senate

Explanatory Memorandum

(Circulated by the authority of the Treasurerthe Hon John Dawkins, M.P.)This Memorandum takes account of amendments made by the House of Representatives to the Bill as introduced.

General Outline and Financial Impact

The Taxation Laws Amendment Bill (No.3) 1993 will amend various Acts (unless otherwise indicated all amendments refer to the Income Tax Assessment Act 1936) by making the following changes:

Fringe Benefits Tax - Amendment to definition of 'stand-by value'

Amends the definition of 'stand-by value' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ('the FBTAA') as it is no longer appropriate to base the stand-by value on the economy air fare of a particular airline. The 'stand-by value' is used in section 33 of the FBTAA which sets out the taxable value of an airline transport fringe benefit

Date of effect: Royal Assent

Proposal announced: Not previously announced

Financial impact: The amendments are not expected to have any significant impact to the revenue

Fringe Benefits Tax - Tax agent's certification

Appeals subsection 71(3) of the Fringe Benefits Tax Assessment Act 1986.

Date of effect: Royal Assent

Proposal announced: Not previously announced

Financial impact: Nil

Amendments to the petroleum mining provisions

Corrects a technical defect in the provisions that authorise deductions for capital expenditure incurred in petroleum mining activities. Contrary to intention, the existing rules allow deductions for expenditure incurred in certain tax-exempt operations. The defect is to be remedied by requiring expenditure to have been incurred for the purpose of producing assessable income.

Date of effect: The amendments apply to expenditure incurred after 7-30pm (by standard time in the ACT) on 21 August 1990, the time from which the defect has existed.

Proposal announced: Announced by the Assistant Treasurer on 4 August 1993.

Financial impact: It is estimated that the amendments will prevent an unintended cost to the revenue not exceeding:

•

in the case of exploration expenditure - $365 million over a minimum of 3 years; and

•

in the case of development expenditure - $693 million over a minimum of 12 years.

Income tax deductions for life assurance companies

Amends the formulas by which some income tax deductions are calculated and apportioned to the various classes of income of life assurance companies. Deemed income under paragraph 275(2)(a) will be excluded from the formulas in section 111C, subsection 113(2) and subsection 116CF(2). Superannuation premiums and the investment component of life assurance policies to which sections 111A and 111AA apply will be included in the formula in subsection 116CF(2).

Date of effect: 1 June 1993.

Proposal announced: Treasurer's Press Release No.48 of 31 May 1993.

Financial impact: There will be a revenue cost in relation to the exclusion of section 275 amounts and a revenue gain in relation to the inclusion of the section 111A and 111AA amounts. However, these amounts cannot be quantified.

Amendments relating to life assurance policies and capital gains

Amends the capital gains tax provisions so that they do not apply to capital gains and losses realised on the disposal of policies of life assurance, or rights under policies of life assurance, by a complying superannuation fund, complying approved deposit fund or a pooled superannuation trust.

Date of effect: The amendments will apply to disposals taking place during or after the year of income in which 1 July 1988 occurred.

Proposal announced: Treasurers Press Release No.76 of 5 July 1993

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

Provisional tax uplift factor

Amends the definition of provisional tax uplift factor so that the factor of 8% used to calculate 1992-93 provisional income is retained for the purpose of calculating 1993-94 provisional income. For later income years a factor of 10% will apply.

Date of effect : The amendment applies to the calculation of provisional tax for the 1993-94 year of income, and for all later years of income.

Proposal announced : Treasurer's press release No 67 of 27 June 1993.

Financial impact : Nil.

Gift provisions - Technical amendment

Reinstates the condition that donations to the Shrine of Remembrance Restoration and Development Trust will be tax deductible only if made before 1 July 1995.

Date of effect: The amendment applies to gifts made on or after 25 November 1992 and before 1 July 1995.

Proposal announced: Not previously announced.

Financial impact: Nil.

Amendments to the imputation system

•

Replaces, as a result of the reduction in the company tax rate from 39% to 33 %, the single franking account in the imputation system with dual franking accounts. This will allow companies to frank dividends with either 39% or 33% imputation credits attached, depending on the rate at which the tax that gave rise to the imputation credit was paid.

•

Amend the Income Tax (Franking Deficit) Act 1987 to reimpose FDT as calculated under section 160AQJ of the Principal Act.

Date of effect: The amendments will apply from the commencement of a company's 1994-95 franking year.

Proposal announced: Prime Minister's 'Investing in the Nation Statement' of 9 February 1993 and confirmed by Treasurer's Press Release No.21 of 25 March 1993.

Financial impact: The estimated overall cost to revenue of the reduction in the company tax rate, with which this measure is associated, is $440m in 1993-94, $1,830m in 1994-95, $1,620m in 1995-96 and $1700m in 1996-97.

Tax concessions for grape growing

Provides a four year write-off for capital expenditure on establishing grape vines in Australia.

Date of effect: The amendments apply to expenditure incurred on or after 1 July 1993 on the establishment of grape vines.

Proposal announced: Not previously announced.

Financial impact: The cost of the amendments is estimated to be

$1.5 million in 1994-95, $3 million in 1995-96 and $4.5 million in 1996-97.

Amendment of the International Agreements Act 1953

Takes a technical correction to Schedule 38 of the Income Tax (International Agreements) Act 1953 to reflect the amended text of subparagraph 1.(b) of Article 4 of the Australia-Vietnam comprehensive double taxation agreement.

Date of effect: The amendment will apply to assessments for the 1992-93 income year and subsequent income years.

Proposal announced : Not previously announced.

Financial impact: Nil.

Amendment of the Occupational Superannuation Standards Act 1987

Amends the Occupational Superannuation Standards Act 1987 (OSS Act) to allow payments of shortfall components prescribed in the Superannuation Guarantee (Administration) Act 1992 to be accepted by complying approved deposit funds.

Date of effect: Royal Assent

Proposal announced: Not previously announced.

Financial impact: No significant impact on the revenue.

Petroleum Resource Rent Tax amendments

•

Amends the Petroleum Resource Rent Tax Assessment Act 1987 as follows:

•

Extends the time for lodgment of a PRRT return and expenditure transfer notices.

•

Treats transfers of part of a taxpayer's interest in a project in the same way as transfers of a taxpayer's whole interest.

•

Enables transfer of exploration expenditure incurred in the financial year a person abandons a petroleum project to be absorbed by receipts from other projects.

•

Enables transfer of exploration expenditure incurred in the financial year a person farms into a project to be absorbed by receipts derived by them, or by another company in the same wholly-owned company group, from other projects.

Date of effect: The first three amendments will apply from 1 July 1993, the other will apply from 1 July 1990.

Proposal announced: 1993-94 Budget, 17 August 1993.

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

Sales Tax: Application of penalties

The proposed amendment will clarify the extent to which penalties can apply to acts or omissions that happen after the introduction of amendments of the sales tax law in the Parliament but before they receive the Royal Assent.

Date of effect: 26 October 1993

Proposal announced: By Assistant Treasurer's Press Release on

21 October 1993.

Financial impact: Nil, as the amendment makes no change to the effect of the existing law.

Sales Tax exemption for the RSPCA and child care services

•

Provides exemption from sales tax for goods used mainly in inspectorial and shelter activities for the Royal Society for the Prevention of Cruelty to Animals (RSPCA).

•

Provides a credit for sales tax paid on goods purchased and used mainly in the inspectorial and shelter activities of the RSPCA on or after 13 March 1993 and before the receipt of the Royal Assent for this Bill.

•

Provides exemption from sales tax for goods used mainly by certain providers of child care services (other than employers sponsored centres), if the providers of the care are eligible to receive child care funding from a Commonwealth, State or Territory government or are approved by the Minister for Family Services.

•

Provides exemption from sales tax for goods used mainly be bodies which coordinate family day care, if the bodies are eligible to receive child care funding from a Commonwealth, State or Territory or are approved by the Minister for Family Services.

Date of effect: Royal Assent.

Proposals announced:

RSPCA: 1993-94 Budget, 17 August 1993

Child care services: Prime Minister's "Investing in the Nation Statement" of 9 February 1993.

Financial impact:

RSPCA: The cost of the amendments is estimated to be approximately $0.5 million per annum. In addition, there will be refunds of tax paid from 13 March 1993 to 30 June 1993.

Child care services: The cost of the amendments is estimated to be $10 million per annum.

Superannuation Guarantee shortfalls

•

Amends the Superannuation Guarantee (Administration) Act 1992 to allow a superannuation guarantee shortfall component to be paid into a complying approved deposit fund (ADF).

•

Amends the Income Tax Assessment Act 1936 to ensure that any shortfall component received by a complying ADF is a taxable contribution

Date of effect: Royal Assent.

Proposal announced: Not previously announced.

Financial impact: Nil.

Amendment of the Superannuation Industry (Supervision) Act 1993

Amends the Superannuation Industry (Supervision) Bill 1993 (SIS Bill) to allow payments of shortfall components prescribed in the Superannuation Guarantee (Administration) Act 1992 to be accepted by complying approved deposit funds.

Date of effect: On commencement of Part 3 of the SIS Bill, or the day after this Bill receives the Royal Assent, whichever is the later.

Proposal announced: Not previously announced.

Financial impact: No significant impact on the revenue.

Deferral of initial payments of company tax for 1993-94

Defers the initial payment of income tax for the 1993-94 income year for companies, superannuation funds, approved deposit funds and pooled superannuation trusts (all referred to as companies), for two months to the 28th day of the third month following balance date.

Date of effect: The initial payment of income tax of affected companies for the 1993-94 income year.

Proposal announced: 1993-94 Budget, 17 August 1993.

Financial impact: There will be no long term impact on revenue. However, revenue of approximately $10m from the initial payments of company tax (for companies which balance in April and May), will be deferred from the financial year ending 30 June 1994.

Amendments related to tourism industry organisations

•

Amends the Income Tax Assessment Act 1936 so that the income of a non-profit society or association established for the purpose of promoting the development of tourism will be exempt from income tax.

•

Amends the Fringe Benefits Tax Assessment Act 1986 to enable such a non-profit society or association to obtain a rebate of a portion of its fringe benefits tax liability.

Date of effect: Income tax amendments apply to income derived on or after 1 July 1993. Fringe benefits tax amendments commence on 1 April 1994.

Proposal announced: 11 March 1993 (income tax amendments); and

17 August 1993 (fringe benefits tax amendments).

Financial impact: Nil.

Minor technical amendments

Makes consequential amendments to the Income Tax Assessment Act 1936, the Taxation (Interest on Overpayments) Act 1983 and the Crimes (Taxation Offences) Act 1980 which are required following the simplification of the Prescribed Payments System and the removal of the Commissioner's priority in respect of debts for unremitted amounts.

Date of effect : Varied.

Proposal announced : Not announced.

Financial impact : The financial impact of the amendments is not significant.

Chapter 1 FRINGE BENEFITS TAX - AMENDMENT TO DEFINITION OF 'STAND-BY VALUE'

Overview

1.1 The Bill will amend the definition of 'stand-by value' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). This term is used in the calculation of the taxable value of an airline transport fringe benefit. The method for determining this value is set out in section 33 of the FBTAA.

Summary of amendments

Purpose of amendment

1.2 Under that part of the definition of 'stand-by value' in subsection 136(1) of the FBTAA which covers travel over a domestic route, the 'stand-by value' is calculated by reference to the 'economy air fare' of the provider of the service where flights are scheduled. Where flights are not scheduled, the 'stand-by value' is calculated by reference to the economy air fare charged by Australian Airlines.

1.3 The amendments will update the definition to reflect that, in a deregulated airline industry, no particular airline will be specified for valuation purposes. The amendment will also ensure that where an airline has a published economy air fare which differs in value from a non-published economy air fare, it is only the published economy air fare which is used for this definition.

Date of effect

1.4 The amendment applies to benefits provided on or after the date the Bill receives Royal Assent [Clause 10] .

Background to the legislation

1.5 Under section 32 of the FBTAA, an airline transport fringe benefit arises where an employer (being an airline operator or travel agent) provides transport to an employee or an associate of an employee and the transport is provided in respect of the employment of that employee. The transport provided by an employer who is an airline operator need not be on a flight of that operator.

1.6 This section requires that the transport that is provided must be subject to the stand-by restrictions that usually apply in relation to the provision of airline transport to employees in the airline industry. Under these restrictions, the stand-by travel rights of an employee come behind those of members of the general public.

1.7 Under section 33 of the FBTAA the taxable value of an airline transport fringe benefit in relation to a year of income is the stand-by value of the transport provided less any amount contributed by the employee towards that benefit.

1.8 'Stand-by value' is a term defined in subsection 136(1) of the FBTAA. Under the definition, rules apply for calculating stand-by values according to whether the relevant flight is over a domestic or international route. It is only that part of the definition that applies to domestic flights that is to be amended by this Bill.

1.9 Under the part of the definition of 'stand-by value' which covers travel over a domestic route, the 'stand-by value' is calculated by reference to 'economy air fare'. In the case of scheduled flights, the 'stand-by value' is based on a percentage (i.e. 37.5%) of the economy air fare of the provider of the service. In the case of flights which are not scheduled, the value is based on a percentage (i.e. 37.5%) of the economy air fare charged by Australian Airlines over that route (or a combination of services operated by Australian Airlines over that route), and if Australian Airlines do not operate a service over that route, a percentage (i.e. 37.5%) of the economy air fare of a carrier (or combination of carriers) which operate a service (or services) over that route.

1.10 In any other case, (i.e. no scheduled service is operated by any passenger air service) the stand-by value is a percentage (i.e. 75%) of the notional value at the time the benefit was provided. The notional value is the amount the recipient could reasonably expect to pay the provider for the transport under an arm's length transaction.

Explanation of the amendments

1.11 The definition of 'stand-by value' in subsection 136(1) of the FBTAA will be amended to change the method of working out the taxable value of a domestic airline transport fringe benefit. [Clause 8]. The stand-by value will be based on the lowest publicly advertised economy air fare of an airline (or airlines in the case of a combination of flights).

1.12 The amended definition reflects that an airline may offer more than one economy air fare, one which may be publicly advertised and one which is not. The amendments also ensure that the 'stand-by value' is not calculated by reference to the economy air fares of a particular airline.

1.13 Paragraph (a) of the definition of 'stand-by value' will be amended so that:

•

if the flight is a scheduled flight, the stand-by value is 37.5% of the lowest publicly advertised economy air fare charged by the provider at the comparison time (i.e. the time the benefit was provided);

•

if the flight is not scheduled and another carrier or other carriers operate a scheduled passenger air service over that route at or about the comparison time, the stand-by value is 37.5% of the lowest publicly advertised economy air fare charged by a carrier operating a scheduled flight over that route at the comparison time;

•

if the transport provided is not on a scheduled flight and no carrier operates a scheduled passenger air service over that route at or about the comparison time, or a combination of scheduled flights operated by any carrier or carriers at or about the comparison time would enable a person to travel over a route, the stand-by value is 37.5% of the lowest combination of publicly advertised economy air fares charged by carriers at or about the comparison time in respect to travel provided over that route;

•

in any other case, the stand-by value is 75% of the notional value at the comparison time of the transport provided. [Clause 9] .

Chapter 2 FRINGE BENEFITS TAX - TAX AGENT'S CERTIFICATION

Overview

2.1 This Bill will repeal subsection 71(3) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Summary of amendments

Purpose of the amendments

2.2 This Bill will repeal subsection 71(3) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) which requires that an employer who furnishes a fringe benefits tax return without a tax agent's certificate is to provide certain information in a prescribed form [Clause 11] .

2.3 Subsection 71(3) will be repealed as it has been decided that it is no longer necessary to provide this information with the return.

2.4 Date of effect: The amendment applies on or after the date the Bill receives Royal Assent.

Background to the legislation

2.5 Subsection 71(3) of the FBTAA requires an employer who furnishes a fringe benefits tax return without a tax agent's certificate to provide, on the form which was prescribed at subregulation 5(2) of the Fringe Benefits Tax Regulations, details of sources of information used in compiling the return

2.6 It was decided to dispense with the requirement to provide this information with the return. Regulation 5 and the relevant part of the form in Schedule 1 of the Regulations were amended accordingly.

Explanation of the amendments

2.7 This Bill completes the process of removing the requirement to provide details of sources of information used in compiling a return by repealing subsection 71(3) [Clause 12] .

Chapter 3 AMENDMENTS TO THE PETROLEUM MINING PROVISIONS

Overview

A. 1 This Bill proposes to amend the income tax provisions that provide deductions for exploration and development expenditure incurred in petroleum mining activities. The amendments will prevent deductions for expenditure incurred for the purpose of deriving exempt income

[Clause 14] .

Summary of the amendments

Purpose of the amendments

3.2 Division 10AA authorises deductions for capital expenditure incurred in exploring for petroleum and in developing and operating a petroleum field.

3.3 The intention of these petroleum mining provisions is to allow deductions only if the expenditure is incurred for the purposes of producing assessable income. However, amendments to the provisions that commenced 21 August 1990 have created a loophole which enables deductions to be claimed for expenditure incurred for the purpose of producing exempt income.

3.4 Generally, all income derived by resident taxpayers is assessable, whether derived in Australia or elsewhere. One exception relates to income derived by resident companies in carrying on a business in "listed" countries (broadly, countries with comparable rates of tax to Australia's).

3.5 Under the loophole, Australian petroleum mining companies are able to claim deductions for exploration and development expenditure incurred in petroleum mining activities conducted in a listed country, even though the income derived from those activities is exempt. These deductions can then be used to reduce tax on assessable income derived from other sources.

3.6 Accordingly, the petroleum mining provisions are to be amended so that deductions are allowable only if expenditure is incurred for the purpose of producing assessable income.

3.7 Date of Effect: The amendments apply to expenditure incurred after 7-30pm (by standard time in the ACT) on 21 August 1990, the commencement time of the amendments that gave rise to the technical defect.

Background to the legislation

3.8 The petroleum mining provisions [Division 10AA] provide the basis of deduction of expenditure on exploration or prospecting activities and capital expenditure on developing and operating a petroleum field.

3.9 Broadly, exploration and prospecting expenditure is deductible in full in the year it is incurred [section 124AH]. Capital expenditure incurred in developing and operating a petroleum field ("allowable capital expenditure") is evenly deductible over the lesser of the number of years in the life of the field or 10 years [section 124ADG].

3.10 Until 21 August 1990, deductions were restricted to expenditure incurred in respect of activities conducted in Australia. A similar restriction applied under a number of other capital allowances that provide deductions for capital expenditure, including the general mining and quarrying provisions (which operate similarly to the petroleum mining provisions).

3.11 These restrictions were removed because it was no longer considered appropriate to discriminate between domestic and foreign source income; that is, foreign sourced income was to be taxed on the same basis as income derived from domestic sources.

3.12 In removing the restrictions, it was always intended that the deductions would be available only if expenditure was incurred for the purpose of producing assessable. This intention was clearly stated in the 1990-91 Budget announcement of the removal of the restrictions, and in both the Second Reading Speech and the Explanatory Memorandum on Taxation Laws Amendment Act (No.6) 1990, which introduced the amendments removing the restriction. Relevant extracts from these documents are at the Appendix to this chapter.

3.13 Nevertheless, this assessable income requirement was inadvertently not included in the amendments as they applied to the petroleum mining provisions. Unlike the general mining provisions, there has never been such a requirement in the petroleum mining provisions. The historical reason for this is that income from carrying on petroleum mining operations in Australia has never been tax-exempt. By comparison, the requirement was necessary for the general mining provisions because of the former exemption for income from mining gold in Australia.

3.14 Not all income derived by resident taxpayers is assessable. In particular, income derived by Australian companies in carrying on a business in certain "listed" countries is exempt from tax [section 23AH]. Broadly, listed countries are those that have comparable rates of tax to Australia's. There are some 60 listed countries. Australian petroleum mining companies have been quite active in some, including: Canada, China, Malaysia, New Zealand, the Philippines, Papua New Guinea and the United States of America.

Explanation of the amendments

3.15 The deficiency in the petroleum mining provisions which allows deductions for expenditure incurred for the purposes of deriving exempt income is to be remedied by inserting a requirement that expenditure be incurred for the purpose of gaining or producing assessable income.

Allowable capital expenditure

3.16 To qualify for deduction, capital expenditure on the development and operation of a petroleum field must be incurred in carrying on prescribed petroleum operations [subsection 124AA(2)].

3.17 Under the existing rules, prescribed petroleum operations are defined as: mining operations for the purpose of obtaining petroleum [subsection 124(1) definition].

3.18 This definition is to be amended by adding a requirement that such mining operations be operations carried on for the purpose of gaining or producing assessable income [Clause 15] .

Cash bid payments

3.19 Section 124ABA deals with cash bidding payments for exploration permits and production licences granted under the Petroleum (Submerged Lands) Act 1967 (the Petroleum Act) or under a corresponding law of a State or the Northern Territory. These payments are treated as allowable capital expenditure upon the grant of a production licence or, if the expenditure is incurred after the licence has been granted, at the time of the payment.

3.20 As well, payments made to a government of a foreign country can qualify if made under a law of that country that has been prescribed as being equivalent in relevant respects to the Petroleum Act.

