excluded from tainted sales income, it will no longer be necessary that the activities of the CFC should substantially enhance the market value of the goods.

Background to the legislation

The current legislation

In broad terms, tainted sales income of a CFC is its income from transactions with related parties who also have an Australian connection. It includes:

•

proceeds of sales made by the CFC where the CFC purchased goods from related parties and sold those goods without having made any substantial alterations to the goods; and

•

proceeds of sales made by the CFC to related parties.

In either case, the related party must be:

•

an associate who is a resident; or

•

a non-resident associate who carries on business through a permanent establishment (PE) in Australia. [Subsection 447(1)].

Tainted sales income could arise only where the CFC has purchased:

•

the goods sold; or

•

material that was incorporated in the goods sold. [Subsection 447(1)]

The concept of tainted sales income has an important place in the foreign source income measures. Tainted sales income forms part of the tainted income of a CFC which is used in the formulae applying the active income test to the CFC. A CFC that fails the active income test will have its tainted income attributed to resident shareholders who hold interests in the CFC.

Tainted sales income does not include proceeds of sales made by the CFC where it substantially altered the goods that were sold with the result that the market value of those goods were substantially enhanced (exclusion). This exclusion was provided to taxpayers to facilitate the competitiveness of Australian controlled businesses operating in foreign jurisdictions.

Agency and subcontracting arrangements

It has been argued that, under the current legislation a CFC could subcontract its business activities, or conduct them through agents, and claim the benefit of the exclusion where the CFC was not engaged through its directors or employees in carrying on an active trade or business operation in the foreign country.

Value added change to goods

The current law requires that to qualify for the exclusion, the goods produced by the genuine business activities of the CFC undergo a value added change through the substantial enhancement of the market value of the goods . This restriction makes the availability of the exclusion dependent on market forces that are beyond the control of the taxpayer.

Explanation of the proposed amendments

The proposed amendments will provide that the benefit of the exclusion from tainted sales income will be available only where a CFC's active conduct of a trade or a business is carried out substantially by its directors and employees.

Tainted sales income will include the proceeds from the sale of goods where:

•

the goods were sold by the CFC to an associate with an Australian connection; or

•

the goods were purchased by the CFC from an associate with an Australian connection; or

•

a component from which the goods were made by the CFC, was purchased by the CFC from an associate with an Australian connection.

The income from these sales may be excluded from tainted sales income only by a specific exclusion provided in the legislation. [Proposed subsections 447(4), (4A) and (4B)] .

Before the exclusion from tainted sales is available to a CFC, the CFC must fulfil two requirements. The CFC must:

•

alter the goods substantially or, manufacture or produce a new article with a different identity from the goods it purchased (first tier of tests) ; and

•

perform a substantial part of these activities through its directors and employees (second and third tier of tests) .

First tier of the tests for exclusion from tainted sales income

The first tier of the tests is intended to ensure that only genuine business activities occurring through the active conduct of a trade or business by the CFC in the foreign country will obtain the benefit of the exclusion. The first tier of the tests examine whether a genuine business activity has been conducted through either substantial alteration, manufacture or production of goods by the CFC.

Where a new and commercially distinct article has not been brought into existence by the genuine business activities of the CFC, the goods must be substantially altered if they are to obtain the benefit of the exclusion. The words 'substantial' and 'substantially' take their meaning from their context. In every instance in section 447, the use of either of those words means 'large or weighty' or 'considerable, solid or big' ( Palser v Grinling [1948] AC 291 at page 317).

The words 'substantial' and 'substantially' import a notion of relativity. Before a conclusion whether the activities carried out by the CFC's directors and employees should be regarded as substantial, they need to be compared in relation to all of the activities required to bring about the altered state or new identity of the goods.

The test to determine whether or not an article is manufactured was adopted by the High Court per Dixon J. in FC of T v Jack Zinader Pty Ltd (1949) 78 CLR 336 at page 343 and was formulated by Darling J. in McNicol v Pinch (1906) 2 KB 352 at page 352 where his Lordship said:

The essence of making or manufacturing is that what is made shall be a different thing from that out of which it is made.

This test was applied in FC of T v Jax Tyres Pty Limited 85 ATC 4001.

Manufacture brings into existence a commercially distinct article with a new identity. A manufacturing process changes the identity of the goods eg cocoa made into chocolate bars brings into existence goods with a new and different identity.

Manufacture or production does not include packaging or labelling of purchased goods. Repair and maintenance will also not constitute manufacture or production.

A van that has gone through a conversion to a mobile campervan still retains the identity of a van but has new attributes. It is only where the new attributes are of such a degree ie large, weighty, considerable, solid or big that the exclusion from tainted sales income of 'substantial alteration' would be available.

Diagram of First Tier of Test

Second tier of the tests

The second tier of the tests allows a CFC to subcontract or carry out through agents a part of its activities provided the directors or employees conduct a substantial part of its operations relating to the goods . For example, a small part of a manufacturing process may be subcontracted.

The second tier recognises commercial reality that some active businesses find it convenient to subcontract small segments of their genuine business activities that go to manufacturing, producing or substantially altering goods. The activities that the CFC conducts must in comparison be large, weighty, considerable, solid or big, in respect to the overall activities required to bring the new goods into existence or to substantially alter the purchased goods.

Third tier of the production test

The 'substantial production' exclusion from tainted sales income is the only test that has a third tier proposed subsection 447(4B). This tier operates where goods have been produced by the CFC and then used by the CFC in the manufacture of an article with a new identity. The third tier requires that the CFC carry out through its directors and employees:

•

a substantial part of the production; and

•

a substantial part of the manufacture of the item produced by the CFC.

Removal of value added change to goods

The amendments will remove the requirement that the activities of the CFC should substantially increase the market value of the goods. This amendment will focus the first tier of the tests on the physical change of the goods ultimately sold by the CFC. [Proposed subsection 447(4C)]

Commencement date

Proposed paragraphs 447(1)(c) and (d) and proposed subsections 447(4), (4A), (4B), (4C) and (6) will apply to a CFC with effect from the statutory accounting period of that CFC commencing after [introduction date]

Clauses involved in the proposed amendments

Clause 63: amends section 447 of the Act by omitting subsection 447(4) and inserting proposed paragraphs 447(1)(c) and (d), and proposed subsections 447(4), (4A), (4B),(4C) and (6).

Clause 68 *: provides that the amendments will operate from the start of a CFC's statutory accounting period which commences after [date of introduction].

Active Income Test - CGT Roll-Over Relief

Summary of the proposed amendments

The proposed amendment relates to the foreign source income (FSI) measurers in Part X of the Income Tax Assessment Act 1936 (the "Act').

The amendment will:

•

extend the capital gains tax (CGT) roll-over relief which is available when determining whether a controlled foreign company (CFC) passes the active income test so that the relief available is analogous to that available for the purposes of calculating its attributable income; and

•

ensure that an election made for CGT roll-over relief in relation to the disposal of an asset when determining whether a CFC passes the active income test will be binding when calculating the capital gain on a subsequent disposal of that asset.

Background to the legislation

Section 438 of the Act modifies the calculation of gross turnover and passive income derived from the disposal of an asset where a CFC applies for CGT roll-over relief. The relevant roll-over provision is to apply to both the active income test and the calculation of attributable income of the CFC. The gain on the disposal of the asset is excluded from the gross turnover and passive income when applying the active income test. It is also excluded in calculating the attributable income of the CFC.

Subsection 438(2) sets out the modifications to be made where an application is made for CGT roll-over relief. Under the current law, an election for roll-over relief when calculating turnover for the active income test can be made only for disposals of an asset that involve two entities (paragraphs 438(2)(a) and (b)). Thus, roll-over is not available where the disposal of an asset does not involve two entities, e.g., where there is an involuntary disposal of an asset or an asset is lost, damaged or destroyed.

Explanation of the proposed amendments

The proposed amendments will modify two areas of Part X of the Act. The first area relates to section 438 which provides CGT roll-over relief for asset disposals by a CFC when determining whether it passes the active income test. The second relates to section 421 which currently provides for the making of an election by a CFC under the CGT roll-over provisions when calculating its attributable income.

Extension of roll-over relief

In broad terms, existing subsection 438(2) only provides CGT roll-over relief for disposals of an asset that involves two entities.

The amendment will extend that relief to cover asset disposals by a CFC that do not involve two entities (see proposed subsection 438(2A)* in Clause 62 ). If a CFC elects to apply the roll-over provisions to the disposal of a particular asset for the purposes of the active income test, then proposed section 438(2A) will:

•

determine the acquisition cost of any replacement asset (see paragraph 438(2A)(e)),

•

provide that the CFC has not derived any gain or loss in respect of the disposal of the asset (see paragraph 438(2A)(d)).