3.21 At the moment, there is no requirement that payments covered by section 124ABA be in relation to assessable income producing activities. Accordingly, the subsection 124ABA(6) definitions of "licence cash bidding payment" and "permit cash bidding payment" are to be amended to require that the payments be made either in carrying on prescribed mining operations or for the purpose of exploring or prospecting for petroleum obtainable by prescribed mining operations [Clause 16] .

Exploration and prospecting expenditure

3.22 The existing provisions allow deductions for expenditure incurred on exploration or prospecting for the purpose of discovering petroleum [subsection 124AH(1)].

3.23 Subsection 124AH(1) is to be amended so that deductions are allowable only if expenditure is incurred for the purpose of discovering petroleum obtainable by prescribed petroleum operations [Clause 17] . This amendment will, with the changed meaning of prescribed petroleum operations outlined above, effectively require that expenditure on exploration and prospecting for petroleum be for the purpose of producing assessable income.

3.24 Clause 17 will also make a corresponding amendment to subparagraph 124AH(4C)(b)(i). Subsection 124AH(4C) is a safeguarding measure which denies a taxpayer a deduction for exploration and prospecting expenditure unless the Commissioner of Taxation is satisfied that the taxpayer is, broadly speaking, either a bona fide petroleum miner [paragraph 124AH(4C)(a)] or a bona fide explorer for petroleum [subparagraph 124AH(4C)(b)(i)].

Application of the amendments

3.25 The amendments apply to expenditure incurred after 7-30 p.m., by standard time in the ACT, on 21 August 1990. This is the time from which deductions under the petroleum mining provisions became available for expenditure on operations outside Australia [Clause 18] .

APPENDIX

Amendments to the Petroleum Mining Provisions

Extracts from documents outlining amendments to extend deductions under the petroleum mining provisions to operations conducted outside Australia

1990-91 Budget:

"As part of the process of achieving more equality in the treatment of Australian and foreign income producing activities, the Government has decided to allow these deductions against assessable foreign source income for capital expenditures made after 21 August 1990. In particular, the Government has decided to...extend the deductions for mining and petroleum activities in Australia provided by Divisions 10, 10AAA and 10AA of Part III to similar foreign activities that generate assessable income" [Budget Paper No. 1, 1990-91, 4.10] .

Second Reading Speech on the amending Act, Taxation Laws Amendment Act (No.6) 1990:

"Other amendments contained in this Bill will...implement the Budget announcement to extend the deductions for certain capital expenditures of particular activities in Australia to similar offshore activities that generate assessable income" [page 1] ; and

"In particular, the Bill will extend, in relation to foreign activities that generate assessable income... the deductions relating to mining and petroleum activities in Australia" [page 5] .

Explanatory Memorandum to Taxation Laws Amendment Act (No. 6) 1990:

"The amendments proposed in this Bill will extend the scope of this Division to expenditure incurred after 7.30pm EST on 21 August 1990 by Australian residents in relation to operations out of Australia provided the operations are conducted for the purpose of producing assessable income" [page 19] .

Chapter 4 DEDUCTIONS ALLOWABLE TO LIFE ASSURANCE COMPANIES

Overview

4.1 The formulas by which some deductions are calculated and apportioned between the various classes of income of a life assurance company will be amended to exclude the section 275 deemed income component. The subsection 116CF(2) apportionment formula will be amended to include sections 111A and 111AA premium amounts [Clause 19] .

Summary of amendments

Formulas which calculate deductions

4.2 Sections 111C and 113 contain formulas to determine the extent to which some deductions or expenditures are allowable to a life assurance company.

4.3 The amendments will exclude amounts transferred to life assurance companies under paragraph 275(2)(a) of the Act from the formulas set out in section 111C and subsection 113(2). The amendments apply to amounts transferred under agreements entered into after 31 May 1993.

Formula which apportions allowable deductions to the various classes of income of life assurance companies

4.4 Deductions which are allowable to a life assurance company and which do not relate exclusively to a particular class of assessable income derived by the life assurance company are apportioned to the various classes of assessable income by a formula in subsection 116CF(2). This provision is to be amended in two respects.

4.5 The first amendment will exclude amounts transferred under paragraph 275(2)(a) from the subsection 116CF(2) formula.

4.6 The second amendment will include superannuation premiums to which section 111A applies, and the investment component of life assurance premiums to which section 111AA applies, in the subsection 116CF(2) formula.

4.7 These amendments will apply to relevant premiums received after 31 May 1993 or to amounts transferred under agreements entered into after that date.

Background to the legislation

4.8 Life assurance companies, unlike most other taxpayers, have separate classes of assessable income arising from the various types of business in which they are engaged. There are four classes of income, each taxed at a different rate. The relevant classes and rates of tax are:

•

Non-complying superannuation class - assessable at 47%

•

Complying superannuation and rollover annuity class - assessable at 15%

•

Accident disability/residual life assurance class - assessable at 39%

•

Non fund class:

-

non-mutual company - assessable at 33%

-

mutual company - assessable at 39%

4.9 These unique factors make it necessary to allocate or apportion deductions to the particular class of assessable income so that the overall tax liability of the company may be determined. This calculation and apportionment of some deductions is achieved through formulas in the tax law.

Reduction of deductions not exclusively related to producing assessable income

4.10 Section 111C reduces certain deductions that would otherwise be allowable to a life assurance company. The reduction made by the formula in this section excludes that part of the deduction that is attributable to deriving exempt income of a life assurance company and, for this purpose, most premium income is treated as assessable income.

4.11 The formula in section 111C is;

Deduction * Assessable income/Total income


4.12 "Assessable income" is the total assessable income of the company. "Total income" is total assessable income plus all exempt income.

4.13 Section 111C does not operate to reduce deductions that are either;

(a)

allowable under subsection 51(1) or section 113; or

(b)

expenses that relate exclusively to the assessable income of a life assurance company.

4.14 Deductions that come within section 111C are those that are allowable under specific provisions of the tax law and that do not come within (a) or (b) above; for example, deductions for gifts under section 78 or subscriptions under section 73.

Expenditure incurred in the general management of the business of a life assurance company

4.15 General management expenses of a life assurance company are not incurred in relation to a specific class of assessable income or exempt income. In these circumstances, it may often be very difficult for a life assurance company to calculate the extent to which much of this expenditure would be deductible.

4.16 Section 113 of the Act provides the means by which a deduction may be calculated for the general management expenses of a life assurance company.

4.17 A life assurance company may elect that its deduction for general management expenses be calculated on the basis set out in subsection 113(1). In that case, the deduction is calculated by reference to the extent that the expenditure was incurred in gaining or producing assessable income. This basis operates in a similar fashion to subsection 51(1). The premium income to which sections 111A and 111AA apply is deemed to be assessable income for the purposes of determining the deduction allowable under subsection 113(1).

4.18 Unless a life assurance company makes the election in subsection 113(1), expenditure incurred in the general management of a life assurance company is deductible only to the extent allowed by the formula in subsection 113(2), that is:

General management expenditure * Assessable income/Total income


4.19 "Assessable income" is the total assessable income of the company (which includes premium income to which sections 111A and 111AA apply). "Total income" is all the income derived by a life assurance company including exempt income.

4.20 Expenses that are of a capital nature, are exclusively incurred in gaining assessable income or are exclusively incurred in gaining exempt income are not general management expenses for the purposes of section 113.

Allocation of deductions

4.21 If a deduction relates exclusively to a particular class of assessable income that deduction is allocated and allowed against that class of assessable income under subsection 116CF(1).

4.22 Where a deduction does not relate exclusively to a particular class of assessable income, subsection 116CF(2) provides a formula for allocating that deduction among the various classes of assessable income.

4.23 The formula in subsection 116CF(2) that allocates deductions is:

Residual current deductions * Income of class/Total income


4.24 "Residual current deductions" is the total of expense deductions not dealt with by subsection 116CF(1). "Income of class" is the assessable income of the relevant class (excluding capital gains) and "Total income" is the total assessable income (excluding capital gains) of all classes of assessable income of the company.

Anomalies in the operation of the formulas

4.25 Some anomalies in the operation and effect of these formulas have now been identified.

4.26 One anomaly is caused by the inclusion in the relevant formulas of amounts deemed to be income under section 275 of the Act. Section 275 allows the contributions tax liability of a complying superannuation fund or of a complying approved deposit fund to be transferred to a life assurance company. This transfer facility was instituted for the administrative ease of small superannuation funds. The transfer is achieved by excluding an agreed amount from the assessable income of the relevant fund and including that amount in the assessable income of the life assurance company. These amounts then form part of the assessable income of a life assurance company for the purposes of the formulas in section 111C, subsection 113(2) and subsection 116CF(2).

4.27 Representatives of the life assurance industry have indicated that virtually no expenses are incurred in relation to section 275 transfers. Their inclusion in the formulas distorts the calculation and apportionment of deductions so that more is directed to the lower taxed superannuation class of assessable income of life assurance companies. This leads to a reduction in the tax value of the deductions of life assurance companies. The amendments seek to overcome this anomaly by excluding section 275 transfer amounts from the formulas.

4.28 Another anomaly arises from including superannuation premiums and the investment component of life assurance premiums in the section 111C and subsection 113(2) formulas but not including these amounts in the subsection 116CF(2) formula. Including these premiums in the first two formulas results in a greater proportion of expenditure being deductible to a life assurance company (and this is the intended result). However, in apportioning the increased deductions according to the subsection 116CF(2) formula no account is taken of the superannuation premiums or the investment component of life assurance premiums. Generally, premium receipts from superannuation policies significantly exceed receipts from ordinary life policies. By omitting these premiums from the formula, a larger proportion of "residual current deductions" is allocated to a more highly taxed class of assessable income. This leads to an unintended increase in the tax value of the deductions allowable to a life assurance company. The amendments seek to correct this anomaly.

Explanation of the amendments

4.29 The proposed amendments will provide that amounts transferred under paragraph 275(2)(a) of the Act are not included in the formulas which determine deductions under section 111C and subsection 113(2) and allocate those deductions to the various classes of assessable income under subsection 116CF(2) [ Clauses 20, 21 and 22] .

4.30 Excluding paragraph 275(2)(a) amounts from these formulas puts a life assurance company in the same position it would have been in had it not accepted a section 275 transfer.

4.31 The amendments to exclude the paragraph 275(2)(a) transferred amounts apply only to amounts that were agreed to be transferred after the date on which the proposed amendments were announced - that is, after 31 May 1993 [Clause 23] .

4.32 The amendments will include superannuation premiums to which section 111A applies, and the investment component of life assurance premiums to which section 111AA applies, in the formula in subsection 116CF(2). This measure will ensure that the "residual current deductions" are apportioned more correctly across the classes of assessable income of a life assurance company [ Clause 22] .

4.33 The amendments to include the superannuation premiums and the investment component of life assurance premiums in the subsection 116CF(2) formula will apply to premiums received after the date on which the proposed amendments were announced - after 31 May 1993 [Clause 23] .

Chapter 5 LIFE ASSURANCE POLICIES AND CAPITAL GAINS

Overview

5.1 The Bill will amend the capital gains tax provisions so that they do not apply to gains or losses on the disposal of life assurance policies held by complying superannuation funds, complying approved deposit funds or pooled superannuation trusts [Clause 24] .

Summary of the proposed amendments

Purpose of the amendments

5.2 The Bill proposes an amendment which will exclude from the capital gains tax provisions gains and losses realised on the disposal of life assurance policies by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust.

Date of effect

5.3 This amendment will apply to disposals of life assurance policies taking place in the year of income in which 1 July 1988 occurred, and subsequent years of income. It will therefore apply with effect from the income year in which the current basis of taxing superannuation and related business commenced.

Background to the legislation

5.4 The provisions relating to capital gains and losses in Part IIIA operate by taxing capital gains and losses realised on the disposal of assets. Section 160M generally provides that, for the purposes of the capital gains and losses (CGT) provisions, a disposal of an asset occurs where a change takes place in the ownership of the asset.

5.5 Section 160ZZI relates specifically to the application of the CGT provisions to the disposal of policies of life assurance.

5.6 Subsection 160ZZI(2) provides a general exemption from CGT for gains and losses realised on the disposal of policies of life assurance, or rights under policies of life assurance. This general exemption is limited by subsection 160ZZI(3) as being available only where the person making the disposal is the "original beneficial owner" of the policy (or rights under the policy) or a person who did not acquire the rights or interest for money or other consideration.

5.7 Subsection 160ZZI(4) specifies that certain acts, transactions or events will result in the disposal of a policy of life assurance, and is expressed to apply "without limiting the generality of section 160M". Subsection 160ZZI(4) merely clarifies the application of section 160M and does not have the effect of limiting "disposals" for the purpose of section 160ZZI to those listed in subsection 160ZZI(4).

5.8 Representations have been made that there is some uncertainty as to the correct application of section 160ZZI to the disposal of life assurance policies held by "Complying Superannuation Funds" (CSFs).

5.9 As discussed above, the general CGT exemption provided by subsection 160ZZI(2) is not available unless the person disposing of the interest or rights in the policy is the "original beneficial owner" of the policy (or did not acquire the rights or interest for consideration). The term "original beneficial owner" is not defined in the Act, and has no legal meaning in trust law. However, it is arguable that, by implication, an "original beneficial owner" of a policy of life assurance must be a person who is a beneficiary under the policy. The trustee of a CSF has only a legal interest in the policies held on behalf of members, and for this reason may not fall within the scope of the CGT exemption provided by section 160ZZI. This result would be inconsistent with the general concessional taxing treatment of CSF's as reflected in subsection 26AH(7) and section 282A which provide an exemption from income tax for bonuses received by CSF's from life assurance policies.

Explanation of the proposed amendments

5.10 The Bill proposes new subsection 160ZZI(3A) [Clause 25] , which will provide that the capital gains and losses provisions do not apply to disposals of life assurance policies, or rights under life assurance policies, by:

•

complying superannuation funds;

•

complying approved deposit funds (ADFs); or

•

pooled superannuation trusts (PSTs).

5.11 The terms "complying superannuation fund", "complying ADF" and "pooled superannuation trust" are defined in section 267.

5.12 For these purposes, the term "policy of life assurance" is defined in subsection 160ZZI(1) to mean:

"a policy of assurance on the life of a person and includes an instrument securing the grant of an annuity, whether or not for a term dependent on the life of a person".

Commencement date

5.13 The exemption proposed by new subsection 160ZZI(3A) will apply to disposals of policies of life assurance taking place during or after the year of income in which 1 July 1988 occurred. It will therefore apply with effect from the income year in which the current provisions relating to the taxation of superannuation and related business contained in part IX took effect [Clause 26] .

Chapter 6 PROVISIONAL TAX UPLIFT FACTOR

Overview

6.1 This Chapter explains provisions in the Bill which propose to amend the definition of provisional tax uplift factor in the Act so that the factor is:

•

reduced from 10% to 8% for the 1993-94 year of income [Clause 31] ; and

•

restored to 10% for later income years.

Summary of amendments

6.2 Purpose of amendment: To amend the Act so that the provisional tax uplift factor is 8% for the 1993-94 year of income and 10% for later income years.

6.3 Date of Effect : The amendment will apply in relation to the calculation of provisional tax (including instalments) payable for the 1993-94 year of income and for all later years of income [ Clause 33 ] .

Background to the legislation

6.4 Provisional income for a year of income is obtained by uplifting the preceding year's taxable income by the provisional tax uplift factor. Provisional tax is then obtained by applying the tax rates and medicare levy to the provisional income and allowing for rebate and credit entitlements which are expected to be claimed or allowed in the provisional year of income [section 221YCAA].

6.5 The "provisional tax uplift factor" reflects the effects of inflation and other relevant factors in ascertaining provisional income. The uplift factor for the calculation of 1993-94 provisional income is 10% [subsection 221YA(1)].

6.6 In Press Release 67 of 1993, the Treasurer announced that the uplift factor of 8% used to calculate 1992-93 provisional income would be retained for the purpose of calculating 1993-94 provisional tax.

Explanation of the amendments

6.7 The Bill proposes to amend subsection 221YA(1) to ensure that a provisional tax uplift factor of 8% will be used in ascertaining provisional tax payable (including instalments) for the 1993-94 year of income and, until the Parliament otherwise provides, 10% for later years of income [Clauses 32 and 33] .

Chapter 7 GIFT PROVISIONS - TECHNICAL AMENDMENT

Summary of amendments

Purpose of amendment:

7.1 This amendment will reinstate the condition that for donations to the Shrine of Remembrance Restoration and Development Trust will be tax deductible only if made before 1 July 1995 [Clause 34] .

Background to the legislation

7.2 During the recent amendments to section 78 improve the readability of the section, the final date for tax deductible gifts to be made to the Trust was inadvertently omitted. This amendment reinstates that date.

Explanation of the amendments

7.3 This Bill amends Item 9.1.1 of subsection 78(4) to include, as a special condition, the final date before which donations must be made to the Trust for those donations deductible [Clause 35] .

Chapter 8 AMENDMENTS TO THE IMPUTATION SYSTEM

Overview

8.1 The imputation system of the income tax law is to be changed to allow a company, from the start of its 1994-95 franking year, to operate two franking accounts rather than the existing single account. The accounts will be known as class A and class B franking accounts. The change is a consequence of the reduction in the company tax rate from 39% to 33% [Clause 39] .

8.2 Franking debits and credits arising in relation to tax paid for 1992-93 and earlier years of income (including a credit that arises because of a franking surplus at the end of the 1993-94 franking year) will be posted to the class A franking account. The most relevant company tax rate for these years is 39%. Even though the tax rate for the 1986-87 and 1987-88 years of income is 49%, the relevant rate of tax for the class A franking account will be 39%.

8.3 Franking debits and credits arising in relation to tax paid for the 1993-94 and later years of income will be posted to the class B franking account. The company tax rate for these years is 33% and this will be the relevant rate for the class B franking account.

8.4 When a company pays a franked dividend the rate of tax used to calculate the imputation credit attached to the dividend will be the rate for the franking account that has been used to frank the dividend. Consequently, if a company has franking credits from tax paid at the 39% rate it will be able to frank a dividend which will then have a 39% imputation credit attached. Where the dividend is paid to an individual any franking rebate allowable will be calculated by reference to the 39% tax rate. Under these changes the rebate will no longer be calculated by reference to the tax rate for the financial year during which the dividend is paid.

8.5 A company will generally be required to make use of any available class A franking credits first to frank a dividend.

Summary of amendments

Purpose of amendments

8.6 As a result of these changes the imputation system will operate in the following way:

•

a company, for its 1994-95 and later franking years, will have two franking accounts. The class A franking account will be maintained for tax paid at the 39% rate and, if any, tax paid at the 49% rate. The class B account will be maintained for tax paid at the 33% rate;

•

the accounts will operate quite separately but in the same way as the current single account;

•

class A franking credits and debits will arise in respect of payments of tax and other related events for the 1992-93 and earlier years of income;

•

class B franking credits and debits will arise in respect of payments of tax and other related events for the 1993-94 and later years of income;

•

when a company pays a dividend a class A and a class B required franking amount will be calculated in respect of the dividend by reference to the surpluses, if any, of the respective accounts;

•

when a company pays a franked dividend it will make a declaration as to the extent the dividend is class A franked and class B franked (a particular dividend can be a class A franked dividend, a class B franked dividend or both);

•

the sum of the class A and class B franked amounts of a dividend cannot exceed the amount of the dividend;

•

class A and class B franking debits will arise to the extent a dividend has been, respectively, class A franked and class B franked;

•

where a class A or class B franked dividend is paid to a company then a class A or a class B franking credit, as the case may be, arises in the recipient company's appropriate account;

•

a class A franked dividend paid to an individual shareholder will carry an entitlement to a franking rebate calculated at the 39% rate while a class B franked dividend will carry an entitlement to a rebate calculated at the 33% rate; and

•

the special rules that apply to life companies will be modified to enable tax paid at the 39% rate for the 1993-94 and later years of income to give rise to a class A franking credit.

A transitional provision

8.7 Included in these amendments is a transitional provision that will apply to a company's 1993-94 franking year where a franked dividend is paid to them by an earlier balancing company. Broadly, where a franked dividend is paid by an early balancing company which is in its 1994-95 franking year to a company which is still in its 1993-94 franking year, the franking credit that arises to the recipient company is deferred until the first day of its 1994-95 franking year.

Franking deficit tax reimposed

8.8 Under the changes franking deficit tax (FDT) may be payable in respect of either the class A or class B franking account. This may be seen as the creation of a new tax liability - FDT payable in respect of a class A and class B franking deficit. Consequently, the Income Tax (Franking Deficit) Act 1987 will be amended to reimpose FDT.

Date of effect

8.9 The amendments will apply to a company's 1994-95 and later franking years.

Background to the legislation

How the imputation system works

8.10 This is a broad description of how the imputation system works. The system is contained in Part IIIAA of the Act.

8.11 The imputation system operates to impute tax paid at the company level as a credit (called an 'imputation credit') to resident shareholders who are assessed on the total amount of the dividend and the imputation credit, but are entitled to a rebate of tax equal to that credit. A dividend with an imputation credit attached to it is known as a franked dividend, and the extent to it is franked is known as the franked amount of the dividend.

8.12 When a franked dividend passes from one resident company to another, the attached franking credit is effectively transferred to the recipient company thus enabling that company to frank a similar amount of its dividends paid to its shareholders. The recipient company includes only the amount of the dividend in its assessable income and the intercorporate rebate applies.

8.13 The following example illustrates the operation of the basic system.

Franking Account

8.14 To enable a company to keep track of the amount of franking credits it has at any one point in time there is a requirement to keep a franking account. The account records the amount of franking debits and franking credits that arise to the company. This enables a company to ascertain the franking account balance at any time, in particular when paying dividends. Franking accounts are kept on an annual basis - a company's franking year.

8.15 Franking credits most commonly arise when a company makes a payment of tax or, as explained above, receives a franked dividend. A debit commonly arises when a company pays a franked dividend.

8.16 In broad terms, entries posted to a franking account reflect the amount of company profits able to be distributed as franked dividends not the tax paid. As such, a mechanism is required to convert an amount of tax paid into an amount of income corresponding to the tax concerned, referred to as the adjusted amount.

8.17 The adjusted amount is calculated by multiplying the amount of tax concerned by the factor -

(1-company tax rate)/company tax rate


where the company tax rate is the rate for the income year in relation to which the tax is paid.

Franking year

8.18 For companies other than early balancing companies the franking year is the financial year - the period from 1 July to 30 June. This includes late balancing companies. For early balancing companies the franking year is the substituted instalment period, broadly, the accounting period the company has adopted.

8.19 For all practical purposes a company's franking year will correspond with its year of tax which, in turn, is the year succeeding the related year of income. Thus for the 1993-94 income year, the related the year of tax is 1994-95 which corresponds with the 1994-95 franking year.

Franking a Dividend

8.20 Franking actually occurs where a dividend is paid by a resident company and the company declares that the dividend is franked to the extent specified in the declaration. Thus a fully franked dividend is a dividend that has a franking percentage of 100%.

Required Franking Amount

8.21 When it comes to franking a dividend the general rule is that a company is required to frank a dividend it pays to the extent allowed by the surplus balance in its franking account after taking account of any future dividends the company is committed to pay. A franking surplus exists on a particular day where the total of the franking credits arising during the franking year up to that day exceeds the total franking debits to that day.

8.22 Broadly, where the franking surplus is not less than the amount of a dividend, the dividend must be fully franked. Where the franking surplus is less than the dividend, the dividend must be partly franked to the extent of the surplus. These rules specify the minimum extent to which a dividend must be franked and is known as the required franking amount.

Overfranking and Underfranking

8.23 A company is permitted to frank a dividend in excess of the required franking amount in anticipation of further franking credits that will arise during a franking year. This is called overfranking. However, in no circumstances is a company able to frank a dividend in excess of the amount of the dividend itself.

8.24 Underfranking occurs when a company franks a dividend to an extent less than the required franking amount. When a dividend is underfranked the company is effectively treated as if it had franked the dividend to the required extent using the relevant franking credits by the posting of a franking debit equal to the amount of underfranking.

Franking Deficit Tax

8.25 A company is liable to pay franking deficit tax (FDT) on the amount of any franking deficit which exists at the end of a franking year. FDT is not a penalty. It is a payment that makes up for the amount of company tax that has been imputed by the payment of franked dividends. Where a company has become liable to FDT it is entitled to have that liability reduced by an initial payment of tax that has been based on the company's own estimation of notional tax. FDT can also be offset against any company tax assessed after the end of the franking year concerned.

Franking Additional Tax

8.26 FDT is not intended to be a facility that allows a company to deliberately overfrank dividends to an extent obviously greater than a reasonable estimate of anticipated franking credits and debits in a franking year. Broadly, a company is liable to a penalty of up to 30% of FDT payable where the FDT liability arose because the company deliberately overfranked a dividend. The penalty is known as franking additional tax.

Effects for Shareholders

8.27 Fully franked or partly franked dividends paid by a resident company carry a rebate entitlement for resident individual shareholders. Shareholders know they have received a franked dividend because a company is required to provide a dividend statement to the shareholder setting out the franked amount of the dividend.

8.28 The amount of the imputation credit attached to the franked dividend is calculated by converting the franked amount of the dividend to the underlying amount of tax paid and is included in the assessable income of the shareholder. A rebate equal to the amount of the imputation credit is allowed to the shareholder.

8.29 Where a franked dividend is paid to a trustee of a trust estate or to a partnership, the attached imputation credit is included in the assessable income of the trust or partnership. An appropriate proportion of the imputation credit then flows through to the beneficiaries/partners depending on their share of the net income of the trust or partnership. In cases where the trustee of the trust is liable to pay tax on trust income, or on behalf of beneficiaries, the trustee is entitled to a rebate equal to the imputation credit or the tax assessed, whichever is the lesser.

8.30 Where a shareholder is a resident company the imputation credit attached to a franked dividend is not included in the assessable income of the company (nor is a rebate allowed to the company for that credit), but is available to the company to frank dividends it pays to its shareholders.

8.31 Imputation credits are not allowed to non-resident shareholders. However, where a franked dividend is paid to a non-resident the franked amount of the dividend is exempt from withholding tax.

Imputation and changes in the company tax rate

8.32 Under the existing law, imputation credits attached to franked dividends are determined by reference to the company tax rate for the financial year in which the dividends are paid. For all practical purposes in this regard, the year of tax corresponds to the franking year of a company and, in turn, to the year of income of the individual shareholders.

8.33 Thus, franked dividends paid by a company in the 1993-94 year of tax when the company tax rate is 39% will be franked by reference to that rate, that is, according to the formula 39/61. In this way, a $61 fully franked dividend will have a $39 imputation credit attached. When received by a resident individual shareholder the dividend will entitle the shareholder to an franking rebate of $39, and when received by another company will entitle the company to a franking credit of $61.

8.34 As part of this basic structure of the law, the situation is that a change in the company tax rate for a particular year of tax automatically adjusts the imputation credit attached to franked dividends in that year.

8.35 This means that when the company tax rate is reduced to 33% for the 1994-95 year of tax ( payable on income of the 1993-94 income year), the imputation credit would be calculated according to the formula 33/67. This gives a resident individual shareholder an imputation credit of $30.04 on a the $61 fully franked dividend, and a company shareholder a franking credit of $61.

8.36 Conversely, franking credits arising on payment of tax are determined by reference to the company tax rate for the year of income for which the payment is being made. For example, the franking credit arising on the payment of tax for the 1987-88 year of income would be calculated using the formula 51/49 regardless of when the payment is made. Thus, if paid during the 1989-90 franking year (when the company tax rate for the related financial year was 39%) the franking credit arising in that franking year is still calculated using the 51/49 factor.

8.37 Consequently, under this basic structure it is possible for a franking credit calculated by reference to one rate to give rise to an imputation credit calculated by reference to another rate.

Explanation of the amendments

Outline

8.38 The amendments will:

•

set up a dual franking system;

•

adjust the required franking account provisions to take account of the two franking accounts and to ensure available class A franking credits are used to frank dividends first;

•

adjust the franking process and the franking rebate calculation to take account of the two franking accounts;

•

ensure FDT can be properly calculated for the two franking accounts and the initial payment of tax can be offset against any aggregate FDT liability;

•

adjust the machinery provisions of the imputation system, including self assessment, to take account of the two franking accounts;

•

install a transitional provision to apply to dividends paid by early balancing companies.

Dual franking accounts

8.39 The amendments will enable a company to keep two franking accounts. The dual franking account system will operate from the beginning of a company's 1994-95 franking year. The two franking accounts will operate separately but on the same basis as the current single franking account. What primarily distinguishes the two accounts is that they will account for tax paid for different years of income.

8.40 The class A franking account will operate in respect of tax paid for 1992-93 and earlier years of income. This account can be distinguished in that the company tax rate for most of these years (so far as is relevant for the imputation system) has been 39%. It is worthwhile thinking of the class A account as the 39% account.

8.41 However, the rate of tax for 1986-87 and 1987-88 years of income is 49%. Even though the class A franking account is the '39% account' it will still be the relevant account for the franking debits and credits that arise in relation to the few tax payments that will occur in respect of the 1986-87 and 1987-88 and earlier years of income.

8.42 The rate of tax for the statutory fund component of a life assurance company's taxable income has remained unchanged. Therefore, being the 39% account, the class A franking account will also be the relevant account for debits and credits arising in respect of tax paid on the statutory fund component of a life assurance company's taxable income for the 1993-94 and later years of income.

8.43 The class B franking account will operate in respect of tax paid for 1993-94 and later years of income. The relevant rate of tax for these years of income is 33%.

8.44 Many companies will not have an active class A franking account. Broadly, unless a company:

•

carries forward a franking surplus from its 1993-94 franking account;

•

receives a franked dividend that has been franked by the paying company using its class A account; or

•

pays tax or another relevant event occurs in respect of the 1992-93 and earlier years of income;

there will be no entries to the class A franking account.

8.45 As mentioned above, the dual franking account system will operate in respect of a company's 1994-95 and later franking years [Subclause 109(1)] .

Surplus or deficit of the two franking accounts

8.46 The ability of a company to frank the dividends it pays is determined in the first instance by reference to the franking surplus of the company's franking account at the time of payment of dividends. The liability for FDT is based on the franking deficit of an account at the end of a franking year.

8.47 So it will be that a company will need to determine the class A franking surplus or class A franking deficit of its class A franking account and the class B franking surplus or class B franking deficit of its class B franking account [Clause 40 , inserting new definitions 'class A franking deficit', 'class A franking surplus', 'class B franking deficit' and 'class B franking surplus in section 160APA, Clause 41 , amended subsections 160APJ(1) and (2), new subsections 160APJ(1A) and(3) '] .

8.48 The surplus or deficit is calculated in the same manner as for the single account. Thus a class A franking surplus exists on a particular day where the total of the class A franking credits arising during the franking year up to that day exceeds the total class A franking debits. A class A franking deficit exists in the reverse situation. The class B franking surplus or deficit is calculated by reference to class B franking debits and credits.

Entries to the two franking accounts

8.49 The following tables set out the entries that will be posted to the two accounts. Class A franking credits and debits will be posted to the class A franking account. Class B franking credits and debits will be posted to the class B franking account.

Non-mutual life assurance companies

8.50 Under the imputation system non-mutual life assurance companies receive franking credits and use franking debits on the same basis as other companies with shareholders. (Mutual life companies are not permitted to maintain franking accounts.) However, these franking credits and franking debits are reduced to take into account the tax liability on income that cannot be distributed to shareholders because of various prudential rules.

8.51 Reducing franking debits and credits are determined by a formula that calculates the reduction on the basis that 80% of the company tax liability is attributable to statutory fund income and cannot be distributed to shareholders. The tax on the statutory fund income is the difference between tax on taxable income and tax on the non-fund component of taxable income. The non-fund component covers income relating to assets which are not included in an insurance fund maintained by the company. Essentially, this is income derived from business other than life assurance, superannuation and accident and disability business.

8.52 Until an assessment of tax payable for a year of income is made (when the final payment is made) a company will not know the actual tax payable on the statutory fund component and the non-fund component. For those franking debits that reduce credits for the initial payment of tax and subsequent payment before final payment and the credit that reduces a refund of tax before final payment there is a temporary reduction based on the previous year's tax assessed. When the tax payable for the year of income becomes known - an assessment is served or deemed to be served - the temporary reduction is reversed and the permanent reduction is calculated.

8.53 This treatment of life assurance companies will be incorporated into the dual franking account system.

8.54 However, for life assurance companies the general company tax rate of 33% for the 1993-94 and later years of income will only apply to the non-fund component of their taxable income. The rates of tax for the statutory fund component will remain unchanged.

8.55 To reflect the different tax rates applying to life assurance companies and based on the existing reducing debits and credits approach the following will apply:

•

as is the case for all companies, a class B franking credit or debit will arise in relation to payments of tax (and other related events) for the 1993-94 and later years of income;

•

the particular class B franking credit or debit is reduced by a class B franking debit or credit, as the case may be, equal to the adjusted amount of the total tax paid on the statutory fund component.

8.56 The net effect of these first two steps is there will remain a class B credit or debit based on tax paid on the non-fund component of the life assurance company's income, that is, tax paid at the 33% rate. The next step is:

•

a class A franking credit or debit arises based on 20% of the tax paid on the statutory fund component of the income.

The 20% class A franking credits or debits that arise will be adjusted amounts of the tax paid and this will be calculated by reference to the 39% tax rate [Clause 40, new definition of 'special life company tax rate' in section 160APA] .

8.57 The 20% class A franking credit or debit represents the tax paid on the statutory fund component of taxable income that can be distributed to shareholders.

8.58 The amendments provide for, where relevant, the sequence of a temporary class A franking credit or debit based on previous year's tax assessed, a reversing entry and a permanent class A franking credit or debit.

8.59 These 20% class A franking credits and debits are in addition to franking credits and debits of a life assurance company that will arise on tax paid in respect of 1992-93 and earlier years of income. Consistent with current treatment, these latter credits and debits will be reduced by 80%.

8.60 The tables below set out the class A and class B franking credits and debits that are peculiar to a life assurance company.

Dividend streaming provisions

8.61 Broadly, the dividend streaming provisions treat a company as having franked to the same extent all dividends paid on a single class of shares under a dividend streaming arrangement. The provisions operate so that franking debits arise to the company in respect of dividends substituted for, or by, franked dividends under the arrangement.

8.62 The debits are calculated by reference, where appropriate, to:

•

the rate at which the substituted dividends were franked (this is expressed in terms of a percentage, the franking percentage, with a fully franked dividend being a dividend franked to 100%);

•

the franked amount of the substituted dividends; or

•

where the franked dividend is the substitute for an unfranked dividend (subsection 160AQCB(4)), the amount of the substituted dividends.

8.63 Under the dual franking account system a substituted dividend may have a class A or a class B franking percentage or a class A or a class B franked amount depending on how the substituted dividend has been franked. In these circumstances class A or class B franking debits will arise under the dividends streaming provisions by reference to relevant percentages or franked amounts.

8.64 The dividend streaming provisions deal with four different types of dividend streaming provisions.

8.65 Under the first type a company pays an unfranked or partly franked dividend in substitution for the payment (or proposed payment) of a franked dividend. The franking percentage of the franked dividend has to be greater than that of the unfranked or partly franked dividend. With a dividend being capable of being simultaneously class A and class B franked it will be the aggregate of the class A and class B franking percentages that is taken into account [Clause40, new definition 'franking percentage' in section 160APA] .

8.66 The amendments will provide for a class A franking debit to arise equal to the amount of the class A franking debit that would have arisen had the unfranked or partly franked dividends been class A franked at the same rate (the substituted class A franking percentage) as the substituted dividends. The class B franking debit arises in the same manner by reference to the rate at which the substituted dividend has been class B franked [Clause 70, new paragraphs 160AQCB(1)(c) and (d)] .

8.67 The second type of arrangement is where a company issues tax-exempt bonus shares to a shareholder in substitution for the payment (or proposed payment) of franked dividends. The amount of the class A or class B franking debit that will arise will be the amount that would have arisen if the company had paid the substituted franked dividends to the shareholder instead of issuing the tax exempt bonus shares [Clause 70, new paragraphs 160AQCB(2)(c) and(d)] .

8.68 The third type of arrangement is where a company's franked dividend is substituted by the payment of an unfranked or partly franked dividend by another company (described in the provisions as a linked company). Under the amendments the amount of the class A franking debit that will arise to the company, that would have otherwise paid the franked dividend, is calculated by multiplying the amount of the unfranked or partly franked dividend by the substituted class A franking percentage. The class B franking debit is calculated by reference to any substituted class B franking percentage [Clause 70, new paragraphs 160AQCB(3)(c) and (d)] .

8.69 The fourth type of arrangement is where the company pays a franked dividend and this is in substitution for the payment of an unfranked dividend by another company.

8.70 Under this type of arrangement there is no substituted franking percentage or franked amount that can be referred to in order to calculate the franking debit. The franking debit that arises to the company is equal to the total amount of unfranked dividends paid by the other company that relates to the franked dividend.

8.71 The amendments will provide that a class B franking debit now arises equal to this amount [Clause70, amended subsection 160AQCB(4)] .

Estimated debit determinations

8.72 Under the imputation system a company is able to apply to the Commissioner to make an estimated debit determination. The company can do this when action has been taken to reduce a tax liability or when a refund of the initial payment of tax is expected. Action to reduce a tax liability - called liability reduction action - includes a request for a credit amendment and the lodgment of an objection. The Commissioner makes a determination by serving notice of the determination on the company or is deemed to have made a determination if 21 days have passed since the lodgment of the application.

8.73 The estimated debit is the franking debit that would arise if the action is successful or the refund is received. By this mechanism, a company is able to anticipate a future franking debit that is expected to arise in the circumstance specified and will result in a reduction of its franking account balance. This avoids the inappropriate application of the required franking rules.

8.74 When the Commissioner makes an estimated debit determination a franking debit equal to the amount specified in the determination arises at that time. When the liability reduction action terminates (called the 'termination time'), eg., the objection is finalised, or the initial payment is refunded, a franking credit arises equal to the estimated debit and this credit offsets the entry created by the debit determination. Any subsequent debit which results from a successful liability reduction action or refund adjusts the franking account balance to reflect the true position.

8.75 Under these amendments a company will be able to apply to the Commissioner to make both estimated class A and class B debit determinations.

8.76 Where a company has taken liability reduction action or is expecting a refund of an initial payment of tax in respect of the 1992-93 and earlier years of income any debit that arises will be a class A franking debit. In these situations application for, and a determination by the Commissioner of, an estimated class A debit is appropriate [Clause 40, new definitions 'estimated class A debit' and 'estimated class A debit determination' in section 160APA, Clause 79, amended section 160AQD] .

8.77 An estimated class B debit determination is appropriate where the action or refund is in respect of the 1993-94 and later years of income [Clause 40, new definitions 'estimated class B debit' and 'estimated class B debit determination' in section 160APA, Clause 80, new section 160AQDA] .

8.78 Companies will be able to make applications for estimated class A and class B determinations after the commencement of their 1994-95 franking year [Subclause 109(2)] .

8.79 A transitional provision covers those estimated debit determinations made in respect of the 1993-94 franking year which remain 'live' at the end of that franking year. The table below sets out the live determinations and the transitional arrangements that will apply to these determinations.

The required franking amount

8.80 Statutory rules apply to determine the required franking amount (RFA) in relation to a dividend that is to be paid by a company. These rules will be modified so now there will be determined both a class A RFA and a class B RFA.

8.81 The modified rules will apply to dividends paid after the start of a company's 1994-95 franking year [Subclause 109(4)] .

8.82 Currently, the first and basic rule for calculating the RFA is a dividend must be franked to the extent permitted by the company's franking surplus at the date of payment of the dividend. Under the dual franking account system the rule will be modified so that a dividend will have to be franked first to the extent permitted by the class A franking surplus of the company and then to the extent permitted by the class B franking surplus.

8.83 Thus, if the class A franking surplus is greater than the amount of the dividend, the dividend must be fully franked using the class A franking surplus even if the company has a class B franking surplus. If the dividend exceeds the sum of the class A and class B franking surplus the dividend must be franked to the extent permitted by the two accounts. If the dividend exceeds the class A franking surplus but not the sum of the class A and class B surpluses the dividend is required to be franked to the extent of the class A franking surplus and so much of the class B franking surplus such that the dividend is fully franked.

8.84 The existing rule that the franked amount of a dividend cannot exceed the amount of the dividend will continue to apply. This means the sum of the class A and class B RFAs cannot exceed the amount of the dividend.

8.85 Under the current provisions the basic rule is subject to further rules which apply where a company, at the date of payment of a dividend, is to pay a further dividend on that day or has an obligation to pay a frankable dividend at a later time during the franking year - a committed future dividend - or will pay dividends as part of certain dividend streaming arrangements. In these situations, unless the company's franking surplus is sufficient to fully frank all of the relevant dividends, the company is required to pro-rate the franking surplus over all the dividends being paid.

8.86 Under the dual franking account system companies will still be required to pro-rate the class A and class B franking surpluses but subject to the requirement that the class A franking credits are required to be used first.

8.87 A further rule applies where a company overfranks a dividend when it has a committed future dividend. The company is required to frank the committed future dividend to the same extent as the earlier overfranked dividend. Also, if more than one dividend is paid on the same day and one of the dividends is overfranked, the other dividend or dividends are required to be franked to the same extent.

8.88 Under the modified required franking rules, being 'franked to the same extent' will mean that the relevant dividends are franked by the same percentage and that the class A and class B franked amount of the relevant dividends are in the same proportion.

Class A and class B RFAs

8.89 The class A RFA will be the amount worked out under the existing formulas in section 160AQE but using the class A franking surplus as the basis for the calculation [Clause 81, new subsection 160AQDB] .

8.90 More specifically the following references in section 160AQE will be changed:

•

franking surplus of a company becomes the class A franking surplus;

•

franked amount becomes class A franked amount;

•

RFA becomes class A RFA; and

•

franking debit becomes class A franking debit.