In situations where a doubt could arise whether an asset has been disposed of by another person, e.g., where there is a redemption or cancellation of shares or units in a unit trust, new subsection 438(2B) in Clause 62 will provide that such cancellations or redemptions do not constitute disposals to another person.

Elections

The CGT roll-over provisions, under which elections can be made, are relevant for the provisions relating to:

•

the active income test; and

•

the calculation of attributable income.

Section 421 outlines how elections are to be made under the CGT roll-over provisions which are relevant for attributable income calculations. These amendments will now provide an equivalent provision in section 438 relating to the making of elections that are relevant to the application of the CGT roll-over provisions for active income test purposes (see new subsection 438(3A) in Clause 62 ).

New subsection 438(3A) has been accorded priority over the existing election provisions contained in section 421. In other words, an election made for the purposes of subsection 438(3A) will also have effect for the purposes of section 421. Section 421 has been amended to provide for this outcome. [Clause 61]

Commencement date

The amendments relating to the extension of roll-over relief made by section 438(2A) will enable taxpayers to benefit from the amendment from the time the accruals tax measures took effect. The accruals tax measures commenced generally from the 1990-91 income year.

The amendments relating to elections made by subsections 438(3A) and subsections 421(2) and (3) take effect from the date of introduction of the Bill into Parliament.

Clauses involved in the proposed amendments

Clause 62: inserts new subsections 438(2A) and (2B) into Part X of the Act to extend the CGT roll-over relief provisions in the active income test to cater for disposals that do not involve two entities.

Clause 62: provides that the amendment made by Clause 61 * in relation to subsections 438(2A) and (2b) will operate from the time the accruals tax measures took effect. The accruals tax measures commenced generally from the 1990-91 income year. The amendment will operate to the taxpayer's advantage.

Clause 61 and 68: inserts new subsections 421(2) and (3), and subsection 438(3A) into Part X of the Act to ensure that a CGT roll-over election made by a CFC on the disposal of an asset, which is relevant for the active income test, will be binding when calculating the capital gain on a subsequent disposal of that asset.

Clause 68: provides that the amendments made by clauses 62 and 62 to subsections 421(2) and (3), and subsection 438(3A) operate from the date of introduction of the Bill into Parliament.

Dividends Paid by Controlled Foreign Companies - Elimination of Double Taxation

Summary of the proposed amendments

The proposed amendments relate to the foreign source income (FSI) measures in Part X of the Income Tax Assessment Act 1936 (the 'Act').

The main amendment will eliminate the double taxation that could arise in the case of the transfer of certain property or services, that are deemed to be dividends, between:

•

an unlisted country controlled foreign company (CFC); and

•

a related listed country CFC.

The double taxation could now arise as the deemed dividend could, in some circumstances, be included twice in the assessable income of resident taxpayers who hold interests in the CFC:

•

once as a dividend (section 459); and

•

again as the taxpayer's share of the income of the CFC that receives the dividend (subparagraph 385(2)(a)(ii)).

The other amendment will align the exclusion (see paragraph 402(2)(d)) from the income of a CFC for certain non-portfolio dividends with the provisions (viz, section 458) that include those dividends directly in the assessable income of resident taxpayers with interests in the CFC.

Background to the legislation

Section 47A of the Act operates to deem certain transfers of property or services made by an unlisted country CFC to a shareholder or an associate of a shareholder to be dividends.

Where the recipient of the deemed dividend is a listed country CFC, section 458 or 459, as the case may be, includes the dividend in a resident taxpayer's assessable income provided that the taxpayer holds interests in both CFCs.

Subparagraph 385(2)(a)(ii) specifies certain amounts that are to be taken into account in calculating the income of a listed country CFC that is to be included in the assessable income of residents who hold interests in that CFC. An amount is so included where that amount:

•

is not listed in the Income Tax Regulations as concessionally taxed income of a listed country; and

•

is not treated as having a source in the listed country; and

•

is not subject to tax in any listed country.

An amount that is deemed to be a dividend under section 47A and taxed to an Australian taxpayer under section 459 may, in certain circumstances, be included in the assessable income of that taxpayer under section 456 as the taxpayer's share of the attributable income of the listed country CFC that received the amount.

For example, where an unlisted country CFC provides an interest-free loan to a listed country CFC, section 47A operates to deem the loan to be a dividend. Where each of the two CFCs is a directly owned subsidiary of an Australian company, section 459 includes the deemed dividend in the assessable income of the Australian company. Subparagraph 385(2)(a)(ii) may also operate to include the amount of that deemed dividend in the attributable income of the listed country CFC. That attributable income would then be included, under section 456, in the assessable income of the resident company. Accordingly, the amount of the dividend would be included twice in the assessable income of the resident company - once under section 459 and again under section 456.

With regard to section 458, it includes in the assessable income of a resident taxpayer amounts of certain 'non-portfolio dividends' (as defined in section 317) paid by an unlisted country CFC to a listed country CFC. This inclusion occurs if the resident taxpayer holds certain interests in both CFCs when the dividend is paid.

Presently, under paragraph 402(2)(d), those non-portfolio dividends are excluded in calculating the attributable income of a CFC that receives the dividends, if a resident taxpayer holds certain interests in the CFC at the end of the accounting period of the CFC in which the dividends are received rather than at the time the dividends are paid.

Explanation of the proposed amendments

The elimination of double taxation will be achieved by providing that the income of a CFC that may be included in the assessable income of a resident under section 456 will not include an amount of a deemed dividend that would be included in the assessable income of that resident under section 459 (paragraph 402(2)(da) in subclause 60(2)).

Paragraph 402(2)(da), in effect, sets out the circumstances in which an amount of a dividend could be included in the assessable income of a resident taxpayer under section 459. It treats those dividends as exempt income of the CFC. Thus, it would not be subject to attribution to resident taxpayers under section 456.

The amendment will also align paragraph 402(2)(d) that excludes certain non-portfolio dividends from the attributable income of a listed country CFC with the provisions of section 458 that subject those dividends, in certain circumstances, to Australian tax. Paragraph 402(2)(d) is being amended to treat the non-portfolio dividends as exempt income of the CFC that received the dividend where the resident taxpayer holds interests in that CFC, as well as in the CFC that paid the dividends, at the time the dividend was paid.

Commencement date

The amendment relating to paragraph 402(2)(da) will enable attributable taxpayers to benefit from the exemption from the time the accruals tax measures took effect. The accruals tax measures commenced generally from the 1990-91 income year.

The amendment relating to paragraph 402(2)(d) operates from the date of introduction of the Bill into Parliament.

Clauses involved in the proposed amendments

Subclause 60(2): inserts new paragraph 402(2)(da) to exclude, from the income of a listed country CFC, certain dividends received by the CFC which have previously been directly attributed to a resident taxpayer under section 459. The subclause also makes a minor technical amendment to the existing provisions of paragraph 402(2)(d).

Subclause 68(6): provides that the provisions of new paragraph 402(2)(da) will apply from the commencement of the accruals tax measures which is generally the 1990-91 income year.

Subclause 68(5): provides that the amendment to paragraph 402(2)(d) will operate from the date of introduction of the Bill into Parliament.

Transitional Finance Shares

Summary of the proposed amendments

The proposed amendments relate to the foreign source income measures in Part X of the Income Tax Assessment Act 1936 (the 'Act').

The amendments will modify the attribution rules under which the attributable income of a controlled foreign company (CFC) 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 a related company which holds certain finance shares.

Background to the legislation

The existing foreign source income measures require taxpayers to include in their assessable income a share of the attributable income of a CFC. The attributable income is, subject to some exceptions, calculated without regard to dividends that may be paid by the CFC. Two of the exceptions provided are for:

•

dividends paid on "eligible finance shares" issued to a subsidiary of an Australian Financial Intermediary, such as a bank; and

•

dividends on a public issue of "widely distributed finance shares".

The dividends paid on these shares are a substitute for interest on loans.

The proposed amendments will provide a similar exception where funds raised by a CFC under an issue of widely distributed finance shares are then provided to a related CFC through a share issue on similar terms. The shares issued are called "transitional finance shares".

The term "transitional finance shares" is used because the benefit of the proposed amendment is to be of limited duration. It will apply to certain finance arrangements that were entered into before the release of the Foreign Source Income Information Paper on 12 April 1989* . The benefits will apply to dividends paid before 1 July 1998 on the transitional finance shares** .