8.91 The formulas otherwise operate as they do currently.

8.92 The first step in calculating the class B RFA is to calculate the gross RFA. The gross RFA will be the amount worked out under existing section 160AQE but using the sum of the class A and class B franking surpluses as the basis for the calculation [Clause 81, definition of 'gross required franking amount' in new subsection 160AQDB and Clause 82, new subsection 160AQE(6)] .

8.93 The class B RFA is the gross RFA less the class A RFA [Clause 81, new subsection 160AQDB(2)] .

8.94

Example

A company has on a particular day the following franking surpluses:

class A franking account: $5 000

class B franking account: $8 000

On that day it proposes to pay a dividend (the 'current dividend') of $10 000 and has a committed future dividend of $10 000.

Step 1: Calculate class A RFA (subsections 160AQDB(1) and 160AQE(2)).

class A RFA = 10 000 * (5 000/(10 000+10 000) = $2 500


Step 2: Calculate gross RFA (subsections 160AQDB(2) and 160AQE(2)).

gross RFA = 10 000* (5 000 + 8 000)/(10 000 + 10 000)


= $6500

Step 3: Calculate class B RFA (subsection 160AQDB(2)).

class B RFA = gross RFA - class A RFA = 6500 - 2500 = $4000


Overfranking and underfranking

8.95 Consistent with the current rules, the amended required franking rules specify only the minimum extent to which a dividend must be class A or class B franked. A company will be able to frank a dividend in excess of the class A or class B RFA. Where a company does so and there is a franking deficit in relation to a particular account at the end of the franking year, the company will be liable to pay class A or class B FDT, as the case may be.

8.96 The underfranking rules will also apply under the dual franking account system. Thus, for example, where the class A RFA is more than 10% of the dividend and the dividend is not franked to the class A RFA, a class A franking debit arises equal to the amount by which the class A RFA exceeds the franked amount of the dividend.

Franking a dividend

8.97 The existing law sets out the actual franking event. A dividend is franked when a resident company is paying a frankable dividend and makes a declaration that the dividend is franked to the percentage specified in the declaration. When this happens the dividend is franked to the extent calculated by applying the percentage specified in the declaration to the dividend in order to determine the franked amount of a dividend.

8.98 Under the dual franking account system a frankable dividend that is paid can be either class A franked or class B franked or both. Thus a company would make a declaration that a dividend is class A franked to the percentage (the class A franking percentage) specified in the declaration and this determines the class A franked amount of the dividend [Clause 40, new definitions of 'class A franked amount', 'class A franked dividend', 'class A franking percentage' in section 160APA, Clause 83 amended subsection 160AQF(1)] .

8.99 A separate declaration is made in relation to a dividend that is to be class B franked giving rise to the class B franked amount of the dividend [Clause 40, new definitions of 'class B franked amount', 'class B franked dividend', 'class B franking percentage' in section 160APA, Clause 83 new subsection 160AQF(1AA)] .

8.100 A franked dividend will now be a dividend that has been class A or class B franked or both. The franked amount of a dividend will be the sum of the class A and class B franked amounts. When a dividend has been both class A and class B franked it will be simultaneously a class A franked dividend and a class B franked dividend.

8.101 The franked amount of the dividend - the sum of the class A and class B franked amounts - cannot exceed the amount of the dividend. Declarations that result in the franked amount exceeding the amount of the dividend are invalid [Clause 83, new subsection 160AQF(1AB)] .

8.102 Where a company pays a class A franked dividend, a class A franking debit arises in the class A franking account equal to the class A franked amount of the dividend. A class B franked dividend gives rise to a class B franking debit in similar fashion.

8.103 Companies will be able to class A frank and/or class B frank a dividend after they commence to operate dual franking accounts.

Dividend statement to shareholders

8.104 The dividend statement that must be provided when a company pays a frankable dividend to shareholders will be revised to take account of the dividend being capable of being class A or class B franked or both.

8.105 The information that will be provided on the dividend is:

•

the class A or class B franked amount or both;

•

the unfranked amount of the dividend;

•

the extra amount that is to be included in the shareholder's assessable income under subsection 160AQT(1) (even if that subsection does not apply to the particular dividend) - this is the class A imputation credit;

•

the class B imputation credit;

•

the sum of the class A and class B imputation credits; and

•

any amount of dividend withholding tax deducted from the dividend [Clause 84, new paragraph 160AQH(b)] .

Franking deficit tax

8.106 Under the dual franking account system franking deficit tax (FDT) will be payable in respect of any franking deficit of a class A or a class B franking account that exists at the end of any franking year. Class A FDT is payable in respect of a class A franking deficit [Clause 40, new definition of 'class A franking deficit tax' in section 160APA, Clause 85, amended subsection 160AQJ(1)] . Class B FDT is payable in respect of a class B franking deficit [Clause 40, new definition of 'class B franking deficit tax' in section 160APA, Clause 85, new subsection 160AQJ(1A)] .

8.107 Class A and class B FDT liabilities will be calculated in relation to a company's 1994-95 and later franking years [Subclause 109(3)] .

8.108 FDT is not a penalty. It is regarded as a payment required to make up the amount of company tax that has been imputed by the payment of frank dividends (whether class A or class B franked) in a franking year that has not actually become available by the end of that year. This is reflected by the fact that the amount of FDT payable is the class A or class B franking deficit, as the case may be, converted back to an equivalent amount of company tax that effectively has been prematurely imputed to shareholders. ; The rate for class A FDT is 39%, while the rate for class B FDT is 33% [Clause 40, new paragraphs (b) and (ba) of definition of 'applicable general company tax rate' in section 160APA]

8.109 Where a company has become liable to pay class A and/or class B FDT it is entitled to offset the sum of these amounts (if any) against any future company tax assessed (including where an amended assessment increases tax assessed). The effect of this is to decrease the actual payment of tax made in relation to the assessment which reduces the franking credit that would otherwise have arisen in the absence of the offset [Clause 86, amended section 160AQK] .

8.110 Where a company is liable for class A or class B FDT but makes an initial payment of tax based on actual (rather than notional tax) liability it is relieved from the payment of the sum of the class A and class B FDT to the extent of the initial payment. Thus, where this aggregate FDT (referred to in subsection 160AQJ(2) as the 'relevant franking deficit tax') is less than the initial payment no FDT is payable.

8.111 Where the aggregate FDT exceeds the initial payment the company is liable to pay only the excess. This excess aggregate FDT is broken up into class A and Class B FDT in the same proportion that the original class A or class B FDT liability was to the aggregate FDT [Clause 85, amended subsection 160AQJ(2)] .

8.112 For a life company calculating the reduced FDT liability the initial payment amount is reduced. This is because the franking credits that arise to a life company when an initial payment is made are reduced. The formula used to calculate the reduced initial payment amount will be adjusted as a result of the changed arrangements for dealing with franking credits and debits that arise for tax paid by a life company [Clause 65, amended paragraph 160APYC(c), Clause 85, amended paragraphs 160AQJ(2)(e) and (f)] .

8.113 Under the current law a franking debit arises under section 160APYC where a company is not liable to pay an amount of FDT because an initial payment of tax has reduced that liability under subsection 160AQJ(2). When the initial payment is made a franking credit arises in respect of the whole of the amount of the initial payment. The franking debit effectively reverses the franking credit to reflect the reduction of the FDT liability by the initial payment.

8.114 For subsection 160AQJ(2) to operate the FDT liability must be in respect of the franking year in which the last day of the company's year of income, for which the initial payment is made, occurs. For example, where a company has the financial year as its income year an FDT liability for the 1993-94 franking year (due on 31 July 1994) could be reduced by the initial payment for the 1993-94 year of income. This would be due on 28 July 1994.

8.115 The dual franking account system will apply from a company's 1994-95 franking year. From that time only initial payments in respect of the 1993-94 and later years of income (giving rise to class B franking credits) can reduce an FDT liability.

8.116 Consequently, section 160APYC will be amended only to provide for a class B franking debit to arise. There is no need to provide for a class A franking to arise.

Effects for shareholders

8.117 Under the imputation system, where a franked dividend is paid to a shareholder who is a resident individual, or a partnership or trustee of a trust estate, the shareholder is required to include the imputation credit attached to the dividend as assessable income. The shareholder is then entitled to a rebate, or to pass on a rebate in the case of a partnership or trust, of the amount so included.

8.118 Under the dual franking account system a franked dividend may be class A or class B franked or both. This will give rise to class A or class B imputation credits, as the case may be, and the imputation credits will be included in the assessable income of the shareholder. If the franked dividend is both class A and class B franked the sum of the imputation credits is included in assessable income.

8.119 This will be done in the same way as under the current provisions but modified to take account of the two classes [Clause 87, amended subsections 160AQT(1) and (1A) and new subsections 160AQT(1AA) and (1B)] .

8.120 The amount to be included in a shareholder's assessable income is calculated by multiplying the class A or class B franked amount of the relevant dividend by the factor -

company tax rate/(1 - company tax rate)</ EQN>


8.121 If it is a class A franked amount the company tax rate is 39% and the factor is 39/61. If it is a class B franked amount the rate is 33% and the factor is 33/67 [Clause 40, new paragraphs (c) and (ca) of definition of 'applicable general company tax rate' in section 160APA] .

8.122 Existing section 160AQT provides for a franking rebate to be allowed to an individual shareholder equal to the amount included in assessable income under section 160AQT. This will be the amount of the class A or class B imputation credit, or the sum of both, attached to the franked dividend.

Dividends paid to trusts and partnerships

8.123 The imputation system places beneficiaries of a trust estate and partners in a partnership in the same position, in relation to the imputation credit, as they would have been if they had received the franked dividend directly as a shareholder. In this way a resident beneficiary or partner is entitled to a franking rebate if he or she is an individual or, in the case of a company, to a franking credit.

8.124 Broadly, where a franked dividend is paid to a partnership or trustee the attached imputation credit is included in the assessable income of the partnership or trust estate. The amount that is included in the assessable income is apportioned between the persons who are assessed in relation to the net income of the partnership or trust estate (including the trustee under sections 98, 99 and 99A). The apportionment is made on the basis of the proportion of the income attributable to the franked dividend that is included in the net income of the trust or partnership that is assessed to the beneficiary, trustee or partner. The amount is known as the 'flow-on franking amount'.

8.125 A resident individual who is entitled to a share of the franked dividends paid to the trust or partnership is entitled to a rebate of an amount equal to the share of the imputation credits in relation to the franked dividends. The amount of rebate calculated in this way is called the 'potential rebate amount'. For a partner or beneficiary that is a resident company the potential rebate amount gives rise to a franking credit that is not included in assessable income. Where a trustee is assessed on the trust income the potential rebate amount is allowed to the trustee.

8.126 Under the dual franking account system there will be both a class A and class B flow-on franking amount and a class A and class B potential rebate amount [Clause 40, new definitions 'class A flow-on franking amount', 'class A potential rebate amount', 'class B flow-on franking amount' and 'class B potential rebate amount' in section 160APA] .

8.127 Taking a class A franked dividend as an example the class A flow-on franking amount will be the share of a class A franked dividend that flows to the partner or trustee as a part of the share of the net income of the trust or partnership. The class A potential rebate amount is the rebate calculated by reference to the share of the imputation credit attached to the share of the class A franked dividend.

8.128 Class B franked dividends will be treated in a similar way.

8.129 The operative provisions ensuring franked dividends received indirectly through partnerships and trusts are treated in the same way as if they had been received directly will be amended to take account of the treatment of class A and class B franked dividends.

8.130 In all cases the amendments ensure that the reference to a flow-on franking amount becomes a reference to a class A and/or class B flow-on franking amount and the rebate allowed is based on the class A or class B potential rebate amount or the sum of both.

8.131 The following provisions are amended:

Adjustment of imputation credits for companies and non-residents

8.132 A company shareholder that is paid a franked dividend is not required under section 160AQT to include the extra amount in relation to that dividend - the imputation credit - as assessable income. Similarly, a non resident is not required to include the imputation credit as assessable income.

8.133 The imputation system ensures this rule is applied even when a company or non-resident shareholder receives a franked dividend through a trust as a beneficiary, through a partnership, or where a trust is assessed in respect of a company or non-resident beneficiary.

8.134 Specific provisions are required in these circumstances because the imputation credit is initially included in the trust or partnership income and then in the share of that income notwithstanding the partner or beneficiary is a company or non resident.

8.135 Broadly, the specific provisions (contained in Subdivision 7C) allow a deduction to the company or non-resident of an amount equal to the imputation credit - the potential rebate amount - that is included in their share of the trust or partnership income. In the case of a potential rebate amount arising on receipt of a trust amount the allowable deduction cannot exceed the trust amount.

8.136 Because there may be both a class A and class B potential rebate amount that will give rise to an allowable deduction the specific provisions need to be modification to take this into account. The provisions otherwise operate in exactly the same way.

8.137 The following provisions will be are amended:

Machinery provisions

8.138 A number of the machinery provisions will be amended to take account of the change from a single franking account to dual franking accounts. The amended provisions will operate in exactly the same way as they did under the single account system. The amendments will simply ensure that the provisions apply equally to both the class A and class B franking account.

8.139 These amendments will apply from a company's 1994-95 franking year - when dual franking accounts operate.

Assessments

8.140 A company is required to self assess its franking account balance and any FDT payable in respect of a franking year. This occurs at the time a company lodges a franking account return if it is required to do so by the Commissioner. (Currently, the requirement to lodge generally applies to companies that have a franking deficit at the end of the franking year.)

8.141 As a result of the dual franking account system a company will be required to self assess the class A or class B franking account balance and any class A or class B FDT payable, as the case may be [Clause 40, new definitions of 'franking account account assessment, 'class A franking account assessment', 'class A franking account balance', 'class B franking account assessment' and 'class B franking account balance' in section 160APA, Clause 98, amended subsection 160ARH(1) and new subsection 160ARH(2)] .

8.142 In addition the Commissioner will be able to make -

•

part year assessments [Clause 99, amended subsections 160ARJ(1) and (2) and new subsection 160ARJ(1A)] ;

•

default assessments where a company does not lodge a franking account return [Clause 100, amended subsection 160ARK(1) and new subsection 160ARK(2)] ; and

•

amended assessments [Clause 101, amended subsection 160ARN(10)]in respect of a company's -

•

class A franking account balance any class A FDT that may be payable; and

•

class B franking account balance and any class B FDT that may be payable.

Penalties

8.143 Franking additional tax (FAT) is a penalty tax that applies where a company deliberately overfranks a dividend. The imposition of FAT will be changed to take into account the dual franking account system.

8.144 A FAT liability will arise when:

•

a company has paid a class A franked dividend during the franking year to an extent greater than the class A RFA; and

•

a class A franking deficit exists at the end of the franking year that is more than 10% of the total of the class A franking credits that arose during that year.

8.145 In this situation a company will be liable to FAT equal to 30% of the class A FDT payable [Clause 103, amended subsection 160ARX(1)] .

8.146 FAT will be imposed in the same way where a company has class B overfranked a dividend [Clause 103, new subsection 160ARX(2)] .

8.147 The amendments will provide for the penalty for failing to lodge a franking account return or any other information to be double the amount of the sum of any class A and class B FDT payable rather than double the FDT payable [clause 104, amended subsection 160ARZ] .

Self assessment penalties

8.148 Substantial changes were made to the penalty provisions in the income tax law recently. The new penalty provisions set out the standards that taxpayers should meet in fulfilling their tax obligations in a self assessment environment. The changes generally apply to the 1992-93 and later years of income.

8.149 Because a company is required to self assess its liability, if any, to FDT the new penalty provisions apply to the FDT obligations.

8.150 Broadly, penalties are imposed in relation to any 'franking tax shortfall'. The franking tax shortfall is the difference between the FDT properly payable by a company for a franking year (the 'proper franking tax') and the FDT that would have been payable by the company for that year if it were assessed on the basis of statements made by the company (the 'statement franking tax').

8.151 These penalty provisions will be changed to reflect the dual franking account system. Penalties will be imposed in respect of a franking tax shortfall of a class A or class B franking account, as the case may be.

8.152 Subject to one exception the operative provisions that impose penalty tax will not be amended. Rather the relevant definitions will be amended so that current definitions of franking tax shortfall, proper franking tax and statement franking tax apply equally to the class A or class B franking account and any FDT liability of the two accounts [Clause 102, amended definitions of 'franking tax shortfall', 'proper franking tax', 'statement franking tax' and new definitions 'class A franking tax shortfall', 'class A proper franking tax', 'class A statement franking tax', 'class B franking tax shortfall', 'class B proper franking tax', 'class B statement franking tax' in section 160ARXA] .

8.153 The operative provisions will then operate normally.

8.154 The one change to the operative provisions relates to the penalty of 25% of a franking tax shortfall that is caused by a company taking a position on a question of interpretation that is not reasonably arguable at the time the position is taken. The application of this penalty is subject to a threshold test. A company is only liable for a penalty for not having a reasonably arguable position where the franking tax shortfall caused by the position is greater than the higher of $10 000 or 1% of the FDT that would have been payable on the basis of the taxpayer's return.

8.155 The amendments will ensure that, where appropriate, this is a reference to 1% of the class A or class B FDT that would have been payable [Clause 105, new subparagraph 160ARZD(1)(c)(ii]) .

Other machinery provisions

8.156 Companies will be required to keep records of matters relevant to ascertaining the class A and class B franking account balance and to retain these records for a period of at least five years [Clause 106, amended section 160ASC] .

Tax file number withholding tax provisions

8.157 Under the tax file number withholding tax provisions, where a taxpayer does not quote a tax file number in relation to the payment of dividends then withholding tax applies to the unfranked amount of a dividend.

8.158 The amendments will ensure that the withholding tax provisions continue to apply in this way. If a dividend is fully franked - the sum of the class A and class B franking percentages equals 100% - withholding tax will not apply. If the sum of the franking percentages is less than 100% withholding tax will apply to the unfranked portion of the dividend [Clause 107, amended subsections 221YHZC(1B) and (1D)] .

Transitional arrangement for 1993-94 franking year

8.159 A transitional provision will be implemented to prevent certain dividends which will carry imputation credits calculated by reference to the 33% tax rate, from being able to generate imputation credits calculated by reference to the 39% rate. The provision will apply to dividends paid by early balancing companies during their 1994-95 franking year to a later balancing company that is still in its 1993-94 franking year.

8.160 There will also be a mechanism to ensure no disadvantage arises for companies receiving dividends from early balancing companies that are relying on these dividends to frank their own dividends and, because of the transitional provision, would otherwise have a franking deficit or an increased franking deficit at the end of the franking year.

8.161 For an early balancing company - a company that with the leave of the Commissioner, has adopted in lieu of the financial year an accounting period that ends one month or more before the end of the financial year - its franking year also commences earlier. Thus for a company that balances on 31 December 1993 in lieu of 30 June 1994, its 1994-95 franking year commences on 1 January 1994.

8.162 The dual franking account system is to apply from a company's 1994-95 franking year. An early balancing company could pay either a class A or class B franked dividend in the period 1 January 1994 to 30 June 1994 to a company that is not an early balancing company and is therefore still in its 1993-94 franking year. At that time the dual franking account system has not started to operate for the recipient company.

8.163 Because a class A or class B franked dividend is still a franked dividend then a franking credit would arise in the recipient company's single franking account. While this does not pose a problem if the dividend is class A franked, if the dividend is a class B franked dividend the value of the imputation credit increases as a result of the disparity in the tax rates.

8.164 If, for example, the early balancing company paid a dividend of $67 that had been 100% class B franked then a franking credit of $67 would arise in the recipient company's franking account. When that dividend is effectively passed on by the recipient company to its shareholders it will have attached to it an imputation credit of $42.84 (67 x 39/61), instead of $33 (67 x 33/67).

8.165 To overcome this problem a transitional provision will ensure that:

•

where a company receives a class A franked dividend during its 1993-94 franking year, a franking credit arises in its single franking account for that year;

•

where a company receives a class B franked dividend during its 1993-94 franking year, the class B franking credit is deferred and will not arise until the beginning of the company's 1994-95 franking year; and

•

if a franking deficit arises, or is increased, as a result of the abovementioned arrangement, the deferred class B franking credits will be deemed to have arisen on the last day of the 1993-94 franking year to the extent necessary to eliminate the deficit. In such cases the amount of the class B franking credits will be reduced by 23% to reflect the fact that the origin of the dividends was a company paying tax at 33%.

8.166 Details of these provisions are set out below.

Receipt of class A franked dividend

8.167 If:

•

a company is paid a class A franked dividend between 1 January 1994 and 30 June 1994;

•

the company is in its 1993-94 franking year; and

•

a class A franking credit would have arisen to the company when the dividend was paid if the dual franking account system had been operated by that company;

then a franking credit arises on the day the dividend is paid on the assumption the class A franked dividend is a franked dividend [Paragraph 111(1)(d)] .

8.168 If the class A franked dividend was received indirectly through a trust or partnership, and a class A franking credit would have arisen in respect of the trust or partnership amount, a franking credit arises on the assumption the class A franked amount of the dividend was a franked amount of the dividend [Paragraph 111(2)(c)] .

Receipt of class B franked dividend

8.169 If:

•

a company is paid a class B franked dividend between 1 January 1994 and 30 June 1994;

•

the company is in its 1993-94 franking year; and

•

a class B franking credit would have arisen to the company when the dividend was paid if the dual franking account system had been operated by that company;

then the class B franking credit is taken to arise on the first day of the company's 1994-95 franking year instead of the day the dividend is paid [Paragraph 111(1)(e)] .

8.170 If the class B franked dividend was received indirectly through a trust or partnership, and a class B franking credit would have arisen in respect of the trust or partnership amount, the class B franking credit arises on the first day of the company's 1994-95 franking year [Paragraph 111(2)(d)] .

Restoration of class B franking credits in 1993-94 franking year

8.171 This transitional provision applies where class B franking credits are deemed to arise at the beginning of the 1994-95 franking year instead of the 1993-94 franking year and a company has a franking deficit at the end of the latter franking year.

8.172 Where these conditions are met, and subject to a limit on the amount, the deferred class B franking credits will be restored to the 1993-94 franking year by deeming them to arise on the last day of that year. The restored franking credits are to be reduced by 23% to reflect the fact that they arose from the payment of a dividend franked at 33%. When restored they become franking credits as opposed to class B franking credits to reflect the fact they are being restored to a single franking account.

8.173 The limit on the amount works like this:

•

if the relevant franking credits are less than 130% of the franking deficit, all the deferred class B franking credits will be reduced by 23% and restored to the 1993-94 franking year [Paragraph 111(3)(c)] ;

•

if the relevant franking credits are greater than 130% of the franking deficit only so much of these deferred class B franking credits as is necessary to eliminate the franking deficit will be restored [Paragraph 111(3)(d)] .

8.174 Where the franking credits do exceed 130% of the deficit the amount of restored franking credits is calculated using the formula:

Franking credit * 130% franking deficit/Total franking credits


where -

franking credit is the amount of each deferred franking credit; 130% franking deficit is the amount of the 1993-94 franking deficit; and total franking credits is the total amount of deferred franking credits.

8.175 The amount of any class B franking credits in excess of 130% of the franking deficit will be credited to the class B franking account at the beginning of the company's 1994-95 franking year [Subparagraph 111(3)(d)(ii)] .

8.176

Example

On 31 May 1994 Company X, an early balancing company, pays Company Y a $10 000 franked dividend that is fully class B franked. The 1994-95 franking year of Company Y commences on 1 July 1994. At the end of its 1993-94 franking year Company Y has a franking deficit of $6 000.

Under subclause 111(1) the $10 000 class B franking credit is normally deferred and arises on 1 July 1994 in the class B franking account of Company Y.

Because Company Y has a franking deficit for its 1993-94 franking year part of the deferred class B franking credit is deemed to be a franking credit that arises on the last day of the 1993-94 franking year. The amount is calculated as follows:

Step 1: Calculate 'proportional franking credit'.

10 000 * (130% * 6 000)/10 000 = $7 800


Step 2: Calculate franking credit.

7 800 - (23% * 7 800) = $6 006


In the 1993-94 franking account a franking credit of $6006 on 30 June 1994.

In the 1994-95 class B franking account a class B franking credit of $2200 (10000 - 7800) arises on 1 July 1994.

8.177 Section 160AR of the Principal Act ensures that, where a company receives a franked dividend indirectly through a trust or partnership, the company is not assessed on the imputation credit that has been included in the trust amount because of section 160AQT. Section 160AR will not be affected by the transitional provision. Even though the franking credit is deferred the deduction under section 160AR will be allowed when the franked dividend received indirectly through a trust or partnership is actually brought to account by the company [Subclause 111(4)] .

Reimposition of FDT

8.180 Section 160AQJ is to be amended so that FDT can be imposed in respect of either a class A or class B franking deficit. This may be seen as the creation of a new tax liability.

8.181 Consequently, the Income Tax (Franking Deficit) Act 1987 which formally imposes FDT will be amended to reimpose FDT as calculated under section 160AQJ of the Principal Act.

8.182 The amendments are contained in the Income Tax (Franking Deficit) Amendment Bill 1993 (the IT(FD)A). The provision imposing FDT is repealed and then reinserted [Clause 3 of the IT(FD)A] .

8.183 This amendment applies at the same time as the amendments to the FDT provisions of the Act [Clause 2 of the IT(FD)A] .

Chapter 9 TAX CONCESSIONS FOR GRAPE GROWING

Summary of proposed amendments

9.1 The capital cost of establishing grape vines in Australia for use in a business of primary production is to be evenly deductible over four years. The deductions will be available once a vine is planted in the land [Clause 115] .

9.2 The amendments will apply to expenditure incurred on or after 1 July 1993.

Explanation of the proposed amendments

Background

9.3 The Income Tax Assessment Act 1936 provides a number of measures under which the otherwise non-deductible capital cost of property may be written-off, such as depreciation for plant and articles and the capital allowance for income-producing buildings.

9.4 Generally, there is no write-off available for the capital cost of establishing or acquiring live plants. Whether expenditure on establishing a live plant is revenue - and so deductible at the time incurred - or is capital, is generally determined by the length of the useful life of the plant. Broadly, the longer that life, the more likely is the expenditure to be capital. So the cost of planting annual crops, such as wheat and barley, is deductible at the time incurred. By comparison, expenditure on planting trees, shrubs, grape vines and similar long-lived plants is generally capital and not deductible.

9.5 This is not to say that all capital costs associated with the establishment of long-lived plants are not deductible. For instance, the capital cost of irrigating or trellising a vineyard may be written-off under the depreciation provisions for plant and articles. Rather, it is the cost of preparing the land and the cost of the plants themselves that is not deductible if those costs are capital.

9.6 There are some exceptions to this general unavailability of deductions for capital expenditure on live plants. For instance: expenditure on establishing trees for the prevention of rural land degradation can qualify for immediate deduction [section 75D]; capital expenditure on acquiring standing timber is deductible to the extent it relates to the felling of the timber for certain income-producing purposes [section 124J].

9.7 Expenditure incurred on or after 1 July 1993 on establishing grape vines in Australia for use in a business of primary production is now to be evenly deductible over four years. Deductions will be available from the time the vines are planted in the land.

9.8 The deductions will be allowable to whoever is the owner of the vines during the four year deduction period. If ownership of the vines changes within the four year deduction period, entitlement to deductions in the year of change will be pro-rated between purchaser and vendor.

9.9 The deductible cost of establishing a vine is to comprise the capital cost of preparing the land (excluding land draining and clearing), the cost of planting and the cost of the vine itself.

9.10 The provisions that will authorise these deductions for the capital cost of establishing grape vines are contained in proposed section 75AA. The following provides a more detailed explanation of these new provisions.

The amendments

Deduction for qualifying expenditure

9.11 Deductions are to be available to the owner of a grape vine if there is an amount of qualifying expenditure in respect of the establishment of the vine. The vine must be used in a business of primary production for the purpose of gaining or producing assessable income [new subsection 75AA(1)] .

Meaning of qualifying expenditure

9.12 "Qualifying expenditure in respect of the establishment of a grape vine" is capital expenditure incurred by a person on or after 1 July 1993 on the establishment of a grape vine in Australia for use in a business of primary production [new subsection 75AA(4)] .

9.13 What constitutes the capital cost of establishing a grape vine is not defined - it is something that is to be determined in each case. Broadly, the capital cost of establishing a vine is considered to comprise all the costs incurred up to the time the vine is established in the land. Generally, costs of maintaining plants once they are established are revenue in nature even though it may be some time before the plants become productive.

9.14 Costs of establishing a grape vine in the land that are capital in nature would include:

•

the cost of preparing the land such as ploughing, topsoil enhancement, etc that is attributable to the vine;

•

the cost of planting the vine in the land; and

•

the cost of the vine.

9.15 The cost of land clearing and drainage of swamp and low-lying land will not qualify for deduction [new subsection 75AA(5)] . Such improvements are not considered to "depreciate" in the sense that the benefit of clearing and drainage is considered to be permanent. As well, it is Government policy not to provide tax concessions for what could be seen to be an environmentally inappropriate activity (this was a reason for terminating section 75A which formerly provided deductions for, among other things, the cost of clearing and draining land).

9.16 The legislation operates in relation to individual grape vines as a matter of convenience - it overcomes difficulties that might otherwise arise in identifying the relevant unit of property for which deductions are allowable. In practical terms, taxpayers will not be required to separately calculate deductions for a number of vines where the cost of each could be expected to be the same. This would commonly be the case where a taxpayer establishes a number of vines at the same time.

Calculation of deductions

9.17 Qualifying expenditure (ie. the capital cost of establishing a vine in the land) is to be evenly deductible over four years commencing at the time the vine is first used for income producing purposes [new subsection 75AA(2)] . A vine is considered to be used for income-producing purposes from the time it is established (ie. planted) in the land - even though it may not become productive for some time - if it is being maintained for the purpose of harvesting the grapes for income-producing purposes, such as for sale or for use in the making of wine.

9.18 Deductions are to be pro rated, between vendor and purchaser, if vines are sold part way through a year of income before the end of the four year deduction period.

Time limit on deductions

9.19 Deductions are to be available only during the four year period commencing at the time a grape vine was established (in effect, the time it was first used for income-producing purposes). This is achieved by specifying that a grape vine is taken not to be used for assessable income-producing purposes after the end of four years from the time the vine was established [new subsection 75AA(3)] .

Loss on destruction

9.20 A deduction will be available on the destruction of a grape vine to the extent that any amount of undeducted qualifying expenditure in relation to the vine is greater than any amount received or receivable in respect of the destruction [new subsections 75AA(6)&(7)] .

Recoupment of expenditure

9.21 A deduction will not be allowable for so much of the qualifying expenditure on establishing a grape vine as is reimbursed to the taxpayer who incurred the expenditure if the amount of the reimbursement is not assessable income in the hands of the taxpayer [new subsections 75AA(8),(9)&(10)] .

Extended meaning of owner

9.22 As mentioned earlier, entitlement to deductions for qualifying expenditure in respect of grape vines rests with the owner of the vines. It is a general legal principle that property that is affixed to land in a permanent manner becomes part of the land. Accordingly, taxpayers who establish grape vines on land that they do not own might not be considered at law to be the owners of the vines.

9.23 Taxpayers who establish grape vines on land over which they hold a "Crown lease" will be treated as the owners of the vines for the purposes of these provisions, as will subsequent holders of the leases, if the law would otherwise treat them as not the owner. "Crown lease" has the same meaning as for the plant depreciation provisions and, broadly, means a lease of land, easement over land, or other right over or in connection with land, that is granted by the Crown [new subsection 75AA(11)] .

Extended meaning of person

9.24 The word "person" appears in the provisions on a number of occasions; for instance, proposed subsection 75AA(4). Under income tax law, the meaning of "person" includes a company (existing subsection 6(1) definition of "person"). This meaning is to be extended for the purposes of these provisions to include a partnership or a person in the capacity of a trustee [new subsection 75AA(12)] .

Chapter 10 INCOME TAX (INTERNATIONAL AGREEMENTS) ACT 1953

Technical amendments

10.1 This Bill will make a technical correction to Schedule 38 of the Income Tax (International Agreements) Act 1953 to reflect the amended text of the Australia-Vietnam comprehensive double taxation agreement. The amendment will replace in subparagraph 1.(b) of Article 4 (Residence) the word "of" in the phrase "management of any other criterion" with the word "or" [Clauses 118 and 119]

10.2 This amendment will apply to assessments in respect of income of the 1992-93 income year and subsequent income years Clause 120]

Chapter 11 AMENDMENT OF THE OCCUPATIONAL SUPERANNUATION STANDARDS ACT 1987

Overview

11.1 The amendment will enable a complying approved deposit fund to accept superannuation guarantee shortfall components [Clause 122] .

Summary of the amendments

11.2 Purpose of amendment: To amend subsection 3(1) of the Occupational Superannuation Standards Act 1987 (OSS Act) to amend the definition of "approved purposes" to include acceptance of payments of shortfall components prescribed in section 65 of the Superannuation Guarantee (Administration) Act 1992 (the SGAA) [Clauses 122 and 123] .

11.3 Date of effect: Royal Assent [Clause 124] .

Background to the legislation:

11.4 The SGAA prescribes a minimum level of superannuation support which employers should provide for each of their employees. Employers failing to comply with the prescribed minimum standard are subject to a superannuation guarantee charge based on the shortfall in their superannuation support plus an additional amount for an administrative charge and an amount as proxy for fund earnings.

11.5 An amount equal to the charge less the administrative charge is to be redistributed in the form of vouchers to those employees whose employers did not provide the prescribed minimum level of support. These vouchers are only payable into the account of the named employee held with a complying superannuation fund.

11.6 The majority of these vouchers are likely to be for small amounts. Some superannuation funds are not willing or able to accept vouchers. It has therefore been decided to ensure wider acceptance of the vouchers, or 'shortfall components' in terms of the SGAA, by allowing them to be deposited into complying approved deposit funds (ADFs).

Explanation of the amendments

11.7 Section 3 of the OSS Act will be amended by omitting paragraph (a) of the definition of "Approved Purposes" in subsection (1) and substituting a paragraph which continues the existing provisions as well as inserting a new provision to allow complying ADFs to accept superannuation guarantee shortfall components [Clause 123] .

Chapter 12 PETROLEUM RESOURCE RENT TAX AMENDMENTS

Overview

12.1 This Bill will make four amendments to the Petroleum Resource Rent Tax Assessment Act 1987 (the PRRT Act) to treat transfers of part of a taxpayer's interest in a project in the same way as transfers of a taxpayer's whole interest, to help ensure that the PRRT Act does not delay exploration following changes in interests in projects, and to ease compliance for PRRT payers. The amendments arise out of a Report to Parliament on the operation of the PRRT Act, tabled in Parliament in 1992 by the Minister for Resources.

12.2 Amendment A extends the time for lodgment of a PRRT return. Amendment B deals with the treatment of expenditure, receipts and tax liability on the transfer of a part interest in a petroleum project. Amendments C and D relax the requirements for transfer of exploration expenditure to be offset against receipts from other projects when a person farms into or abandons a petroleum project [Clause 125] .

Summary of the amendments

12.3 This Bill will make four amendments to the Petroleum Resource Rent Tax Assessment Act 1987 (the PRRT Act).

Amendment A: extension of lodgment time

12.4 This amendment will extend the time for lodgment of a PRRT return and of expenditure transfer notices from 21 days to 42 days from the end of the year of tax for a project, commencing from the first year of tax after 1 July 1993. That will be the year of tax ending 30 June 1994, or the first later year in which a taxpayer derives assessable receipts from a petroleum project.

Amendment B: treatment of expenditure of a person who transfers part of their interest in a petroleum project to another person

12.5 If a person enters into a transaction which transfers their whole interest in a petroleum project to another person, the PRRT Act operates to place the purchaser in the same position as the vendor. It treats the purchaser as if they had derived the assessable receipts, incurred the deductible expenditure and paid the tax instalments of the vendor up to the time of the transaction, and treats the vendor as not having done so. [Section 48].

12.6 However, if a person enters into a transaction to transfer only part of their interest in a project to another person, all expenditure, receipts and tax derived, incurred or paid up to the time of the transaction remain with the vendor.

12.7 This amendment will treat transactions entered into on or after 1 July 1993 which transfer a partial interest in a project in the same way as transactions which transfer an entire interest. The purchaser will be placed in the shoes of the vendor by being treated as if they had derived, incurred or paid amounts of receipts, expenditure and tax derived, incurred or paid by the vendor before the transaction, proportionate to the share of the vendor's interest transferred [Clause 129] .

Amendment C: transfer of exploration expenditure incurred after farm-in to a petroleum project

12.8 Currently, a taxpayer who farms into an existing petroleum project and subsequently incurs exploration expenditure on the project in that financial year cannot transfer that expenditure to be offset against their assessable receipts, or the receipts derived by another member of the same wholly-owned company group, from another project.

12.9 This amendment ensures that exploration expenditure incurred on or after 1 July 1990 on a project the taxpayer had already farmed into will be offset against their assessable receipts from another project. This will apply as long as the taxpayer, or the wholly-owned company group, retains an interest in both projects at the end of the farm-in year.

Amendment D: transfer of exploration expenditure on the abandonment of an entire interest in a petroleum project

12.10 Currently, a participant in a petroleum project who abandons their entire interest in the project before the end of a financial year cannot transfer exploration expenditure incurred on the project in that year to be offset against receipts from another project. This exploration expenditure will not be deductible by anyone.

12.11 This amendment will ensure that a person who abandons their interest in a project on or after 1 July 1993 will retain all expenditure they incurred before they abandoned the project. Their exploration expenditure will be transferable to be offset against receipts from other concurrent projects. This is similar to the treatment of expenditure when a project is abandoned by all participants.

Background to the legislation

12.12 Petroleum Resource Rent Tax (PRRT) is a tax on profits from petroleum projects. It is assessed on a project basis; the liability to pay PRRT is imposed on a person, in relation to their interest in the project. This liability is based on any profit received by the person from the project after taking into account their receipts and indexed expenditure in relation to the project, and allowing a minimum rate of return on most expenditure.

12.13 PRRT is levied at the rate of 40% and is assessed on the basis of an annual return. Three quarterly instalments are paid before the final instalment and annual return. The taxable profit of a PRRT payer is the excess of assessable receipts over deductible expenditure in a financial year. Deductible expenditure may be either capital or revenue in nature, and may be:

•

exploration expenditure;

•

general project expenditure; or

•

closing down expenditure.

12.14 Taxpayers carry forward all their exploration and general project expenditure on a petroleum project in which they have an interest until it is absorbed by their assessable receipts from the project. It may be carried forward at the augmented bond rate (the long-term bond rate plus 5%) or the Gross Domestic Product (GDP) factor rate. Expenditure incurred more than 5 years before a project commences is carried forward at the GDP factor rate, while more recent expenditure is carried forward at the augmented bond rate. Closing down expenditure may also be absorbed against taxable profits of earlier years of the project, if assessable receipts of the same year are inadequate.

12.15 Because real expenditure on a project is carried forward on an indexed basis, financing costs are not part of deductible expenditure.

12.16 As PRRT is project-based, most expenditure and receipts must stay with the project. In 1991, limited wider deductibility of exploration expenditure incurred on or after 1 July 1990 was introduced. Each year, exploration expenditure actually incurred by a taxpayer on a project which is not absorbed then against assessable receipts from the project will be transferred to the extent it can be offset against excess assessable receipts of the taxpayer, or other members of the same wholly-owned company group, from other projects.

12.17 The rules for wider deductibility are contained in the Schedule to the PRRT Act. Expenditure incurred on an exploration right or a petroleum project must be transferred to a project, and the taxpayer who incurred the expenditure must hold interests in both transferring entity and receiving project concurrently.

12.18 The taxable profit of a taxpayer in a year of tax in relation to a project is the excess of their assessable receipts from that project over the sum of:

•

deductible expenditure of the project;

•

amounts of exploration expenditure transferred to the project from other projects held by the taxpayer; and

•

(if the taxpayer is a company in a wholly-owned group) amounts of exploration expenditure transferred to the project from projects held by other companies in the group.

12.19 In November 1992, a Report on the operation of the PRRT Act was tabled in Parliament by the Minister for Resources. The Report flagged a number of matters for further consideration. The amendments in this Bill arise out of further consideration of these matters and consultation with industry.

Amendment A: Extension of time to lodge a PRRT return

Background

12.20 Under the PRRT Act, a tax return must be lodged for each petroleum project for each financial year, called a year of tax , in which the taxpayer derives assessable receipts from that project. The first year of tax may be a year in which tax is not yet payable in relation to the project, because not all expenditure of the taxpayer has been absorbed by receipts. [Section 59]

12.21 A PRRT return must be lodged with the Commissioner of Taxation within 21 days of the end of the year of tax in which the taxpayer derives receipts from the project. The Commissioner has a discretion to allow more time for lodgment of returns if he considers it necessary. [Subsection 59(1)]

12.22 A taxpayer who has incurred exploration expenditure on projects or exploration rights able to be offset against receipts from other projects transfers the expenditure by completing and lodging a transfer notice with the Commissioner. The notice must be lodged within 21 days of the end of the financial year in which the transfer is made, or longer if the Commissioner allows. Transfer notices may allow the taxpayer to choose between several possible projects against which transferable expenditure can be claimed. In default, the Commissioner can transfer the expenditure. [Sections 45A, 45B and 45C].

12.23 Until a transfer notice is completed for every transfer of expenditure made by a taxpayer for a financial year, a taxpayer cannot lodge their final return for the year of tax in relation to those projects on which they have derived assessable receipts. This is because they cannot calculate their taxable profit, if any, in relation to each project, or the amounts of expenditure to be carried forward to a later year.

12.24 Industry groups have submitted that 21 days is insufficient time to lodge returns and that the lodgment period should be extended. The Commissioner has received several applications for extension of time to lodge returns. Those applications have commonly sought another seven or fourteen days in which to lodge returns. To ease compliance for PRRT payers, the Government proposes to double to 42 days - 6 weeks - the time to lodge PRRT returns and transfer notices.

Explanation

12.25 This Bill amends the PRRT Act to double the time for lodgment of a PRRT return from 21 days to 42 days from the end of the year of tax in which the taxpayer derives assessable receipts from a project [Subclause 130(1); Subsection 59(1)].