The respective operations of the widely distributed finance share and transitional finance share measures are illustrated in the following diagrams

DIAGRAM 1

Illustration of Widely Distributed Finance Shares amendment

Effect of amendment is to allow a deduction from attributable income of shareholder of Company A for dividends paid on widely distributed finance shares. Company B is a CFC and would be allowed a deduction for interest paid to Company A on the loan from Company A.

DIAGRAM 2

Illustration of proposed Transitional Finance Shares amendment

Effect of proposed amendment would be to also allow a deduction from attributable income of shareholder of Company B for dividends paid on shares that are issued by Company B to Company A on substantially the same terms as widely distributed finance shares issued by Company A.

Why are the changes required?

Unless dividends paid by the CFC on these transitional finance shares are excluded in the calculation of its attributable income, the attributable taxpayers (usually ordinary shareholders who are Australian residents) would be attributed to much of the income of the CFC. Without the exclusion, the attributed income would include the income required to be paid out as dividends to a related CFC which, in turn, pays a like dividend to the shareholders of widely distributed finance shares.

These widely distributed finance share dividends and transitional finance share dividends are, in effect, a substitute for interest on loans.

What will the changes do?

Exclusion of dividends paid on transitional finance shares will ensure that the attributable taxpayers are not attributed income they will never receive.

Transitional finance shares are to be excluded in calculating the proportion of the income of the CFC that is attributed to resident taxpayers. This will be done by excluding those shares from the calculation of a direct attribution interest in a CFC or a controlled foreign trust (CFT) (section 356 of the Act).

Likewise, the shares will be excluded for the purpose of calculating a taxpayer's direct attribution account interest in a company (section 366 of the Act). The purpose of attribution accounts is to ensure that distributions out of previously attributed income are not taxed again on distribution.

In addition, in calculating the attributable income of a company, under sections 384 or 385 of the Act, a deduction is to be allowed under section 394 for dividends paid out on transitional finance shares.

Why are the changes only transitional?

Because of the complexity of this kind of finance arrangement (where funds are channelled through related companies) a permanent change in the law would present unacceptable compliance and administrative problems. A short term amendment to accommodate finance arrangements that are of limited duration and to which taxpayers were already committed is justified on equity grounds. For this reason, the change in the law will be transitional only.

Explanation of the proposed amendments

What are transitional finance shares ?

The conditions required for a share to qualify as a transitional finance share are set out in new section 327B at Clause 56 . They include requirements about:

•

the widely distributed finance shares issued to fund the purchase of the shares being tested;

•

the shares being tested;

•

the timing of dividends paid;

•

the relationship between the company that issues the shares and the company that takes up the shares; and

•

the common ownership of the company that issues the transitional finance shares and the company that takes up the issue by an ultimate parent company.

A sunset clause ensures that the benefits of the amendment cannot be extended beyond 30 June 1998. Only the dividends paid by that date will qualify for the benefits provided by these amendments.

The transitional finance share provision is structured so that shares can be tested as transitional finance shares at any time prior to 1 July 1998. The shares will be tested, for example, at the time section 356 is applied to calculate the attributable taxpayer's direct attribution interest in a CFC. Where all of the tests in section 327B are met the shares will be transitional finance shares at that particular time.

The tests in section 327B are based on continuing compliance so that shares will only qualify as transitional finance shares if:

•

they have not previously failed the tests; and

•

they also pass the tests on their current application.

The shares being tested -

Widely distributed finance shares issued to fund the shares being tested

Transitional finance shares are finance shares issued by a CFC and taken up by another CFC which has itself issued widely distributed finance shares (see diagram 2 above). The conditions for widely distributed finance shares are generally contained in section 327A.

In the transitional finance share measures there are additional conditions about widely distributed finance shares that are issued to raise funds for the acquisition of the transitional finance shares. They are:

•

the widely distributed finance shares must have been issued before the release of the Government's Information Paper on the taxation of Foreign Source Income on 12 April 1989 (IP time);

•

the sole purpose of the issue of widely distributed finance shares must have been to fund the acquisition of the finance shares; and

•

the issue of widely distributed finance shares must also comprise the whole of a common issue of shares by the first company. That is, if there is a split issue of widely distributed finance shares all of the shares covered by each part of the issue must be used to fund the subsequent acquisition of finance shares.

The finance shares must have been issued within a reasonable time after the issue of the widely distributed finance shares by the first company.

The issue of finance shares must also comprise the whole of a common issue of shares by the second company. That is, if there is a split issue of finance shares all of the shares covered by the sub-issue must be funded from the prior issue of widely distributed finance shares.

The rights and obligations of the parties to the two share issues must be substantially similar. In effect, this means that the finance shares will substantially mirror the widely distributed finance shares. Critical factors are the amount and timing of capital subscribed under the share issues and the provisions for redemption of the shares.

In determining whether these are substantially similar, the reasonable costs of the first issue and the time when funds from one of the issues, are available for payment through to the other issue will be taken into account. The timing of dividends paid to shareholders of the first company must also substantially reflect the timing of dividends on the finance share issue.

Finance shares

Before shares are accepted as transitional finance shares they must first fit within the broader categorisation of finance shares. In general, if the dividends paid on shares are substituted for interest on a loan then the shares will be regarded as finance shares. Relevant considerations include:

•

how the amount of dividends on the shares are calculated (eg, as a percentage of the share capital raised under the finance arrangement); and

•

the conditions on the regularity and manner of payment of those dividends.

The timing of dividends paid

There are four conditions about the timing of the accrual and payment of dividends on the finance shares and widely distributed finance shares which ensure that the dividends are paid regularly and in time at all levels. These conditions are applied to dividends that accrued and were paid during the 24 month period prior to the time when the finance shares are tested to see if they qualify as transitional finance shares. The time when the finance shares are tested is called "the test time".

To apply these conditions the dividends (which are a substitute for interest on a loan) are assumed to be interest. In the notes that follow, a reference to interest accruing during a particular period on the transitional finance shares is a reference to the dividends that accumulated during that period on those shares.

The first condition is that the interest accrued at intervals of not more than 12 months.

Example 1

In this example, A to B is the 24 month period prior to the test time. C and D are interest accrual dates which fall between A and B and are not more than 12 months apart.

The second condition is that interest accruing for the 12 month period between 12 and 24 months before the test time was paid not later than 12 months after it accrued.

Example 2

In this example, A to B is the 24 month period prior to the test time. C is the interest accrual date and D is the interest payment date. These dates fall between A and B and are not more than 12 months apart.

The third condition provides a link between the dividends on the widely distributed finance shares and the accrued interest on the transitional finance shares referred to above. Dividends paid on the widely distributed finance shares during the 12 months ending at the test time must be wholly attributable to interest that accrued during the 12 months immediately preceding the time of the dividend payment.

Example 3

In this example, A to B is the 24 month period prior to the test time. C is the interest accrual date and D is the payment date for the widely distributed finance share dividends. These dates fall between A and B and are not more than 12 months apart.

The fourth condition is that the amount of dividends paid on the widely distributed finance shares in the 12 months prior to the test time is approximately equal to the total amount of interest to which the dividends relate.

Common ownership

The company which issues the widely distributed finance shares (the first company) and the company which issues the finance shares (the second company) must be under common ownership. This means that 90% or more of the paid-up capital (excluding the finance share capital) must be beneficially owned, directly or indirectly, by the same ultimate parent company. A tracing mechanism is provided for measuring interests held through one or more intermediate companies.

The following example shows how the tracing mechanism is used to measure common ownership.

Example 4

In this example the first and second offshore companies have 90% common ownership.

There are a number of conditions in the widely distributed finance share provisions of section 327A which require the company that issues the widely distributed finance shares to be a publicly listed company or a subsidiary of a publicly listed company.

There is also a requirement for wide ownership of the shares in the publicly listed company. These are similar to the tests in section 103A of the 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 but do not contain the discretionary powers provided to the Commissioner under that section.

The effect of these conditions, combined with the common ownership requirement for transitional finance shares, is that the company that issues the transitional finance shares will be a public company or a company that is a subsidiary of a public company.

Modification of widely distributed finance shares

It is proposed to modify the widely distributed finance share provisions for the purpose of the transitional finance share measures. The object of the modification is to allow tracing through bare trust arrangements for the purpose of applying the public company test in subsection 327A(2).

The public company test in subsection 327A requires 75 percent or more of the voting, dividend and capital rights for the ordinary shares in a company to be held by not less than 21 entities. Where shares are held on trust by a nominee or other bare trust arrangement the modification will ignore the trustee or nominee and allow the beneficial owner of the voting shares etc. to be counted as one of the entities for the purpose of the test.