12.26 The amendment will also double the time allowed for lodgment of transfer notices transferring exploration expenditure to be offset against receipts derived by the taxpayer or another group company from another project. Transfer notices will be required to be lodged within 42 days of the end of the financial year in which the transfer is made [Clause 127 and section 45A; Clause 128 and section 45B] .

12.27 The longer period of 42 days will apply to returns and transfer notices for the financial year starting on 1 July 1993 (and ending on 30 June 1994), and for later financial years [Subclauses 127(2), 128(2) and 130(2)].

Amendment B: treatment of expenditure of a person who sells part of their interest in a petroleum project to another person

Background

12.28 The PRRT Act contains rules which apply when a person enters into a transaction which transfers their whole entitlement to assessable receipts from a petroleum project (their entire interest in the project) to another person. These rules determine the positions of the "vendor" and the "purchaser" (as defined by the legislation) of the interest for the purpose of calculating their PRRT liability. They apply even if the transfer is for no consideration. [Section 48]

12.29 Basically, the purchaser of an entire interest in receipts from a project will be placed in the shoes of the vendor in relation to the project. The law treats the purchaser as if they had derived the assessable receipts, incurred the deductible expenditure, and paid the tax instalments of the vendor up to the time the transaction was entered into, and treats the vendor as not having done so. The purchaser is taken to have incurred expenditure that might have been transferable by the vendor under the wider deductibility regime; however, wider deductibility only applies to actual expenditure of a person and so this expenditure is not transferable in the hands of the purchaser.

12.30 By contrast, a vendor who enters into a transaction which transfers only part of their entitlement to assessable receipts from a petroleum project (a partial interest in the project) retains all receipts, expenditure and tax instalments derived, incurred or paid before the time of the transaction. Thus, even if a purchaser buys 90% of a vendor's interest in a petroleum project, leaving the vendor with only a 10% interest, the vendor retains all receipts, expenditure and tax instalments which they had previously derived, incurred or paid in relation to the project. The purchaser is not treated as having derived any part of the receipts, incurred any part of the expenditure or paid any part of the tax instalments before the time the transaction was entered into.

12.31 The only exception to this treatment of a transaction which transfers a partial interest in a project is a transitional measure for agreements entered into before the announcement of PRRT in 1984. Section 49 enables a transfer of expenditure, as agreed by the parties, on a transaction to transfer a partial interest in a project where the transfer occurred before 1 July 1984 and the Commissioner was given a copy of the expenditure agreement within 30 days after the PRRT Act came into operation.

12.32 Industry has submitted that the requirement that a vendor of a partial interest in a project retain all their receipts and expenditure in relation to the project for PRRT purposes may significantly affect commercial decisions. In particular, it is said to restrict the ability of the vendor to negotiate anything but a complete disposal of an interest in a project, thus affecting the choice whether to farm out of a project.

12.33 This effect of the PRRT Act may impede the completion of existing projects, particularly where there has been substantial expenditure and an existing venturer lacks funds to continue but wishes to retain some interest in the project. This is especially problematic for more marginal projects. The Government has decided to amend the Act to ensure that where only part of a person's interest in project receipts is transferred to another person, the purchaser is placed in much the same position as the vendor would have been in but for the transfer, to the extent of the proportion of the vendor's interest which is transferred.

Explanation

12.34 This amendment introduces rules covering parties to a transaction which transfers part of a person's entitlement to derive in the future assessable receipts from a project to another person (a transaction which transfers a partial interest in the project). It puts in place a similar regime to that in Section 48 for transactions which transfer an entire interest in a petroleum project [Clause 129; new section 48A] .

12.35 The amendment will apply to farm-in/farm-out arrangements where an existing participant in a petroleum project enters into a transaction on or after 1 July 1993 to transfer part of their entitlement to derive future assessable receipts from the project to one or more incoming participants. It will apply even where there is no consideration for the transfer of entitlement under the transaction. [New subsection 48A(1)]

12.36 The purchaser of a partial interest will be treated as having derived, incurred or paid proportionate amounts of assessable receipts, deductible expenditure and tax instalments of the vendor before the time the transaction is entered into, and the vendor will be taken not to have derived, incurred or paid that proportion of receipts, expenditure and tax instalments. Transferable exploration expenditure of the vendor will be taken to have been incurred by the purchaser, but will not be transferable to other projects by the purchaser.

The structure of the amendment

12.37 New section 48A deals with transactions transferring a partial interest. It uses substantially the same terms as Section 48 (dealing with entire interests), but is set out in a more formally structured way. [Clause 129]

12.38 Subsections (1) to (3) of new section 48A set out the conditions for application of the section, while subsections (5) to (10) describe the effects of the section. New subsection 48A(4) is a drafting provision which ensures that these consequences have effect for all the purposes of the PRRT Act, and which separates the conditions for application from the consequences of application of the section.

Transactions which transfer a partial interest

12.39 A person who enters into a transaction which transfers part of their entitlement to assessable receipts from a project is the vendor , and the person (or each of the persons) who receive the part entitlement is called the purchaser(s) of that entitlement. [New paragraphs 48A(2)(a) and (b)] The time at which such a transaction is entered into is the transfer time , and the financial year in which the transaction occurs is the transfer year . [New paragraphs 48A(2)(c) and (d)]

12.40 A partial interest in a project may be transferred before the first year in which assessable petroleum receipts are derived from the project (before the first year of tax in relation to the project). [New subsection 48A(3)] Such a transaction may be entered into where there is not yet a production licence (and hence a project) in existence on an area, but only an exploration permit or retention lease. Assessable receipts may be derived and deductible expenditure incurred in relation to a petroleum project that has not yet started [sections 31 and 45], so a person may have an entitlement to assessable receipts from the project at that time, and may transfer either a part of that entitlement, or that entire entitlement, to another person.

12.41 The proportion of a vendor's whole entitlement to assessable receipts which is transferred by a transaction is the transfer percentage of the vendor's entitlement. The effect of new section 48A will be to place the purchaser in the same position as the vendor would have been in relation to the project, but for the transfer, in respect of the transfer percentage of entitlement to assessable receipts.[New paragraph 48A(2)(e)].

12.42 For example, Explorer NL is the sole operator on an exploration permit. No project is yet in existence, and no receipts have been derived, but Explorer NL has incurred $5 million exploration expenditure. As no receipts have yet been derived, Explorer has not yet lodged its first PRRT return in relation to the project. It enters into a transaction to transfer half of its entitlement to assessable receipts in the future to Buyer. The transfer percentage is 50%. New Section 48A will apply to place Buyer in the position in which Explorer would have been in relation to the project, in respect of 50% of the $5 million deductible expenditure incurred by Explorer before the transfer time . Buyer is taken to have incurred $2.5 million exploration expenditure, derived no receipts and paid no tax in relation to the project.

Assessable receipts, expenditure and tax liability

12.43 The purchaser of the transfer percentage of the vendor's entitlement to assessable receipts from a petroleum project will be taken to have:

•

derived the transfer percentage of assessable receipts;

[new paragraph 48A(5)(a)]

•

incurred the transfer percentage of expenditure;

[new paragraphs 48A(5)(b) and (c)] and

•

paid the transfer percentage of liability for tax instalments;

[new paragraph 48A(5)(d)]

which would have been derived or incurred by the vendor in relation to the project in relation to the transfer year, if that year had ended immediately before the transfer time. The transfer of expenditure is dealt with in more detail below.

12.44 The vendor is taken not to have derived, incurred or paid the transfer percentage of assessable receipts, expenditure or tax instalments. The vendor retains receipts, expenditure and tax liability only to the extent that they retain an interest in receipts of the project. [New subsection 48A(6)]

12.45 If there is more than one purchaser, each will have acquired a part of the transfer percentage of the vendor's interest in the project. The transfer percentage of assessable receipts, expenditure and tax instalments will be distributed between the purchasers in proportion to their acquired entitlement to the partial interest transferred. [New subsection 48B(5)].

12.46 For example, if X Co agrees to transfer 50% of its interest in a project to Y Co and Z Co in equal shares, the transfer percentage is 50%. However, the acquired entitlement of each of Y Co and Z Co is only 25% of X Co's assessable receipts. Y Co and Z Co will each taken to have derived, incurred or paid 25% of receipts, expenditure and tax which was derived, incurred or paid by X Co before the transfer time. X Co will be taken not to have derived, incurred or paid 50% of its former receipts, expenditure and tax instalments.

12.47 The approach taken in new Section 48A requires that the amounts of receipts, expenditure and tax liability of the vendor be calculated in the same way as if there has been a transfer of the vendor's entire interest in the project. Then, as only the transfer percentage of the vendor's interest is transferred, the amounts actually taken to be derived or incurred by the purchaser are calculated by taking the transfer percentage of those entire amounts. This amount is fixed. The vendor and purchaser cannot agree on whether expenditure can be transferred, and what amount will be transferred, as they could in the transitional period under section 49.

Treatment of expenditure

12.48 When a vendor enters into a transaction which transfers their entire interest in a project, their expenditure is taken to be incurred by the purchaser in two different ways under Section 48. Deductible expenditure which is not transferable is taken to be incurred by the purchaser in the transfer year, after it has been compounded in the hands of the vendor using either the GDP factor, or the augmented bond rate. This includes "inherited" expenditure taken to be incurred by vendor as a result of previous Section 48 or new Section 48A transactions. [Paragraph 48(1)(a)(i)]

12.49 However, transferable exploration expenditure is treated differently because of the operation of the wider deductibility regime. Transferable exploration expenditure is either class 2 augmented bond rate exploration expenditure, or class 2 GDP factor expenditure. It is calculated under the Schedule and is based on actual exploration expenditure incurred by the person plus any amounts previously taken to have been incurred by the person under Section 48. These form the incurred exploration expenditure amount of the person [ Clause 1 , Parts 2 and 3 of the Schedule].

12.50 A technical result of the calculation of transferable exploration expenditure of the vendor is that some amounts are deemed not to have been incurred by the vendor until they can be utilised. This renders these amounts "invisible" for the purposes of a Section 48 transaction. To avoid this problem, Section 48 simply takes the purchaser to have incurred expenditure that would have been included in the incurred exploration expenditure amount of the vendor in relation to the project before the transfer time. The purchaser is taken to have incurred this expenditure at the time the vendor actually incurred it, and the expenditure is compounded in the hands of the purchaser, not the vendor. [Paragraph 48(1)(a)(ia) and subsection 48(2). A more detailed explanation, with an example, can be found in the Explanatory Memorandum to Taxation Laws Amendment Act (No. 5) 1992.]

12.51 A similar approach to expenditure is taken in new Section 48A for transactions which transfer part of a person's interest in assessable receipts from a project. The purchaser of a partial interest will be taken to have incurred, in the transfer year, the transfer percentage of deductible expenditure of the vendor which is not transferable, as compounded by the Schedule in the hands of the vendor. As with Section 48, deductible expenditure of the vendor in relation to the project includes "inherited" expenditure of the vendor as a result of previous Section 48 or new Section 48A transactions. [New paragraph 48A(5)(b)]

12.52 In addition, the purchaser of a partial interest will be taken to have incurred the transfer percentage of amounts of expenditure which would have been included in the incurred exploration expenditure amount in relation to the vendor and the project, as if the transfer year had ended immediately before the transfer time. [New paragraph 48A(5)(c)].

12.53 The purchaser will be taken to have incurred these amounts in the year in which they were actually incurred by the vendor, and they will be compounded under the Schedule to become class 2 augmented bond rate exploration expenditure or class 2 GDP factor exploration expenditure in the hands of the purchaser .[New subsection 48A(7)]

12.54 Amendments have been made to the definition of incurred exploration expenditure amount in the Schedule to the Act, to ensure that, like transferable exploration expenditure taken to be incurred by a purchaser of an entire interest in a project, transferable exploration expenditure taken to be incurred by a purchaser of a partial interest under new paragraph 48A(5)(c) is included in the incurred exploration expenditure amount of the purchaser [ Clause 131; clause 1 of the Schedule, subparagraphs (a)(ii), (b)(ii) and (b)(iii) of the definition].

12.55 Expenditure which would be transferable to other projects in the hands of the vendor will not be transferable in the hands of the purchaser. Wider deductibility is intended only to apply to expenditure actually incurred by a taxpayer. Consequently, while both Section 48 and new Section 48A have the result that exploration expenditure which is transferable in the hands of the vendor is in the nature of transferable exploration expenditure in the hands of the purchaser, this expenditure will not in fact be able to be transferred by the purchaser because the purchaser had no interest in the project when the expenditure was incurred.

Transfer of property in relation to the transaction

12.56 A transaction which transfers a partial interest in a project may involve the transfer from the vendor to the purchaser of a partial interest in property being used in relation to the project at the transfer time. The vendor may derive receipts and the purchaser may incur expenditure because of a transfer of property in relation to the transaction.

12.57 Assessable property receipts are receipts derived by a person in relation to a petroleum project, in relation to property used on the project in respect of which the person has incurred project expenditure at the exploration, general or closing-down stages of the project. They include the sale price of property; insurance receivable or its value if property is lost or destroyed; its value at the time its use on a project is ended; amounts gained from hiring out or granting rights to use property; and amounts received for the provision of information. [Section 27]

12.58 Although a transaction which transfers a partial interest in a project may lead to a change of interests in property used on the project, in relation to the project, the property has not been disposed of, lost, destroyed, hired out or its use terminated as a result of the transaction. Therefore, any receipts derived by the vendor, or expenditure incurred by the purchaser, because of a transfer of property in relation to the transaction will not be treated as assessable property receipts of the vendor or eligible real expenditure of the purchaser.

12.59 Where there is a transfer of property in relation to the transaction, new subsection 48A(8) will apply to:

•

deem the vendor not to have derived any assessable property receipts in relation to the transaction; [paragraph 48A(8)(a)] and

•

deem the purchaser(s) not to have incurred any eligible real expenditure in relation to the transaction [paragraph 48A(8)(b)]

because of the transfer of the property.

12.60 This follows the treatment of transfers of property where a taxpayer's whole interest in a project is transferred. It ensures that PRRT liability is based on expenditure incurred by the taxpayer which makes the property available to the project, and on receipts derived by the taxpayer from use of the property outside the project, or its sale, loss, destruction or termination of use on the project. PRRT liability is not affected by the amount of consideration on a farm-in.

Property, miscellaneous compensation and employee amenities receipts

12.61 As a result of a transaction which transfers the transfer percentage of the vendor's entitlement to assessable receipts from a project, the purchaser holds a percentage interest in the project and may hold an interest in property used on the project. The interest of the purchaser as a percentage of the whole of the project will not be the same as the transfer percentage if the vendor is not the only other participant in the project.

12.62 After the transfer time, the purchaser should derive the transfer percentage of any project receipts which would have been derived by the vendor but for the transfer, including assessable property receipts, assessable miscellaneous compensation receipts and assessable employee amenities receipts. The vendor will derive the remaining percentage of these receipts.

12.63 Assessable property, miscellaneous compensation and employee amenities receipts derived by a person are defined in terms of eligible real expenditure of the person. [Sections 27, 28 and 29 respectively] This is project expenditure of the person incurred at exploration, general or closing-down stages of the project. [Section 2]

12.64 To ensure that the purchaser is taken to receive the transfer percentage of assessable property, miscellaneous compensation and employee amenities receipts after the transfer time, the purchaser will be taken to have incurred the transfer percentage of any eligible real expenditure incurred by the vendor in relation to the project. This is the same approach as is taken in paragraph 48(1)(e) in relation to transfers of entire interests. [New subsection 48A(9)]

12.65 After the transfer of a partial interest, property in which the vendor, purchaser and other project participants have an interest may be sold and generate assessable property receipts. The purchaser of the partial interest is taken by new Section 48A to have incurred the transfer percentage of the expenditure incurred by the vendor on the property. Section 27 will then apply correctly and the purchaser will derive the percentage of the assessable property receipts proportionate to its interest in the whole project.

Bad Debts

12.66 Bad debts which arise after the transfer time in relation to a transaction which transfers a partial interest will be treated in the same way as they are treated by paragraph 48(1)(f) in relation to a transfer of an entire interest. [New subsection 48A(10)]

12.67 Bad debts in relation to a project are deductible to a taxpayer as exploration, general project or closing down expenditure, depending on the stage at which they are written off. [Section 40]

12.68 A bad debt of a purchaser of a partial interest may relate to receipts owing to the vendor of the partial interest before the transfer time. The purchaser is taken to have brought to account receipts which were owing to the vendor in the transfer year. In order to calculate a bad debt to be treated as expenditure of the purchaser which relates to receipts owing to the vendor before the transfer year, the purchaser will be taken to have brought to account the transfer percentage of any debt brought to account by the vendor as assessable petroleum, exploration recovery, property, compensation, or employee amenities receipts. [New subsection 48A(10)]

Amendment C: Transfer of exploration expenditure incurred after farm-in to a petroleum project

Background

12.69 Under the wider deductibility regime in the PRRT Act, some exploration expenditure incurred on a project is transferable on a mandatory basis to be offset against excess assessable receipts derived from other projects. Wider deductibility delays PRRT liability until exploration expenditure is absorbed by receipts from all projects in which a taxpayer (or another member of the same wholly-owned company group) has an interest.

12.70 Transferable expenditure is either class 2 augmented bond rate exploration expenditure or class 2 GDP factor expenditure. Unused transferable exploration expenditure incurred by a taxpayer on or after 1 July 1990 in relation to a project will be transferred to the extent to which it can be offset against their assessable receipts, or against receipts derived by another company in the same wholly owned group, from another project. The rules for the wider deductibility of exploration expenditure are set out in the Schedule to the PRRT Act. Part 5 deals with transfer of expenditure between projects held by the same taxpayer, while Part 6 deals with transfer of expenditure between projects held by different group companies.

12.71 A taxpayer must first transfer unused exploration expenditure to the extent to which it can be be offset against their own receipts from other projects. If any transferable expenditure remains after these transfers, a taxpayer who is a member of a wholly-owned company group must transfer this expenditure to the extent to which it can be offset against any receipts derived from other projects by other companies in the group. The taxpayer must make the transfer by completing a transfer notice and giving it to the Commissioner at the end of the financial year in which the transfer is made. Transfer notices may allow the taxpayer to choose between several possible projects against which transferable expenditure can be claimed. In default, the Commissioner can transfer the expenditure. [Sections 45A, 45B and 45C].

12.72 The wider deductibility regime allows some spreading of exploration expenditure across projects. However, trading in expenditure is not allowed. A person cannot buy up a PRRT-liable project to receive expenditure from a failed exploration project, or buy up a failed project in order to transfer expenditure to a PRRT-liable project, even during the financial year in which expenditure is transferred. This is ensured by the common interest rule in the Schedule, in relation to projects held by a single taxpayer, and projects held by group companies.

12.73 The common interest rule for transfer of expenditure between project interests of the same taxpayer requires that before expenditure can be transferred, the taxpayer must hold a continuous interest in both:

•

the project on which the expenditure was incurred, and from which it is transferred (the transferring entity ); and

•

the project to which the expenditure is transferred (the receiving project )

from the beginning of the financial year in which the expenditure was incurred to the end of the financial year for which it is transferred. [Subclause 22(1) of the Schedule]

12.74 Transferable expenditure may be incurred on and transferred from either a petroleum project which is the subject of an eligible production licence or an exploration right, and so this is defined as the transferring entity . However, it can only be transferred to a petroleum project, so this is termed the receiving project . The year in which the expenditure is transferred is known as the transfer year . [Clauses 20 and 29 of the Schedule]

12.75 A similar rule applies to wholly-owned group companies (not other groups: Section 2B). The company which incurs and transfers the expenditure must have held an interest in the transferring entity continuously from the beginning of the financial year in which the expenditure was incurred to the end of the year in which it is transferred. The company which receives the expenditure to be offset against its receipts from the receiving project must have held an interest in that project over the same period of time. Both companies must have been members in the same group in that time. The company which transfers the expenditure is the loss company , while the company which receives the expenditure is the profit company . These terms do not imply that either company is making a profit or a loss for income tax or accounting purposes. [Clause 28 and subclause 31(1) of the Schedule]

12.76 If a taxpayer farms into a petroleum project during a financial year and incurs expenditure on the project in that year, the common interest rule prevents the transfer of this expenditure to other projects held by the taxpayer or by another company in the same group. This is because the taxpayer has not held an interest in the transferring entity (the project the taxpayer has farmed into) from the beginning of the financial year in which the taxpayer incurred the expenditure.

12.77 Following industry submissions, the Government has decided to remove this consequence of the common interest rule because it may lead taxpayers to delay incurring exploration expenditure until the financial year following farm-in. It is not the intention of the PRRT Act to delay exploration.

Explanation

12.78 This Bill amends the common interest rule in relation to the transferring entity so that a taxpayer who farms into a petroleum project during a financial year can transfer exploration expenditure incurred on the project in that year. This expenditure must be transferred if it satisfies the other conditions for transferability in the Schedule.