This will have two results:

•

The first is that, in the transitional finance share measures, references to "widely distributed finance shares" are to be read as the widely distributed finance share measures in their modified form discussed above.

•

The second result arises where finance shares qualify as transitional finance shares. In that case, the modified tests are applied to determine whether the shares issued by the first company to fund the acquisition of transitional finance shares from the second company are widely distributed finance shares.

Extended meaning of "widely distributed finance shares" - funding of transitional finance shares

Section 327A of the Principal Act, as amended by Taxation Laws Amendment Bill (No.4) 1991, contains the tests for widely distributed finance shares. This section is to be amended to extend the meaning of "widely distributed finance shares" to allow for the modification discussed above where widely distributed finance shares are issued to fund an acquisition of transitional finance shares. New subsection 327A(1A) provides for the modification.

Direct attribution interest in a CFC or CFT

Section 356 of the Act contains the rules for determining an entity's direct attribution interest in a CFC or a CFT.

Transitional finance shares are to be ignored when calculating a direct attribution interest [Clause 57].

Direct attribution account interest in a company

Section 366 of the 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.

Transitional finance shares are not to be included in calculating a direct attribution account interest. [Clause 58]

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

Section 394 of the Act allows a deduction in calculating the attributable income of a CFC for eligible finance share dividends and widely distributed finance share dividends paid by a CFC during a specified time. This 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 or widely distributed finance shares.

The amendments will allow a similar deduction for dividends paid on transitional finance shares [Clause 59] .

Definitions of "transitional finance share" and "transitional finance share dividend" are to be inserted in existing section 317 by [Clause 54] .

Additional notional exempt income - unlisted or listed country CFC

Section 402 of the Principal Act treats certain amounts, in calculating the attributable income of a CFC, as exempt income, including specified non-portfolio dividends. A transitional finance share dividend will be excluded from the classes of non-portfolio dividends referred to in section 402. [Clause 60]

Commencement date

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

With one exception, the foreign source income measures in Part X of the Act will, therefore, always be read in their amended form. However, those amendments are to be disregarded 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 55, 57, 58, 59 and 60. This will avoid any possibility of a retrospective offence. [Clause 74] These amendments will, in general, be of benefit to taxpayers.

Clauses involved in the proposed amendments

Clause 54 : amends section 317 of the Principal Act - the general definition section of Part X - to insert new definitions of 'transitional finance share' and 'transitional finance share dividend'.

Clause 55: will amend section 327A of the Principal Act, as amended by Taxation Laws Amendment Bill (No.4) 1991, to insert new subsection (1A). It modifies the operation of the widely distributed finance share measures where shares are issued to finance an acquisition of transitional finance shares.

Clause 56 : inserts new section 327B after section 327A of the Act. It sets out the requirements for a share to qualify as a transitional finance share.

Clause 57 : includes reference to transitional finance shares in section 356 of the Act - direct attribution interest in a CFC or CFT.

Clause 58 : includes reference to transitional finance shares in section 366 of the Act - direct attribution account interest in a company.

Clause 59 : includes reference to transitional finance shares in section 394 of the Act - notional allowable deduction for eligible finance share dividends, widely distributed finance share dividends and transitional finance share dividends.

Clause 60 : will amend section 402 of the Act so that a transitional finance share dividend will not be treated as notional exempt income.

Clause 68: commencement date.

Clause 74: transitional - Part X record keeping offences.

Taxation of the Income of Life Assurance Companies

Summary of the proposed amendments

The proposed amendments will provide that:

(a)

no part of a life assurance company's income (including foreign income derived other than through a permanent establishment (PE) in another country) arising from its Australian operations is to be exempt from tax on the basis that it relates to policies held by non-residents;

(b)

a life assurance company is liable to tax on that part of its income from a PE in a listed country (i.e., a comparably taxing country) that is not exempt from tax under section 23AH and which does not relate to unrelated non-resident life policy holders; and

(c)

a life assurance company is liable to tax on that part of its income from an unlisted country PE that does not relate to life policies issued to unrelated non-resident life policy holders.

These amendments will have effect from the 1991-92 year of income.

Background to the legislation

Exemption of Foreign Branch Profits of Australian Companies (Section 23AH)

The profits derived by an Australian company from a business carried on through a branch in a listed country are exempt from Australian tax to the extent that those profits have been subject to tax in a listed country and are not eligible designated concession income (section 23AH). This exemption is available to the branch profits of an Australian resident life assurance company.

Exemption of Income Attributable to Certain Policies (Section 112A)

Under the present law, the assessable income of a life assurance company does not include a portion of the income of an "Australian statutory fund" or other fund that is maintained by the company to meet its obligations under policies issued by the fund (section 112A). This provision has the effect that income attributable to investments that cover, amongst other things, life policies issued to unrelated non-resident policy holders by offshore PEs of the life assurance company is not taxed in Australia.

The proportion of the income of a statutory fund which is to be excluded from the assessable income of a life assurance company for a particular income year is to be determined by applying the following formula to the income from that fund's assets:

(calculated liabilities estimated to arise under, amongst other things, eligible non-resident policies in that fund) / (calculated liabilities estimated to arise under all life policies)


Basically, the calculated liabilities estimated to arise under eligible non-resident policies in a statutory fund is the valuation of the amount which that statutory fund will be liable for in respect of those policies. The value of those liabilities will be reduced where the rate of compound interest used by the life assurance company when calculating that liability is less than a rate of 4% (section 114). Similarly, the calculated liabilities estimated to arise under all life policies is the valuation of the amount that the statutory fund will be liable for in respect of all its life policies as adjusted where the rate of compound interest used to calculate that liability is less than a rate of 4%.

An "eligible non-resident policy" is a life assurance policy that is issued by a life assurance company in the course of a business carried on by the company at or through a PE of the company in a foreign country. The policy must also be vested in an entity that is not an associate of the company or an Australian resident who is not treated for the purposes of a double tax agreement between Australia and another country as a resident solely of that other country (subsection 110(1)).

The combined effect of sections 23AH and 112A

A life assurance company which has issued policies to non-residents through a PE in a listed country may be exempt from tax in relation to a larger amount of its income than is appropriate. This is because:

(a)

its comparably taxed profits referable to a PE in a listed country are exempt from tax (section 23AH); and

(b)

the policies issued by that PE to non-residents form part of the denominator and the numerator of the formula used to determine the proportion of the profits of the company (including profits from Australian sources) that are to be exempt from tax.

Example

An Australian statutory fund has calculated liabilities of $50,000 referable to Australian policies and $20,000 referable to life policies issued to unrelated non-residents through a PE in a listed country. The income derived from the assets of the fund during the year of income was $80,000. $50,000 of this income relates to Australian sources and $30,000 was derived through a PE in a listed country and was comparably taxed by that country.

Under section 112A -

•

the assessable income of the life assurance company referable to the income of the fund which was derived through the PE in a listed country would be reduced by:

$30,000 x ($20,000 / ($20,000 + $50,000)) = $8,571.43


The balance, i.e, $21,428.57, will be exempt from tax under section 23AH. That is, the whole of the $30,000 income derived through the PE is exempt. In any event, the whole of the income amount of $30,000 would be exempt from tax under section 23AH.

•

the assessable income of the life insurance company referable to Australian sources would be reduced by:

$50,000 x ($20,000 / ($20,000 + $50,000)) = $14,285.71


Hence, the life insurance company is assessable on only $35,714.29 (i.e., $80,000 - $30,000 - $14,285.71).

Explanation of the proposed amendments

The formula in section 112A for determining the proportion of the income of a statutory fund which is to be excluded from the assessable income of a life assurance company for a particular income year will no longer include a component relating to "eligible non-resident policies". A separate formula is to be inserted in new section 112C for the purposes of determining the proportion of the income of a statutory fund derived from policies issued to eligible non-residents in carrying on a business in a foreign country at or through a PE. This proportion of the income is to be excluded from the assessable income of a life assurance company because it relates to "eligible non-resident policies".

The new formula will apply to each amount of income derived by a life assurance company where that amount was derived (subsection 112C(1)):

(a)

by carrying on a business through a PE of the company in a foreign country;

(b)

from the assets in a fund maintained by the company for the purposes of its life assurance business;

(c)

from assets described in the accounts of the PE business as assets of the PE business; and

(d)

from sources in a foreign country or foreign countries.

In addition, the amount of income which satisfies the above tests is to be reduced to the extent that the assets from which it was derived were not held to cover liabilities referable to policies issued in the course of carrying on the PE business.

A statement from a professionally qualified actuary setting out the calculated liabilities in relation to the life policies issued by the PE, and certifying that the assets shown in the financial statements of the PE are not excessive in relation to those liabilities, would generally be accepted in this regard.

The proportion of each amount which will be exempt from tax is to be determined by applying the following formula (subsection 112C(2)):

Calculated liabilities for eligible non-resident policies / Total calculated liabilities


The calculated liabilities for eligible non-resident policies is the valuation of the amount that the company will be liable for in respect of eligible non-resident policies that were issued in the course of its business carried on through the PE. As at present, the value of those liabilities will be reduced where the rate of compound interest used by the life assurance company when calculating that liability is less than a rate of 4%.

The total calculated liabilities is the valuation of the amount that the company will be liable for in respect of all policies issued in the course of its business carried on through the PE. Similarly, the value of those liabilities will be reduced where the rate of compound interest used by the life assurance company when calculating that liability is less than a rate of 4%.

The above formula will also apply to reduce a 'modified 160Z gain amount' or an 'ordinary 160Z gain amount' (as defined in section 110) if, had the relevant gain been income, section 112C would have applied to that income.

Commencement date

These amendments will apply from the 1991-92 year of income. The decision to apply the amendments with effect from the 1991-92 income year has been taken having regard to the fact that:

•

the relief that would otherwise be provided would be inappropriate; and

•

there is adequate time for making returns of income and payment of taxes for that year.

Clauses involved in the proposed amendments

Clause 21 inserts new section 112C which will exempt a portion of certain amounts of income derived by a life assurance company which is referable to life insurance policies issued in the course of the company's PE business.

Clause 20 ensures that section 112A will no longer apply in relation to eligible non-resident policies by omitting references in that section to those types of policies.

Clause 19 modifies the manner in which the "modified 160Z gain amount" and "ordinary 160Z gain amount" as defined in subsection 110(1) are to be determined. The modification is required to accommodate situations where both section 112C and section 112A are to apply to a gain.

Subclause 65(8) provides that these amendments will apply from the 1991-92 income year.

Chapter 6 Deferral of Initial Payments of Company Tax for 1991-92

Clauses: 76,77,78,79,80,81,82,83, and 84

Overview

Defer the initial payment of income tax for the 1991-92 income year for companies, superannuation funds, approved deposit funds and pooled superannuation trusts (all referred to as companies), from the 28th day of the month following balance date to the 28th day of the month following balance date.

Deferral of Initial Payments of Company Tax for 1991-92

Deferral of Initial Payments of Company Tax for 1991-92

Summary of the proposed amendments

6.1. Part 3 of the Bill will formally defer the time for the initial payment of income tax (IP) for the 1991-92 income year by companies, superannuation funds, approved deposit funds and pooled superannuation trusts (all referred to as companies).

6.2. The affected companies will be those which have a tax liability of $1,000 or more but less than $400,000, and which balance after 31 December 1991, and pay their tax in two instalments.

6.3. The date for the IP will be deferred from the 28th day of the month following balance date to the 28th day of the third month following balance date.

Abbreviations Used in this Chapter

IP = initial payment of company income tax.

FDT = franking deficit tax.

Background to the Legislation

Collection of Tax

6.4. In the Economic Statement of 26 February 1992, similar arrangements to those introduced for the 1990-91 income year for the collection of company tax were announced. The purpose of the new arrangements is to provide relief for small companies by extending the due date for the IP.

6.5. Companies are required to pay their income tax under one of the following methods, depending on their level of tax liability:

Companies with a tax liability of $20,000 or more

6.6. Companies with a notional tax liability of $20,000 or more (and which do not estimate their liability on income of the relevant year to be less than $20,000) are required to make two payments of tax each year. For a company balancing in June, the IP is due on 28 July following balance date (section 221AP of the Income Tax Assessment Act 1936 (the Act)). The IP(sections 221AD, 221AQ and 221AP) is:

•

85% of the notional tax (i.e. the tax payable at the current year rate on the taxable income of the preceding income year);

or

•

85% of the tax which the company estimates will be payable on its taxable income for the income year.

6.7. The balance of the company's total actual tax liability is due on 15 March following the balance date (section 221AZD). If the IP made by a company exceeds the total actual tax liability, the company will receive a refund from the Commissioner unless a debt exists under another taxation law (section 221AZF).

Companies with a tax liability of $1,000 or more but less than $20,000

6.8. Companies with a notional tax liability of $1,000 or more but less than $20,000, or a notional tax of $20,000 or more but which estimate their tax liability for the income year to be in the range $1,000 to $20,000, have two payment options: They may pay in the same way as companies whose tax liability is $20,000 or more (see above notes). Alternatively, they may elect to make a single payment of the total actual tax liability for the income year on 15 December following balance date (section 221AU).

Companies with a tax liability of less than $1,000

6.9. Companies with a tax liability of less than $1,000 are required to make a single payment of their total actual liability for the income year on 15 March following balance date (section 221AT).

Companies with substituted accounting periods

6.10. As explained above, the possible payment dates are 28 July, 15 December and 15 March for companies whose balance date is 30 June. For companies with substituted accounting periods ending on or before 31 May in lieu of the following 30 June, the corresponding payment dates are the 28th day of the first month and the 15th day of the sixth and ninth months following balance date (subject to 28 January being the earliest required payment date). For late balancing companies the corresponding payment dates are within the same timeframe as for early balancing companies, except that the final payment is due no later than 15 June in the year following the year of income (section 221AN).

Why change the law?

6.11. In the Economic Statement of 26 February 1992, the Government announced similar deferral arrangements for the 1991-92 income year as were introduced for the 1990-91 income year. The due date for the initial payment of company tax will be deferred for nine weeks for the 1991-92 income year.

Franking account credits and debits for initial payment of tax

6.12. When a company makes an IP, a franking credit for the adjusted amount of that IP arises on the day it makes its IP (section 160APMA). Further, a franking debit arises where a refund of tax which gave rise to a franking credit, is made (section 160APYBA).

6.13. Special credits and debits arise to life assurance companies to exclude from the franking account, debits and credits in respect of statutory fund income allocated to participating policy holders (sections 160APVBA and 160AQCD).

The Existing Law for Franking Deficit Tax (FDT)

6.14. A company which pays franked dividends in excess of its franking credits in a given year may be liable to pay an amount of FDT. This is essentially a payment required to make good the amount imputed to shareholders which exceeds the amount available to be imputed. The amount of FDT to be paid is calculated based on the amount of the franking deficit and the company tax rate (subsection 160AQJ(1)).

6.15. FDT must be paid on the last day of the month following balance date. For companies balancing in June, payment of FDT is due on 31 July (section 160ARU). This date is three days later than the due date for the IP (see above).

The IP reduces the FDT payable under the current law

6.16. The payment of FDT may be reduced or made unnecessary by the IP (if any) payable by a company where that IP is based on an estimate made by the company. Accordingly, where the FDT due does not exceed the IP, no FDT is payable by the company. Where the FDT due exceeds the IP, the company need only pay the excess (subsection 160AQJ(2)).

Current special rules for life assurance companies

6.17. The reduced amount of FDT required to be paid by life assurance companies as a result of the IP differs from that payable by other companies. The FDT amount payable by life assurance companies is calculated by reference to 80% of the fund component of the company (subsection 160AQJ(2)). The fund component is that part of the taxable income that is subject to concessional tax treatment under Division 8 of Part III of the Act (Life Assurance Companies).

Current franking account debits for reduced FDT

6.18. If the FDT due does not exceed the IP, a franking debit equal to the adjusted amount of the FDT arises (paragraph 160APYC(a)). If the FDT due exceeds the IP, a franking debit equal to the adjusted amount of the IP arises (paragraph 160APYC(b)).

Deferral arrangements will affect FDT payments

6.19. The due date for payment of FDT will not change as a result of Part 3 of the Bill. However, payments of FDT will affect the amount of the IP otherwise due.

Explanation of the Amendments

Nine Week Deferral of IP for 1991-92 Income Year

6.20. The Bill will modify the operation of the Income Tax Assessment Act 1936 (the Act) by extending the time for the affected companies ( see Summary of Proposed Changes), to pay the IP from the 28th day of the month after balance date to the 28th day of the third month after balance date. For companies which balance on 30 June 1992, this means the due date for the IP will be deferred from 28 July to 28 September 1992. [Clause 77]

FDT Reduces the IP

6.21. As mentioned above, a company's FDT is due on the last day of the month following balance date. For companies balancing in June 1992, payment of FDT is required on 31 July 1992.