12.79 As transfers between projects of the same taxpayer and of group companies are treated separately by the common interest rule, these amendments are in separate clauses in the Bill and will be dealt with separately below. The Bill amends clause 22 of the Schedule in relation to transfers of expenditure between projects in which the same taxpayer has an interest [Clause 132; new subclause 22(2AA) of the Schedule] and clause 31 of the Schedule in relation to transfers of expenditure between projects in which different group companies have an interest. [Clause 133; new subclause 31(2AA) of the Schedule]

Commencement and application

12.80 The amendments will commence on 1 July 1991, the date of commencement of the wider deductibility regime for exploration expenditure contained in the Schedule to the PRRT Act. They will apply, as does the Schedule, to exploration expenditure incurred on or after 1 July 1990. [Clause 2(2)]

Transfers between projects held by the same taxpayer

12.81 A person who farms into a project gains an entitlement to assessable petroleum receipts from the project at the time of entering into the transaction. This is an interest in the project. A person may gain an interest in a project before any assessable receipts are derived from it, and before a production licence comes into force. [Sections 31 and 45; clauses 2 and 3 of the Schedule]

12.82 The farm-in time is the time at which the person starts to hold an interest in relation to the project which is the transferring entity. A taxpayer may farm in to gain an interest in receipts from a project during a financial year, and then farm in again to increase their interest. The first time the taxpayer farms in will be the farm-in time . [New subclause 22(2AA)(b)].

12.83 This amendment will ensure that where a person farms into the transferring entity during a financial year and then incurs transferable exploration expenditure in relation to the project in that year, the common interest rule will not require the person to have held an interest before the farm-in time. When the other requirements for transfer are met, that expenditure will be transferable to be offset against that person's receipts from other projects. [New subclause 22(2AA)].

12.84 The amendment does not change the requirements of the common interest rule in relation to the receiving project . The taxpayer must hold an interest in the receiving project from the beginning of the financial year in which the expenditure is incurred (the beginning of the year the taxpayer farmed into the transferring entity) to the end of the year in which the expenditure is transferred. [Subclause 22(1) of the Schedule]

12.85

Example 1

Co and B Co each have a 50% interest in an exploration joint venture and each hold a 50% interest in an exploration permit. On 1 September 1993, X Co farms into the joint venture by purchasing half of A Co's interest for $5 million. A Co now holds a 25% interest, B Co holds a 50% interest and X Co holds a 25% interest in the project. The farm-in time is 1 September 1993.

X Co incurs $10 million exploration expenditure on the permit before December 1993. Currently, this expenditure cannot be offset against assessable receipts derived by X Co in relation to other projects it holds at the time. This amendment will enable X Co's transferable exploration expenditure to be offset against its receipts from other projects, provided other requirements for transfer are met.

On 1 January 1994, X Co enters into another agreement with A Co to earn a further 20% of A Co's interest on condition that X Co incur $2 million exploration expenditure by 1 March 1994. The further $2 million exploration expenditure incurred by X Co will also be transferable to other projects under the proposed amendment, provided other requirements are met.

Section 48 or 48A expenditure

The intention of the wider deductibility regime is that a taxpayer is only able to offset exploration expenditure actually incurred by them against their receipts from other projects. This results from the requirement that the person hold an interest in relation to the transferring entity from the beginning of the financial year in which the expenditure was incurred.

When a taxpayer farms into a project by purchasing the interest or part of the interest of another participant, they will be placed in the shoes of the vendor by the operation of Section 48 or new Section 48A. Under these provisions, the taxpayer is taken to have incurred, and effectively "inherits", all or part of any transferable exploration expenditure of the vendor. This "inherited" expenditure is not incurred after the farm-in time and so cannot be transferred to another project. [New paragraph 22(2AA)(b)]

If the taxpayer farms in a second time in the financial year to gain an increased interest in the project, and does so by again purchasing the interest or part of the interest of another participant, Section 48 or new Section 48A will apply again. In this situation, there is the possibility that the taxpayer will be taken to have incurred some of the expenditure actually incurred by that other participant after the farm-in time .

This amendment ensures that the taxpayer will only be able to transfer exploration expenditure which they have actually incurred, and not which they have been taken by section 48 or new section 48A to have incurred. Therefore, a taxpayer who has "inherited" expenditure because of the application of those sections cannot transfer that expenditure to other projects. [Subclause 22(2AA)(c)]

12.86

Example 2

P Co farms into a project on 1 April 1995 by purchasing Q Co's entire interest (leaving P Co and R Co holding a 50% interest each in the project). The farm-in time is 1 April 1995. Section 48 operates to take P Co to have incurred $4 million exploration expenditure incurred by Q Co earlier in the financial year. P Co also incurs $1 million expenditure on drilling an exploration well. At the same time, R Co incurs $1 million on seismic testing.

12.87

In May, P Co gains a further 10% interest in relation to the project by purchasing 20% of R Co's interest. P Co is taken by new section 48A to have incurred 20% of the transferable exploration expenditure of R Co at the time it is incurred by R Co. Consequently, P Co will be taken to have incurred $0.2 million exploration expenditure after the farm-in time, in addition to the $1 million actually incurred by P Co. Only the expenditure actually incurred by P Co after the farm-in time ($1 million) can be transferred to other projects.

Transfer of expenditure between group companies

12.88 Where a taxpayer who is a group company has unused transferable exploration expenditure, after expenditure has been transferred to other projects held by the taxpayer, the unused expenditure may be able to be transferred to be offset against assessable receipts of another group company from another project. [Section 45B]

12.89 The taxpayer with unused expenditure is a loss company . The expenditure can only be transferred to offset assessable receipts derived by another company in the group with an interest in a project which has taxable profits: a profit company . The loss company must transfer as much of its unused transferable exploration expenditure to profit companies in the group as the latter can absorb.

12.90 This Bill amends the common interest rule in relation to the loss company and the transferring entity only. It ensures that a group company which farms into a petroleum project in a financial year and then incurs exploration expenditure in relation to the project which remains unused at the end of that year, can transfer that expenditure to be offset against receipts derived by a profit company in the group from another project. [Clause 133; new subclause 31(2AA) of the Schedule]

12.91 The amendment does not affect the rule that the profit company must hold an interest in relation to the receiving project continuously from the beginning of the financial year in which the expenditure was incurred to the end of the transfer year. [Subclause 31(1) of the Schedule]

12.92 The farm-in time is the time at which the loss company started to hold an interest in relation to the petroleum project. [New subclauses 31(2AA)(a) and (b)]. The amendment will remove the requirement of the common interest rule that the loss company have held an interest in relation to the transferring entity (the project which the company farmed into) before the farm-in time. [New subclause 31(2AA)]

12.93 The restrictions regarding expenditure "inherited" under section 48 or 48A, discussed above for transfers between project interests held by the same taxpayers, also apply to transfers between project interests held by different group companies. Only expenditure actually incurred by the loss company can be transferred to other projects. [New subclause 31(2AA)(c)]

12.94

Example

A Co is a new subsidiary in the Expol Group, owned by Ex Holdings Co. On 1 August 1992, A Co earned a 25% interest in an existing petroleum project by incurring $2 million exploration expenditure and $10 million general project expenditure. This is A Co's only petroleum interest, and it derives no assessable petroleum receipts in the 1993-94 financial year. The farm-in time is 1 August 1993. At the end of the year, A Co is a loss company because it has unused exploration expenditure.

This amendment will enable A Co's $2 million exploration expenditure to be transferred to be offset against receipts derived by another company in the group which has profitable petroleum interests.

Amendment D: transfer of exploration expenditure on the abandonment of an entire interest in a petroleum project

Background

12.95 A person with an interest in receipts from a petroleum project and who has incurred expenditure in relation to the project (whether on an exploration right or production licence) may later decide to leave the project because of its low prospectivity or for other commercial reasons. The person may either:

•

enter into a transaction which transfers their interest in the project to another person; or

•

abandon or "walk away" from their interest in the project.

12.96 Under the first option, all assessable receipts, deductible expenditure and tax instalments derived, incurred or paid by the person before the transfer time are taken to be derived, incurred or paid by the purchaser of the interest, and the person is taken not to have derived, incurred or paid them. All expenditure is therefore deductible to the purchaser in relation to the project. [Section 48]

12.97 Under the second option, as the law stands, the person retains all expenditure they incurred before "walk away". In walking away from the project, they give up their interest in assessable receipts from the project they abandoned, so the expenditure cannot be offset against receipts from that project. This means that non-transferable expenditure of the person cannot be absorbed against any expenditure. This consequence is not affected by this amendment. However, participants are less likely to walk away once a project enters the production phase.

12.98 It may be possible for the person who walks away from a project to offset any transferable exploration expenditure which they incurred on the project before abandonment against their receipts, or receipts derived by other companies in the same wholly-owned group, from other projects. This depends on the operation of the common interest rule in the Schedule, described in detail in the Background to Amendment C above. As the expenditure is to be transferred from the project the person abandons, the rules relating to the project from which expenditure is to be transferred (the transferring entity) must be considered. [Clauses 22 and 31 of the Schedule]

12.99 The common interest rule requires that the person hold an interest in relation to the project from which expenditure is to be transferred from the beginning of the financial year in which the expenditure is incurred to the end of the year for which it is transferred. The person will satisfy this rule with respect to transferable exploration expenditure which they incurred in a financial year before the "walk away" year.

12.100 However, the person will generally fail this test in relation to transferable exploration expenditure incurred on the project during the year in which the person walks away . Such expenditure can only be offset against receipts from other projects in two situations:

•

If the person who walks away is the sole participant in the project, the exploration right or production licence will lapse as a result of abandonment. The common interest rule does not preclude the person transferring from a project expenditure incurred in the year in which it lapses. [Subclauses 22(2A) and 31(2A)]

•

If there is more than one participant in the project, and all the participants abandon it during the same financial year, then the right or licence will lapse as described above. Each participant can offset transferable expenditure incurred in that year against receipts from other projects, if other requirements are satisfied.

12.101 However, as the law stands, if other participants remain on the project which the person abandons, that person cannot transfer their expenditure to other projects in which they hold an interest; nor can it be deducted by the remaining participants in the project.

12.102 The Government has decided to amend the common interest rule to ensure that a person who "walks away" from a petroleum project is not precluded from transferring exploration expenditure incurred in the "walk away" year to be offset against assessable receipts derived by them, or by another company in the same group, from other projects. This will reduce the chances of such expenditure being lost completely, and is consistent with the treatment where a project lapses.

Explanation

12.103 This amendment modifies the common interest rule relating to transfers between projects held by the same person. The amendment will ensure that a person who ceases to hold an interest in the transferring entity in the financial year in which expenditure is to be transferred, is not precluded from transferring eligible expenditure to be offset against their receipts from other projects under wider deductibility. [Clause 132 ; new subclause 22(2AB)]

12.104 It also modifies the common interest rule relating to transfers between group companies so that a group company with unused exploration expenditure who ceases to hold an interest in the transferring entity in the transfer year, is not precluded from transferring this expenditure to be offset against receipts derived by another group company from other projects. [Clause 133; new subclause 31(2AB) of the Schedule]

12.105 The amendment does not affect the common interest rule in relation to the receiving project (to which the expenditure is transferred). The person, or the profit company, will still be required to hold an interest in the receiving project from the beginning of the financial year in which the expenditure is incurred to the end of the transfer year. [Subclauses 22(1) and 31(1) of the Schedule]

12.106 The amendment will apply where a person has ceased to hold an interest in the transferring entity on or after 1 July 1993. The time at which the person ceases to hold an interest is the cessation time . [New paragraphs 22(2AB)(a) and 31(2AB)(a) of the Schedule]

12.107 It will not apply where the person who ceases to hold the interest does so not by abandoning the project, but by entering into a transaction which transfers their whole interest to another person. Section 48 will apply in this situation. [New paragraphs 22(2AB)(b) and 31(2AB)(b) of the Schedule]

12.108

Example

A Co, B Co and C Co are joint venture participants involved in exploration work on permit P1. The permit is up for renewal on 29 June 1994. The participants will be required to commit themselves to further exploration expenditure in order to renew the permit. B Co and C Co wish to renew the permit even though it is only marginally prospective, but A Co wishes to concentrate on other, more profitable projects in which it has an interest. It tries to farm out its interest but the remaining participants do not wish to buy it, and it can find no external buyers. A Co abandons its interest in receipts derived from the sale of petroleum found on P1 on 1 May 1994.

A Co has incurred $2 million transferable exploration expenditure on P1 between 1 July 1993 and 1 May 1994. Currently, A Co cannot transfer this expenditure to be offset against its receipts from other projects, nor is it deductible to the remaining participants on P1. This amendment will ensure that A Co can transfer this expenditure to be offset against excess assessable receipts from other projects which A Co has held from the start of the 1993-94 financial year, as long as it retains its interest in these projects for the whole financial year.

If A Co derives no excess assessable receipts from those other projects in the 1993/94 financial year (that is, if deductible expenditure of A Co on those projects exceeds assessable receipts from them), exploration expenditure incurred by A Co on P1 will be deductible in a future year against excess assessable receipts from one of those projects.

Chapter 13 SALES TAX: APPLICATION OF PENALTIES

Summary of proposed amendment

13.1 The proposed amendment will clarify the extent to which penalties can apply to acts or omissions that happen after the introduction of amendments of the sales tax law in the Parliament but before they receive the Royal Assent [amendment (2)] .

Explanation of the proposed amendments

13.2 Section 129 of the Sales Tax Assessment Act 1992 operates to relieve a person of liability for a sales tax penalty which would otherwise be incurred in the period:

•

starting on the date a sales tax amending Act commences (or is taken to have commenced); and

•

ending 28 days after the Act has received the Royal Assent ;

where that penalty applies as a result of the amending law.

13.3 The intended effect of the provision is that, until the 28th day after Royal Assent is given to the amending law, a person cannot be guilty of an offence or be liable to a penalty that arises from an infringement of the amending law.

13.4 For example, if an amending sales tax Act were to increase the rate of sales tax on certain goods, from 20% to 21%, with effect from the date of introduction of the Act (as a Bill) in the House of Representatives, then the result would be that:

•

a taxpayer would be liable for late payment penalty under the existing law if the taxpayer failed to make a payment of tax at the 20% rate by the due date for payment;

•

a taxpayer would not be liable for late payment penalty under the amended law if the taxpayer does not account for the additional 1% of tax by the due date for payment of the tax, provided that the taxpayer makes that payment within 28 days of the amending Act receiving the Royal Assent. If the taxpayer does not make that payment by that date, then late payment penalty will commence to apply from that date.

13.5 There has been some suggestion that section 129 could operate to relieve a taxpayer of any liability under the existing law for tax on an assessable dealing where that dealing is affected by the amending Act. In the example above, the argument would be that section 129 would operate to relieve a taxpayer for any late payment penalty on the payment of tax at the 20% rate.

13.6 The purpose of this amendment is to put beyond doubt the intended operation of section 129. This amendment is not considered to have any substantive effect on the operation of section 129.

13.7 The amendment will insert into section 129 an express statement that the section does not operate to relieve a person from liability to a sales tax penalty to the extent to which the liability would have existed even if the sales tax amending Act had not been enacted.

Chapter 14 SALES TAX EXEMPTION FOR THE RSPCA AND CHILD CARE SERVICES

Overview

14.1 The amendments will:

•

exempt the RSPCA from sales tax on goods used mainly in carrying out inspections and operating animal shelters [Subclause 141(d)] .

•

exempt certain child care bodies and family day care coordination units [Subclause 141(c)].

Summary of proposed amendments

14.2 Purpose of amendments: The Taxation Laws Amendment Bill (No. 3) 1993 will:

•

amend the Sales Tax (Exemptions and Classifications) Act 1992 to provide an exemption from sales tax on goods used mainly in the inspectorial and shelter activities, that are not commercial activities, of the Royal Society for the Prevention of Cruelty to Animals (RSPCA) [Subclause 141(d)] ; and

•

provide a credit to the RSPCA of sales tax paid on goods used mainly in their inspectorial and shelter activities, that are not commercial activities, that were purchased on or after 13 March 1993 and before this Bill receives Royal Assent [Clause 143] .

•

amend the Sales Tax (Exemptions and Classifications) Act 1992 to provide sales tax exemption for goods fur use mainly be certain providers of child care services (other than employer sponsored centres). The exemption will also apply to goods for use by bodies which coordinate family day care.

Generally, exemption will only be available to child care bodies or family day care coordination units which are entitled to receive child care funding from the Commonwealth, a State or a Territory. Child care services which are approved by the Minister for Family Services will also be entitled to an exemption [Subclause 141(c)].

14.3 Date of effect: The amendments will take effect from the date the Bill receives the Royal Assent [Subclause 2(1)] .

Sales tax exemption: RSPCA

Background to the legislation

14.4 The RSPCA, through its State, Territory and National bodies, provides a range of services directed towards the welfare of animals, such as the collection of stray animals, the provision of shelter and veterinary care for these and other animals, and the inspection of sites of possible animal abuse.

14.5 Under the existing law, the RSPCA is entitled to exemption on food to feed animals housed in its shelters but not on other goods used in the welfare of animals.

Explanation of proposed amendments

14.6 The Bill will amend Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992, by inserting new Item 163A, to provide an exemption for goods used by the RSPCA mainly in carrying out activities associated with [Subclause 141 (d)] :

•

inspectorial functions; or

•

the operation of animal shelters;

provided that they are not used mainly in commercial activities.

14.7 Thus exemption will apply to goods used mainly in the following types of activities:

•

shelter of stray animals;

•

veterinary care for stray and injured animals;

•

inspection of sites of possible animal abuse; and

•

collection of stray or injured animals.

14.8 However, exemption will not apply to goods used mainly in the following types of activities:

•

commercial kennels;

•

inspections on a commercial fee-paying basis; and

•

veterinary services provided in competition to commercially supplied veterinary services.

Motor Vehicles

14.9 Motor vehicles used mainly to carry out inspections or the collection of injured or stray animals will be covered by the exemption. However, motor vehicles supplied for general use of RSPCA executives and staff (and for example as part of salary packages) will not be covered, unless they are mainly used as mentioned above.

Credit for tax already paid

14.10 The Bill will provide the RSPCA with a credit for sales tax paid on goods purchased on or after 13 March 1993 and before the Royal Assent of this Bill. This credit will be by way of a transitional provision in this Bill. The credit will only be able to be obtained, by the RSPCA, by way of a credit claim to the Australian Taxation Office [Clause 143] .

14.11 The transitional credit will not be available on sales tax paid on purchases by the RSPCA after the Royal Assent of this Bill.

Composition of the RSPCA

14.12 The RSPCA is an organisation comprising a number of State and Territory bodies plus a National body.

14.13 The Bill will provide exemption to all of these bodies. New exemption Item 163A of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992,specifies these bodies as those listed in items 4.2.6 to 4.2.14 (inclusive) of table 4 in sub-section 78(4) of the Income Tax Assessment Act 1936. The bodies listed are as follows:

•

the Royal Society for the Prevention of Cruelty to Animals New South Wales;

•

the Royal Society for the Prevention of Cruelty to Animals (Victoria);

•

the Royal Queensland Society for the Prevention of Cruelty;

•

the Royal Society for the Prevention of Cruelty to Animals (South Australia) Incorporated;

•

the Royal Society for the Prevention of Cruelty to Animals Western Australia (Incorporated);

•

the R.S.P.C.A. (Tasmania) Incorporated;

•

the Society for the Prevention of Cruelty to Animals (Northern Territory);

•

the Royal Society for the Prevention of Cruelty to Animals (A.C.T.) Incorporated; and

•

the R.S.P.C.A. Australia Incorporated.

Background to the legislation

14.14 Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 identifies goods which are exempt from sales tax. The Act does not currently contain a specific exemption for child care services.

Explanation of proposed amendments

14.15 These amendments will insert a new Item (Item 144A) into Schedule 1 of the Sales Tax (Exemptions and Classifications) Act 1992 which will give effect to the proposed exemption for child care services [Subclause 141(c)] .

Exempt child care bodies

14.16 Only "exempt child care bodies" will be able to claim exemption. There will be two types of child care body which may be exempt:

•

bodies whose principal function is to provide one or more of the following types of child care:

long day care - this service is provided in specially adapted centres to predominantly under school age children. Care is provided on a regular full or part time basis and is generally available for 8 hours a day, 48 weeks per year.

outside school hours care - this service is for school age children before and after school hours.

vacation care - this service is for school age children during school holidays.

occasional care - this service is for flexible child care. Children are not necessarily cared for on a regular basis but as the need arises.

Persons who provide family day care in their homes will not be regarded as child care bodies. Employer sponsored bodies will be excluded from the exemption.

•

family day care co-ordination units. A family day care scheme is a network of individuals, organised by a central co-ordination unit, who provide care in their own homes for other people's young children. A co-ordination unit organises the provision of family day care, supports the care providers, arranges the placement of children with care givers and monitors the care.

14.17 However, these bodies will be required to meet a further condition to qualify for exemption. They will only be exempt if they are eligible to receive Commonwealth, State or Territory government funding or are approved by the Minister for Family Services [Clause 140: new section 3B of the Sales Tax (Exemptions and Classifications) Act 1992] .

Commonwealth, State or Territory funding

14.18 A child care body of the kind described above, which provides long day care, outside school hours care, vacation care and/or occasional care will be able to claim sales tax exemption if it is eligible to receive funding from the Commonwealth or a State or Territory in connection with that child care. This is funding specifically to assist with, or support, the provision of the child care [Clause 140: new section 3B of the Sales Tax (Exemptions and Classifications) Act 1992] .