6.22. Therefore, under the deferral arrangements, FDT will be paid before the IP, rather than after the IP as would normally be the case. Accordingly, the Bill provides for the IP for companies estimating their tax payable to be reduced or made unnecessary by any prior payment of FDT. This ensures that the same total of FDT and IP is paid under both the existing arrangements and the deferral arrangements.

6.23. This reduction of the IP will not in any way affect the calculation of FDT due or franking credits and debits to be made in the franking account.

When will the FDT reduce the IP?

6.24. The IP will be reduced or made unnecessary where a company:

•

makes an estimate of its tax due for the purposes of determining the amount of its IP; and

•

is liable, under the deferral arrangements, to make an IP not later than the 28th day of the third month following balance date; and

•

will pay FDT before giving a notice estimating its taxable income for 1991-92. [Subclause 78(1)]

What if the IP does not exceed the FDT?

6.25. Where the IP due does not exceed the FDT paid, a company will not be required to make the IP. [Subclause 78(2)]

Example 1

6.26. Consider a company which will balance in June 1992 and pay $30,000 FDT on 31 July 1992. If the company's IP due on 28 July will be $25,000, the FDT liability of $30,000 will be reduced to $5,000 under the existing rules. However, under the deferral arrangements, as $30,000 FDT will have already been paid on 31 July, no IP will be due on 28 September.

What if the IP will be greater than the FDT?

6.27. Where the IP due will exceed the FDT paid, a company will be required to pay the difference between the IP and the FDT only. [Subclause 78(3)]

Example 2

6.28. Assume $30,000 FDT will be paid on 31 July 1992 as in Example 1 and the company's IP due will be $50,000 on 28 September 1992. Under the deferral arrangements, the IP will be offset by the FDT paid and reduced to $20,000. Under the existing arrangements, the company would have paid $50,000 in total (i.e. an IP on 28 July of $50,000, and no FDT on 31 July because of the existing offset rules).

Special offset arrangements apply for life assurance companies

6.29. As for the 1990-91 income year, special provisions are required to ensure that life assurance companies pay the same total amount of FDT and IP under the deferral arrangements as they would have under the existing arrangements.

6.30. Where the amount of the IP due does not exceed the FDT paid plus 80% of the fund component (defined as the eligible fund component in subclause 123(6)), the life assurance company is required to pay an amount equal to the eligible fund component on the due date for the IP. [Subclause 78(4)]

6.31. Where the amount of the IP due will exceed the FDT to be paid plus the fund component, the life assurance company will be required to pay the difference between the IP due and the FDT paid. [Subclause 78(5)]

A reduced amount of IP does not affect the calculation of certain thresholds

6.32. The amount of the IP is used to calculate the thresholds which determine whether a company (balancing in June) can:

•

pay its income tax in one payment on 15 March (i.e. where its tax liability is less than $1,000) (section 221AU); or

•

pay its tax :

-

in two payments, an IP on 28 July and a final payment on 15 March (i.e. where its tax liability is between $1,000 and $20,000); or

-

elect to make one payment on 15 December (section 221AT).

6.33. Any reduction or elimination of an IP by a prior payment of FDT as described above will not apply for the purposes of calculating these thresholds. [Clause 79]

Credits where the IP is Reduced by FDT

6.34. Under the existing rules, a company is given credit against any tax assessed for the full amount of an IP made by the company.

6.35. Where the IP made by a company will be reduced, either partly or fully, under the deferral arrangements by a payment of FDT, the company will be given credit against tax assessed as though no reduction had been made. This will ensure that companies are in no way disadvantaged by the deferral arrangements. [Clause 80]

6.36. Where an IP will be made unnecessary by a prior payment of FDT, the credit will arise when the company notifies the Commissioner of its estimated income tax liability (described as a "paragraph 221AQ(1)(a) notice" in the Bill). [Subclause 81(1)]

6.37. Where an IP will be reduced by a prior payment of FDT, the credit will arise when the reduced payment is made. [Subclause 81(2)]

Franking Credits and Debits where FDT is Paid

6.38. As explained in the Background section above, payments of IP and FDT give rise to credits and debits to a company's franking account. Franking account credits enable franked dividends to be paid to shareholders.

The IP is notionally increased for franking account and FDT purposes

6.39. The deferral arrangements are not intended to affect the amount of the franking account credits and debits that arise under sections 160APMA, 160 APVBA, 160APYBA, 160APYC and 160AQCD. They are also not intended to affect the liability for FDT and the consequential offset allowable under section 160AQK.

6.40. To ensure this result, the Bill provides that, for these purposes, the amount of the IP will be taken to be the amount that would have been paid if the IP had been made before any FDT was due. For FDT purposes, this notional increase has a consequential affect on the FDT liability. [Clauses 81 and 82]

Examples

6.41. In the examples used above and assuming the deferred IP is made on 28 September 1992, the franking account will be credited on that day for the adjusted amounts for $25,000 (Example 1) and $50,000 (Example 2). The debits on that day will be the adjusted amounts for $25,000 (Example 1) and $30,000 (Example 2). These are the franking account credits and debits that would have been made under the existing arrangements when the IP was paid and the FDT was offset.

The notional increase in the IP does not affect liability for FDT

6.42. This notional increase in the IP will ensure the FDT and franking account credits and debits are not affected by the deferral. Accordingly, as explained above, a notional increase in the IP for franking account purposes will reduce the FDT otherwise payable. [Clause 82]

6.43. A reduction in FDT under Clause 82 will reduce the franking additional tax payable (section 160ARX of the Act). If the Commissioner had made an assessment as to additional tax payable (section 160ARL of the Act) before the reduction, a refund of the excess franking additional tax can be requested under section 160ARR of the Act.

6.44. The Bill also prevents a company from gaining a refund for the reduction in FDT [Clause 83]. If a company was able to gain a refund in these circumstances, it would pay less tax than under the existing arrangements.

6.45. For the same reason, the operation of the FDT reduction provision as a result of the deferral arrangements, will not give rise to a franking credit under section 160APQA, where an FDT offset entitlement under sections 160AQK or 160AQKA is reduced.

Changed timing for franking credits and debits

6.46. Franking credits and debits that arise because of an IP or payment of FDT arise when the company made its IP. Where, because of a prior payment of FDT, a company will not be required to make an IP, the credits and debits will arise when the company gives the Commissioner its estimate of tax due (i.e. its paragraph 221AQ(1)(a) notice). [Subclause 81(1)]

Commencement date

6.47. The amendments made by Part 3 will commence from the date that the Bill receives the Royal Assent. However, the amendments retrospectively affect payments of company tax for the 1991-92 income year. This retrospectivity does not disadvantage companies and is concessional in nature.

Clauses involved in the proposed amendments

Clause 76: provides for the interpretation of certain terms used in Part 3 of the Bill.

Clause 77 : provides for the deferral of the IP for affected companies to the 28th day of the third month following balance date.

Clause 78 : is called the IP offset provision and provides for the amount of the IP to be made by a company to be reduced by the amount of any prior payment of FDT.

Clause 79 : provides that any reduction of an IP by clause XX does not affect the calculation of the thresholds that determine how a company will pay its income tax liability.

Clause 80 : provides that, where an IP is reduced under clause 78, the credit to be allowed to the company against tax assessed is to be equal to the amount of the IP as though no reduction had been made.

Clause 81 : provides that, for franking credit and debit purposes, the amount of the IP is to be equal to the amount that would have been paid if the IP had been made before the payment of FDT (i.e. as if the deferral had not occurred).

Clause 82 : is called the FDT reduction provision and provides that, for franking account and FDT purposes, the FDT due by a company is to be calculated on the assumption that the amount of the IP is equal to the amount that would have been paid if the IP had been made before the payment of FDT (i.e. as if the deferral had not occurred).

Clause 83: prevents a refund of FDT as a result of the notional increase in the IP for the purposes of Clause 82 .

Clause 84: prevents an additional franking account credit being given if a reduced FDT offset arises from the operation of Clause 82 .

Chapter 7 Exemption from Clawback provisions of Grants or Recoupments made under the Co-operative Research Centres Program

Clauses: 12,13 and 14

Overview

Prevents the application of the research and development (R&D) clawback provisions to certain eligible companies where a grant or recoupment is made by the Commonwealth under the Co-operative Research Centres Program;

Ensures that an eligible company, which is a partner in a partnership designated as a Co-operative Research Centre (CFC), which is eligible for an R&D deduction as a result of expenditure incurred under the Program, is excluded from the application of the R&D clawback provisions; and

Provide that an eligible company which is a partner in a partnership not designated as a CRC, which is eligible for an R&D deduction as a result of expenditure incurred under the Program, is not excluded from the application of the clawback provisions.

Exemption from Clawback provisions of Grants or Recoupments made under the Co-operative Research Centres Program

Exemption from Clawback provisions of Grants or Recoupments made under the Co-operative Research Centres Program

Summary of the proposed changes

7.1. This Bill deals with the clawback provisions which currently apply, under section 73C or 73D, to a grant or recoupment received in relation to expenditure on R&D activities forming or forming part of a particular project carried on by or on behalf of an eligible company.

7.2. The proposed changes will have three important effects. They will:

•

exclude application of the clawback provisions from certain eligible companies where a grant or recoupment is made by the Commonwealth under the Co-operative Research Centres Program (the Program);

•

ensure that an eligible company, which is a partner in a partnership designated as a Co-operative Research Centre (CRC), and eligible for an R&D deduction as a result of expenditure incurred under the Program, is excluded from the application of the R&D clawback provisions; and

•

ensure that an eligible company, which is a partner in a partnership not designated as a CRC and which is eligible for an R&D deduction as a result of expenditure incurred under the Program, is not excluded from the application of the R&D clawback provisions.

7.3. Basically, the new clawback exclusion provisions, when applicable, will ensure that expenditure incurred by an eligible company under the Program is eligible for up to the maximum R&D deduction. The clawback provisions will continue to apply to any grant or recoupment received by a company, which is participating in the Program, from a source outside the Program, in relation to the particular project being undertaken under the Program or any other project. The new arrangements will not apply where a grant or recoupment is made under the Program to a syndicate of jointly registered eligible companies in a situation where the syndicate is a partnership which is not designated as a CRC.

7.4. The amendments in relation to clawback apply to recoupments or grants made on or after 1 July 1991. Those relating to a partnership designated as a CRC apply in relation to expenditure incurred on or after 1 March 1991.

Background to the legislation

Current law applying to grants and recoupments - Sections 73C and 73D.

7.5. Under the existing provisions clawback applies where a grant or recoupment is received by an eligible company in relation to expenditure on R&D activities forming or forming part of a particular project carried on by or on behalf of the company. The clawback provisions operate to reduce the maximum R&D deduction available to the company. Where a company receives a grant or recoupment the rate of R&D deduction is reduced, by the operation of a multiplier, to 100% for the expenditure affected by the multiplier.

7.6. The proposed amendments to sections 73C and 73D will exclude this effect when a grant or recoupment is from the Commonwealth under the Co-operative Research Centres Program.

7.7. These measures are being introduced for Co-operative Research Centres to lift the nation's R&D effort and to increase the involvement of the private sector in this effort. The amendments are intended to encourage individual companies, public research bodies and tertiary institutions to come together to carry out high quality long term strategic research to support the development of internationally competitive industry sectors.

Explanation of the proposed amendments

How will the exclusion from the clawback provisions operate?

7.8. Clawback provisions (sections 73C and 73D) apply where a grant or recoupment is received in relation to expenditure on R&D activities. These amendments will prevent the application of the clawback provisions to an eligible company, other than an eligible company which is a partner in a partnership not designated as a Co-operative Research Centre (CRC), when a grant or recoupment is made by the Commonwealth under the Co-operative Research Centres Program (proposed subsections 73C(2A) and 73D(2A)).

Who will enjoy the exclusion from the clawback provisions?

7.9. The exclusion from the clawback provisions (proposed subsections 73C(2A) and 73D(2A)) will apply only to an eligible company and where:

•

a recoupment or grant is made by or from the Commonwealth;

•

the recoupment or grant is under the Co-operative Research Centres Program; and

•

the company is a partner in a partnership designated as a CRC or the company incurs expenditure directly to a CRC which is not a partnership.

Will partnerships of eligible companies also enjoy the exclusion from the clawback provisions?

7.10. The proposed amendments to section 73B address both the situation that an eligible company is a partner in a partnership designated as a CRC and the situation that an eligible company is a partner in a partnership not so designated. Thus -

•

if the partnership is designated as a CRC under the Program and subsection 73B(3A) applies, a partner which is an eligible company will be able to claim an R&D deduction but will be excluded from the application of the clawback provisions in section 73C or 73D; and

•

the exclusion from the clawback provisions (proposed subsections 73C(2A) and 73D(2A)) does not apply to expenditure taken to have been incurred by a partner where the partnership is not designated as a CRC. This allows a partner in such a partnership a normal deduction under section 73B but clawback will apply where any grant or recoupment, including a grant or recoupment under the Program, is made.

What happens if the Co-operative Research Centre (CRC) is a partnership ?

7.11. If the CRC is a partnership to which subsection 73B(3A) applies, that is a partnership where at least one partner is an eligible company and each other partner is an eligible company or a body corporate that is a registered research agency, or at least one partner is an eligible company and the partnership is designated as a CRC, then an eligible company (but only an eligible company) which is a partner in the CRC will be able to claim a deduction for R&D expenditure calculated in accordance with the subsection. Proposed subsection 73C(2A) or 73D(2A) will apply, as appropriate.

What happens if the CRC is not a partnership ?

7.12. If the CRC is, for example, an unincorporated body other than a partnership or is a company -

•

an eligible company which satisfies the provisions of section 73B will be able to claim a deduction under the section and proposed subsection 73C(2A) or 73D(2A) will apply to exclude the operation of the clawback provisions; or

•

if the eligible company is a partner in a partnership not designated as a CRC which incurs R&D expenditure under the Co-operative Research Centres Program, the company will be able to claim a deduction calculated in accordance with subsection 73B(3A), as amended by proposed paragraph 73B(3A)(da), and proposed subsection 73C(2A) or 73D(2A) will not apply.

Commencement Date

7.13. The amendments in relation to clawback apply in relation to recoupments or grants made on or after 1 July 1991.

7.14. The amendments relating to a partnership designated as a CRC apply in relation to expenditure incurred on or after 1 March 1991.

Clauses involved in the proposed amendments

Clause 12:

•

Enables access to the R&D deduction by an eligible company which is a partner in a partnership comprising at least one such company and designated as a Co-operative Research Centre (CRC) under the Co-operative Research Centres Program.

•

Ensures that an eligible company, which is a partner in a partnership not designated as a CRC, which is eligible for an R&D deduction as a result of expenditure incurred under the Program, is not excluded from the application of the R&D clawback provisions.

Clause 13: Prevents the application of the R&D clawback provisions to certain eligible companies where a recoupment or grant is made by the Commonwealth under the Co-operative Research Centres Program.

Clause 14: Prevents the application of the R&D clawback provisions to certain eligible companies where a non-assessable recoupment or grant is made by the Commonwealth under the Co-operative Research Centres Program.

Chapter 8 Gift Provisions - World Wide Fund for Nature Australia

Clause: 15

Overview

Reflect a change in name for the World Wildlife Fund Australia which is listed in the income tax gift provisions.

Gift Provisions - World Wide Fund for Nature Australia

Gift Provisions - World Wide Fund for Nature Australia

Explanation of the proposed amendment

8.1. On 2 March 1990, the World Wildlife Fund Australia, which is listed under subparagraph 78(1)(a)(xlvii) of the Income Tax Assessment Act 1936, changed its name to the World Wide Fund for Nature Australia.

8.2. The Bill will amend section 78 to reflect this change of name, so that gifts of the value of $2 or more of money or of property purchased within 12 months, made to the World Wide Fund for Nature Australia on or after 2 March 1990 will be tax deductible. [Clause 15].

Chapter 9 Members of the Defence Force Serving in Cambodia

Clauses: 2 and 5

Overview

Exempt from income tax the pay and allowances of members of the Australian Defence Forces allotted for duty with the United Nations Advance Mission in Cambodia and the United National Transitional Authority in Cambodia.

Members of the Defence Force Serving in Cambodia

Members of the Defence Force Serving in Cambodia

Summary of the proposed amendments

9.1. The proposed amendments will exempt from income tax the pay and allowances of members of the Australian Defence Forces (ADF) allotted for duty in Cambodia as a part of the United Nations Advance Mission in Cambodia (UNAMIC) and the United Nations Transitional Authority in Cambodia (UNTAC).

Background to the legislation

9.2. The amendments will exempt from tax the pay and allowances of ADF personnel serving in Cambodia with the United Nations peacekeeping forces (UNAMIC and UNTAC) from 20 October 1991.

Explanation of the proposed amendments

9.3. Section 23AC exempts from income tax the pay and allowances of ADF personnel during a period of operational service in an operational area.

Operational area

9.4. An area covered by the section 23AC exemption is defined as 'an operational area'. The amendment will include Cambodia as an operational area with effect from 20 October 1991. [Subclause 5(d)]

Operational service

9.5. To qualify for the exemption, ADF personnel have to be engaged in operational service in an operational area. To qualify as engaged in operational service, ADF members serving in the new operational area must have a written certificate from the Chief of the Defence Force. This certificate must state that the allotment for duty to the operational area is in respect of service with either of the groups called the United Nations Advance Mission in Cambodia or the United Nations Transitional Authority in Cambodia. The reason for this requirement is to exclude from the exemption ADF personnel who may be allotted for duty in the operational area for reasons unconnected with UNAMIC and UNTAC. [Subclause 5(a)]

Period of operational service

9.6. The exemption will apply for the period of operational service. In relation to service in Cambodia, this period commences on 20 October 1991 and will continue until a termination date is specified by the Chief of the Defence Force. [Subclause 5(d)]

9.7. Paragraph (c) ensures that the existing delegation and review procedures apply to the new operational area. [Subclause 5(c)]

Commencement date

9.8. The amendments to section 23AC apply from the 1991-92 year of income. The amendments will provide relief to affected taxpayers.

Clauses involved in the proposed amendments

Subclause 5(a): amends section 23AC to extend the operational area for the exemption to include Cambodia

Subclause 5(d): amends section 23AC to have effect in relation to Cambodia from 20 October 1991

Subclause 2(1): specifies the commencement date.

Chapter 10 Definition of "Resident" or "Resident of Australia"

Clauses: 2 and 4

Overview

Amend definition "resident" or "resident of Australia" to include as residents Commonwealth public servants who are covered by the new Public Sector Superannuation Scheme (PSS).

Definition of "resident" or "resident of Australia"

Definition of "resident" or "resident of Australia"

Summary of the proposed amendment

10.1. A technical amendment is to be made to the definition of "resident" or "resident of Australia" to include as residents Commonwealth public servants who are covered by the new Public Sector Superannuation Scheme (PSS). Their spouses and children under 16 years of age are also treated as residents.

Background to the legislation

10.2. The existing definition of "resident" or "resident of Australia" contained in subsection 6(1) of the Act, so far as it applies to individuals, prescribes four tests of residency.

10.3. The four tests are:-

(i)

residence according to ordinary concepts;

(ii)

the domicile test;

(iii)

the 183 days test; and*

(iv)

the Commonwealth superannuation test.

10.4. In determining whether or not a natural person is a resident of Australia, the starting point is always whether the individual in question resides in Australia within the ordinary meaning of that expression. However, the satisfaction of any one test is sufficient to render an individual a resident of Australia for Australian income tax purposes.

10.5. The Commonwealth superannuation test (subparagraph 6(1)(a)(iii) of the ITAA) was inserted into the Act in 1939 to include all Commonwealth public servants as residents. This was done by treating as a resident a person who contributes to the Commonwealth Superannuation Scheme (CSS). The spouse or child under 16 of a person who contributes to the CSS is also treated as a resident.

Explanation of the proposed amendments

10.6. The PSS was introduced on 1 July 1990 as a consequence of the passage of the Superannuation Act 1990. The amendment will treat Commonwealth public servants who are members of the PSS in the same way as they would have been treated had they been members of the CSS. A spouse or a child under 16 years of age of a member of the PSS scheme will also be treated as a resident. [Clause 4]

10.7. Under the Commonwealth superannuation test, members of the CSS were treated as residents of Australia even though they may have been posted overseas for a period of time that would otherwise cause them to be considered as non-residents of Australia. The same arrangements will apply to members of the PSS.

Commencement date

10.8. The amendment is to take effect from 1 July 1990 as it is consequential to the introduction of the PSS and gives effect to what has been long accepted as a test of residence in Australia.

Clauses involved in the proposed amendment

Clause 4: Extends the operation of subparagraph 6(a)(iii) to include a member of the PSS scheme.

Clause 2: Specifies the commencement date.

Chapter 11 Technical Amendments to Medicare Levy Exemption Provisions

Clauses: 52,53 and 65

Overview

Amend the Income Tax Assessment Act 1935 (the Act) to make that Act reflect the Government's initial intention to limit a concession on account of holding a health card to blind pensioners and recipients of sickness allowance.

Technical Amendments To Medicare Levy Exemption Provisions

Technical Amendments To Medicare Levy Exemption Provisions

Summary of proposed amendments.

11.1. This Bill will make minor technical amendments to sections 251R and 251U of the Income Tax Assessment Act 1936.

Background to the legislation

Current law

11.2. Section 251T provides that the Medicare Levy is not payable by a "prescribed person". Section 251U sets out a number of categories of persons who are prescribed persons for the purposes of section 251T.

11.3. Paragraph 251U(1)(c) initially referred to the holders of health care cards as being one of the categories of prescribed persons. The original intention was that this paragraph only apply to blind pensioners and recipients of sickness allowance. At the time they were the only persons holding these cards. They did not have to hold the card for the full year and the income of the person or his spouse was not to be taken into account in determining any exemption.

11.4. However, other groups of people in receipt of Social Security benefits have health care cards. As a result these other persons may have inadvertently become entitled to exemption from the Medicare Levy, even though their income level was above the Medicare income threshold.

11.5. This defect was remedied by sections 78 and 85 of Taxation Laws Amendment Act (No.3) of 1991. That Act omitted the existing paragraph 251U(1)(c) and replaced it with paragraphs (c),(ca),(caa) and (cb) which limited the exemption to blind pensioners and recipients of sickness allowance as originally intended. New paragraph 251U(1)(caa) was included as a consequence of changes to the Social Security Act 1991 which took effect from 12 November 1991.

Explanation of the proposed amendments

11.6. Subsections 251R(6A) and 251U(3) entitle an "eligible prescribed person" to a reduction in their Medicare Levy liability to only half of the Levy. An "eligible prescribed person" for these purposes is a person holding a health care card under the old paragraph 251U(1)(c). Accordingly, some people may be entitled to a half Medicare Levy exemption when this was not the Governments intention.

11.7. The amendments in Clauses 52 and 53 propose the removal from subsections 251R(6A) and 251U(3) of any reference to the "old" paragraph 251U(1)(c). These subsections will now refer to the paragraphs inserted by Taxation Laws Amendment Act (No.3) of 1991 (ie. paragraphs 251(1)(c), (ca), (caa) and (cb)).

11.8. The reference to these new paragraph numbers in subsections 251R(6A) and 251U(3) will ensure that the Government's intention - that only blind pensioners and recipients of sickness allowance will be entitled to the relevant exemption - is given effect.

11.9. In considering these proposals reference should also be made to Chapter 15 of the Explanatory Memorandum for Taxation Laws Amendment Act (No.3) of 1991 at pages 165 to 173.

Commencement date.

11.10. The amendments to subsections 251R(6A) and 251U(3) to include a reference to paragraphs 251U(1)(c), (ca) and (cb) are to be retrospective in effect and will apply on or after 1 July 1991. Therefore, these amendments will apply to the 1991-92 income year in full.

11.11. The amendment to subsections 251R(6A) and 251U(3) to include a reference to paragraph 251U(1)(caa) will take effect on or after 12 November 1991.

Clauses involved in the proposed amendments.

Subclause 52(1): amends subsection 251R(6A) to omit a reference to the "old" paragraph 251U(1)(c) and substitute a reference to paragraph 251(1)(c), (ca) and (cb) as inserted by Taxation Laws Amendment Act (No.3) of 1991.

Subclause 52(2): includes in subsection 251R(6A) a reference to paragraph 251(1)(caa) as inserted by Taxation Laws Amendment Act (No.3) of 1991.

Subclause 53(1): amends paragraph 251U(3)(b) to omit a reference to the "old" paragraph 251U(1)(c) and substitute a reference to paragraph 251U(1)(c), (ca) and (cb) as inserted by Taxation Laws Amendment Act (No.3) of 1991.

Subclause 53(2): includes in subsection 251U(3)(b) a reference to paragraph 251(1)(caa) as inserted by Taxation Laws Amendment Act (No.3) of 1991.

Subclause 65(9): provides that the amendments made by subclauses 52(1) and 53(1) will commence on or after 1 July 1991.

Subclause 65(10): provides that the amendments made by subclauses 52(2) and 53(2) will commence on or after 12 November 1991.