14.19 Similarly, a family day care co-ordination unit will be able to claim exemption if it is eligible to receive funding from the Commonwealth or a State or Territory in connection with the organising, supporting and monitoring of family day care. This is funding specifically to assist with, or support, those activities [Clause 140: new section 3B of the Sales Tax (Exemptions and Classifications) Act 1992] .

14.20 Generally, eligibility for the relevant funding will be determined in accordance with child care guidelines administered by the relevant State or Territory department or the Commonwealth Department of Health, Housing, Local Government and Community Services. Eligibility for funding is usually evidenced by the signing, and continued existence, of an agreement between the child care service and the government funding the service. The terms of the agreement are basically that the child care body will be eligible for funding if it continues to observe certain conditions.

14.21 Eligibility for Childcare Assistance (fee relief) may qualify a child care body for exemption. Other kinds of funding which may qualify a child care body for exemption are operational assistance and establishment or capital grants.

14.22 Funding which is intended to benefit a particular group in the community, but which incidentally benefits a child care body will not qualify the body for exemption. For example, receipt of funds to enable a child care body to employ a disabled person would not, of itself, qualify it for sales tax exemption.

Approval by the Minister for Family Services

14.23 The Minister for Family Services will also have a discretion to approve exemption for child care bodies which are funded in other ways. The approval will be in accordance with guidelines agreed between the Assistant Treasurer and the Minister for Family Services and take the form of a disallowable instrument [Clause 140: new sub-sections 3B(1), 3B (3) and 3B(4) of the Sales Tax (Exemptions and Classifications) Act 1992] .

Employer sponsored child care centres

14.24 Certain employer sponsored child care bodies will be excluded from the exemption. The bodies which will be excluded will be:

•

bodies established and maintained principally for the provision of long day care, outside school hours care, vacation care or occasional care;

•

located on premises owned or leased by one or more employers; and

•

where the provision of care is principally for children of employees or the employer [Clause 140: new sub-section 3B(2) of the Sales Tax (Exemptions and Classifications) Act 1992] .

Exempt goods

14.25 Not all goods purchased by an exempt child care body will be exempt. In the case of exempt child care bodies established and maintained principally for the provision of long day care, outside school hours care, vacation care or occasional care, exemption will only be allowed for goods for use mainly in the provision of those kinds of care. For example, a body responsible for a long day care centre which also provides family support services will not be able to claim exemption for goods which will be used mainly in the provision of the family support services [Clause 141: new Item 144A, Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992] .

14.26 The goods for which family day care co-ordination units will be able to claim exemption will be goods used mainly in organising, supporting and monitoring the provision of family day care. Exemption will not extend to goods acquired by individual care givers for use in providing care in their homes [Clause 141: new Item 144A, Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992] .

Chapter 15 SUPERANNUATION GUARANTEE SHORTFALLS

Overview

15.1 The amendments will allow a superannuation guarantee shortfall component to be paid to a complying ADF [Clause 145] .

Summary of amendments

15.2 Purpose of amendments: The proposed amendment will allow a superannuation guarantee shortfall component to be paid into a complying approved deposit fund (ADF) and ensure that any shortfall component received by a complying ADF is a taxable contribution.

15.3 The purpose of the amendment is to increase the number of funds that can accept the shortfall component, particularly if that shortfall component consists of a small amount.

15.4 Date of Effect : Date of Royal Assent [Clauses 38 and 149] .

Background to the legislation

15.5 An employer is liable to pay the superannuation guarantee charge (SGC) which is imposed on the employer's superannuation guarantee shortfall in a year. The charge is imposed by the Superannuation Guarantee Charge Act 1992. The amount of SGC payable is equal to the amount of the employer's superannuation guarantee shortfall in the year.

15.6 The superannuation guarantee shortfall component is defined in section 64 of the Superannuation Guarantee (Administration) Act 1992 (SGAA) to be, generally speaking, the SGC imposed on an employer less any administration component and any penalties (other than late payment penalty that relates to the individual superannuation guarantee shortfall).

15.7 Subsection 65(1) of the SGAA specifies that, subject to some limited exceptions, the Commissioner of Taxation can deal with any superannuation guarantee shortfall component by either:

•

paying the amount of the component to a complying superannuation fund nominated by the employee, in accordance with the regulations, for the benefit of the employee; or

•

making arrangements in accordance with the regulations so that the amount of the component may be paid to a complying superannuation fund for the benefit of the employee.

15.8 In practice, the Commissioner sends a voucher equal to the superannuation guarantee shortfall component to each employee for whom an employer has paid the SGC. The voucher is only payable into an account of the employee held with a complying superannuation fund.

15.9 Many of these vouchers are expected to be for small amounts. Some superannuation funds are not willing or able to accept small amounts. Therefore, to ensure wider acceptance of the vouchers (i.e., superannuation guarantee shortfall components), the Government has decided to allow them to be paid into a complying ADF.

Explanation of proposed amendments

Superannuation Guarantee Administration Act 1992

15.10 It is proposed to insert a definition of approved deposit fund in subsection 6(1) of the SGAA by reference to the definition of approved deposit fund (ADF) in subsection 3(1) of the Occupational Superannuation Standards Act 1987 (OSSA). [Clause 146; section 6]

15.11 A complying approved deposit fund will be an ADF that is a complying ADF for income tax purposes (that is, a complying ADF within the meaning of Part IX of the Income Tax Assessment Act 1936). Essentially, a complying ADF is a fund which has received a notice from the Insurance Superannuation Commissioner (ISC) under section 14 or section 15 of OSSA stating that the ISC is satisfied that the fund satisfies or should be treated as having satisfied the ADF conditions. [Clause 147; new section 7A]

15.12 The proposed amendments to section 65 of the SGAA will allow the Commissioner to deal with the shortfall component by paying it, or making arrangements for it to be paid, to a complying ADF in addition to a complying superannuation fund. The ADF will be deemed to be a complying ADF if at the time the payment is made it satisfies the ADF conditions under the OSSA. [ Clause 148; paragraph 65(1)(a) and new subsections 65(3) and (4)]

15.13 Clauses 150, 151 and 152 make consequential amendments to reflect the proposed replacement of OSSA with the Superannuation Industry Supervision Act 1993. These clauses will commence on the date of commencement of Part 3 of the SIS Bill, or the day after this Bill receives the Royal Assent, whichever is the later [Subclause 2(4)] .

Income Tax Assessment Act 1936

15.14 It is proposed to amend subsection 274(1) of the Income Tax Assessment Act 1936 to ensure that a superannuation guarantee shortfall component paid to a complying ADF will be a taxable contribution in the hands of the ADF. [ Clauses 36 and 37; new paragraph 274 (1)(d)]

Chapter 16 AMENDMENT OF THE SUPERANNUATION INDUSTRY (SUPERVISION) ACT 1993

Overview

16.1 The amendment will enable a complying approved deposit fund to accept superannuation guarantee shortfall components [Clause 154] .

Summary of the proposed amendments

16.2 Purpose of amendment: To amend clause 10 of the Superannuation Industry (Supervision) Bill 1993 (the SIS Bill) to change the definition of "approved purposes" to include acceptance of payments of shortfall components prescribed in section 65 of the Superannuation Guarantee (Administration) Act 1992 (the SGAA).

16.3 Date of effect: On commencement of Part 3 of the SIS Bill, or the day after this Bill receives the Royal Assent, whichever is the later.

Background to the legislation

16.4 The SGAA prescribes a minimum level of superannuation support which employers should provide for each of their employees. Employers failing to comply with the prescribed minimum standard are subject to a superannuation guarantee charge based on the shortfall in their superannuation support plus an additional amount for an administrative charge and an amount as proxy for fund earnings.

16.5 An amount equal to the charge less the administrative charge is to be redistributed in the form of vouchers to those employees whose employers did not provide the prescribed minimum level of support. These vouchers are only payable into the account of the named employee held with a complying superannuation fund.

16.6 The majority of these vouchers are likely to be for small amounts. Some superannuation funds are not willing or able to accept vouchers. It has therefore been decided to ensure wider acceptance of the vouchers, or 'shortfall components' in terms of the SGAA, by allowing them to be deposited into complying approved deposit funds (ADFs).

Explanation of the proposed amendments

16.7 Clause 10 of the SIS Bill will be amended by omitting paragraph (a) of the definition of "Approved Purposes" and substituting a paragraph which continues the existing provisions as well as inserting a new provision to allow complying ADFs to accept superannuation guarantee shortfall components [Clause 155] .

16.8 These amendments are to apply to deposits made to a fund at or after the beginning of the fund's 1994-95 year of income [Clause 156] .

Chapter 17 DEFERRAL OF INITIAL PAYMENTS OF COMPANY TAX FOR 1993-94

Overview

The Bill will defer the time for the initial payment of company tax for the 1993-94 income year.

Summary of amendments

17.1 Purpose of amendments : To defer the time for the initial payment of income tax (IP) for the 1993-94 income year by companies, superannuation funds, approved deposit funds and pooled superannuation trusts (all referred to as companies).

17.2 The measure to defer the IP, which was announced in the 1993 Budget, is similar to the deferral for the 1990-91 and 1991-92 income years. The purpose of the deferral arrangements is to provide relief for small companies by extending the due date for the IP.

17.3 The two main differences to the earlier deferrals are that the deferral of IP for the 1993-94 year of income -

•

will affect companies which have a notional or estimated tax liability of more than $1,000 and less than $300,000; and

•

will apply to all companies regardless of their balancing dates.

17.4 The date for the IP will be deferred for 2 months to the 28th day of the third month following balance date.

17.5 Date of effect : The amendments will commence from the date the Bill receives Royal Assent and will apply to defer the IP for companies (including early balancers) for the 1993-94 year of income.

Background to the legislation

Collection of Tax

17.6 For the 1993-94 year of income, 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

17.7 Companies with a notional tax liability of $20,000 or more (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.

17.8 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

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

17.10 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

17.11 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).

Franking account credits and debits for initial payment of tax

17.12 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).

17.13 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, 160APVH, 160AQCD and 160AQCN), [ sections 160APVH and 160AQCN are to be inserted by Clauses 59 and 78] .

The Existing Law for Franking Deficit Tax (FDT)

17.14 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)).

17.15 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).

17.16 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)).

17.17 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 the eligible fund component (F) of the company (subsection 160AQJ(2)). The eligible 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). It excludes the non-fund component which covers income relating to assets which are not included in an insurance fund maintained by the company; that is, income derived from business other than life assurance, superannuation and accident and disability business.

Current franking account debits for reduced FDT

17.18 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

17.19 The due date for payment of FDT will not change as a result of Part 12 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 1993-94 income year

7.20 The Bill will modify the operation of the the Act by deferring the time for the affected companies 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 1994, this means the due date for the IP will be deferred from 28 July to 28 September 1994 [Clause 165] .

FDT reduces the IP

17.21 As mentioned above, a company's FDT is due on the last day of the month following balance date. For companies balancing in June 1994, payment of FDT is required on 31 July 1994.

17.22 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.

17.23 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?

17.24 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 1993-94 [Subclause 166(1)] .

17.25 Where the IP due does not exceed the FDT paid, a company will not be required to make the IP [Subclause 166(2)] .

Example 1

17.26 Consider a company which will balance in June 1994 and pay $30,000 FDT on 31 July 1994. If the company's IP (due on 28 July) is $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.

17.27 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 166(3)] .

Example 2

17.28 Assume $30,000 FDT will be paid on 31 July 1994 as in Example 1 and the company's IP (due on 28 September 1994) is $50,000. 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

17.29 As for the IP deferral for the 1990-91 and 1991-92 income years, 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.

17.30 Where the amount of the IP due does not exceed the FDT paid plus the eligible fund component [subsection 160AQJ(2) - see also paragraph (f) of Clause 85 ], the life assurance company is required to pay an amount equal to the fund component on the due date for the IP [Subclause 166(4)] .

17.31 Where the amount of the IP due exceeds the FDT paid plus the eligible fund component, the life assurance company will be required to pay the difference between the IP due and the FDT paid [Subclause 166(5)] .

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

17.32 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).

17.33 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 167] .

Credits where the IP is Reduced by FDT

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

17.35 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 168] .

17.36 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 169(1)] .

17.37 Where an IP will be reduced by a prior payment of FDT, the credit will arise when the reduced IP is made [Subclause 169(2)] .

Franking Credits and Debits where FDT is Paid

17.38 As explained in the Background to the legislation 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

17.39 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, 160AQCD, 160APVH and 160AQCN. They are also not intended to affect the liability for FDT and the consequential offset allowable under section 160AQK.

17.40 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 169 and 170] .

Examples

17.41 In the examples used above and assuming the deferred IP is made on 28 September 1994, 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

17.42 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 170] .

17.43 The Bill prevents a company from gaining a refund for the reduction in FDT [Clause 171]. If a company was able to gain a refund in these circumstances, it would pay less tax than under the existing arrangements.

17.44 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 [ Clause 172 ] .

Changed timing for franking credits and debits

17.45 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 169(1)] .

Chapter 18 TOURISM INDUSTRY ORGANISATIONS

Overview

18.1 The Bill will amend the Income Tax Assessment Act 1936 (the Act) so that the income of a non-profit society or association established to promote the development of tourism will be exempt from income tax [Clause 173] .

18.2. The Bill will also amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) so that, if such a non-profit society or association is required to pay fringe benefits tax, it will be entitled to a rebate of part of the fringe benefits tax payable [Clause 173] .

Summary of amendments

Purpose of amendments

18.3 The proposed amendments will:

•

exempt from income tax the income of a non-profit society or association which is established for the purpose of promoting the development of tourism, and

•

make such a non-profit society or association a "rebatable employer" entitled to a rebate of part of any fringe benefits tax payable.,/list

18.4 These measures will place non-profit organisations that promote the development of tourism on the same footing as other non-profit organisations specified in the current paragraph 23(h) of the Act, e.g., those that promote the development of aviation.

Dates of effect

18.5 These amendments have the following dates of effect:-

•

The amendment to provide the exemption from income tax applies to income derived on or after 1 July 1993.

•

The amendment to provide the rebate of fringe benefits tax will take effect on 1 April 1994.

Background to the legislation

Income Tax

18.6 Paragraph 23(h) exempts from income tax the income of a non-profit society or association established for the purpose of promoting the development of aviation or of the agricultural, pastoral, horticultural, viticultural, manufacturing or industrial resources of Australia.

18.7 Exemption is not available to an organisation that is carried on for the purposes of profit or gain to its individual members. The organisation must be established to promote the development of the particular industry and exemption is not available if the organisation is established with a dominant purpose other than promoting the development of that industry.

18.8 The Commissioner of Taxation is of the view that an organisation established to promote tourism is not exempt from tax under paragraph 23(h). Taxation Determination TD 93/122 explains this view.

18.9 It is proposed that paragraph 23(h) be amended to extend to a non-profit tourism industry organisation the same tax exemption as a society or association promoting the development of aviation or a resource described in paragraph 18.6 above.

Fringe benefits tax

18.10 A new system of taxing fringe benefits (referred to as "grossing up") takes effect on 1 April 1994. The system will increase the amount of fringe benefits tax an employer has to pay by including the amount of fringe benefits tax payable in the taxable value of that benefit.

18.11 However, the fringe benefits tax paid will be allowed as an income tax deduction to affected employers.

18.12 Some non-government and non-profit employers will be entitled to a rebate of part of the fringe benefits tax so that the amount of tax they will have to pay will not be substantially different from the amount they would have had to pay under the old system.

Meaning of non-profit

18.13 Subsection 65J(5) of the FBTAA provides guidance on what is a "non-profit" body. Such an organisation will qualify for the rebate if it is:

•

not carried on for the purposes of profit or gain to individual members, and

•

not a company where all the shares are beneficially owned by, or by an authority of, the Commonwealth, a State or a Territory, and

•

not a company limited by guarantee where the members' interests and rights are beneficially owned by, or by an authority of, the Commonwealth, a State or a Territory.

18.14 Section 65J of the FBTAA defines a "rebatable employer".

18.15 An amendment of section 65J of the FBTAA is proposed, consistent with the proposed amendment of paragraph 23(h), so that non-profit, non-government tourism industry organisations will receive the same special treatment as other rebatable employers.

Explanation of the amendments

Income tax

18.16 Paragraph 23(h) is proposed to be amended to provide an exemption for the income of non-profit societies or associations established for the purpose of promoting the development of tourism [Clause 175] .

18.17 For income tax purposes, the activities of such tourism industry organisations may be international, national or regional in nature.

18.18 Under the proposed amendment, exemption will be available to a society or association that is established for the dominant purpose of promoting the development of tourism, provided it is not carried on for the purposes of profit or gain to its individual members. It will be a question of fact whether, in a year of income, a society or association meets these requirements. The amendment applies to income derived on or after 1 July 1993 [Clause 176] .

Fringe benefits tax

18.19 Under the new "grossing-up" system, the amount of fringe benefits tax payable is calculated by reference to the tax-inclusive value of the fringe benefit. Therefore, income tax deductions are allowed for the amount of fringe benefits tax paid.

18.20 A "rebatable employer" is entitled to a rebate of fringe benefits tax at the rate of 48%. Because an employer can claim a rebate of 48% of the fringe benefits tax it has paid, its fringe benefits tax liability will not be substantially different from the amount that would have been payable had the system for valuing these benefits not changed.

18.21 The amendment proposed by Clause 178 will make any non-profit society or association established to promote the development of tourism a rebatable employer for which the special arrangements apply. This means that such an organisation will be entitled to claim a rebate of 48% of the fringe benefit tax it pays when the arrangements come into effect on 1 April 1994 [Clause 179] .

Chapter 19 MINOR TECHNICAL AMENDMENTS

Overview

19.1 This Chapter explains provisions in the Bill which propose to make minor technical amendments to the Crimes (Taxation Offences) Act 1980, Income Tax Assessment Act 1936, and the Taxation (Interest on Overpayments) Act 1983.

19.2 As the amendments relate to several Acts, the following abbreviations are used:

Crimes (Taxation Offences) Act 1980 [C(TO)A]; and

Income Tax Assessment Act 1936 [ITAA];

Taxation (Interest on Overpayments) Act 1983 [T(IO)A].

Summary of amendments

19.3 Purpose of amendment: This Bill proposes to amend the three Acts as follows:

•

the C(TO)A to correct an omission from the recent amendments to the ITAA which simplified the administration of the Prescribed Payments System (PPS) and the relevant provisions in the ITAA [Clause 4] ;

•

the ITAA so that deductions made from prescribed payments will be in whole dollars [Clause 27] ; and

•

the T(IO)A to remove a reference to a PPS provision which is now redundant following the recent PPS simplification [Clause 158] . The T(IO)A will also be amended to correct an omission from the recent amendments to the ITAA contained in the Insolvency (Tax Priorities) Legislation Act 1993. The amendment will allow for the payment of interest when the penalty, on the non payment of a liability for an estimate of unremitted deductions, is refunded.

19.4 Date of Effect : The amendments explained in this Chapter will apply as follows:

•

the consequential amendment to the C(TO)A to remove the redundant PPS provision will apply to prescribed payments made on or after Royal Assent to the Bill;

•

the amendments in the ITAA relating to the PPS deductions being in whole dollars will apply to prescribed payments made on or after 1 January 1993; and

•

the consequential amendment to the T(IO)A resulting from the recent insolvency legislation will apply to penalties in respect of unremitted amounts that became payable after 30 June 1993.

Background to the legislation

Consequential amendments to Prescribed Payments System provisions

19.5 These are minor technical amendments as a consequence of the recent simplification of the prescribed payments system. These amendments are explained in more detail later in this chapter.

Consequential amendments to Insolvency legislation

19.6 The Insolvency (Tax Priorities) Legislation Act 1993 which received Royal Assent on 16 June 1993 introduced new Division 8 into Part VI of the ITAA. This Division enables the Commissioner to recover amounts not remitted under Divisions 2, 3A, 3B and 4 on the basis of an estimate.

19.7 Where the amount of an estimate is not paid within the required time the person liable to the estimate will also be liable to a penalty for late payment. In addition to a penalty of 16% per annum accruing while the estimate remains unpaid, a person other than a government body will also be liable to a flat penalty of 20% of the amount of the estimate [subsection 222AJA(3)].

19.8 However, the new insolvency legislation provides the Commissioner with powers, similar to those under existing remittance provisions, to remit the penalties imposed on late payment of an estimate [section 222AJC]. Where the Commissioner decides not to remit or to remit only part of the flat penalty, the person will be able to object against that decision under Part IVC of the Taxation Administration Act 1953 [subsection 222AJC(3)].

19.9 To ensure that the penalty is treated consistently with other comparable penalties, the proposed amendment to the T(IO)A will provide that where the amount of penalty is refunded as a result of a successful objection, the applicant will be entitled to interest on any overpaid tax.

Explanation of the amendments

Consequential amendments to Prescribed Payments System (PPS) provisions

19.10 The recent simplification of the PPS administrative arrangements and legislative provisions did not make three necessary consequential amendments to the ITAA, the T(IO)A and the C(TO)A.

19.11 The first amendment was to subsections 221YHD(2), 221YHD(3), 221YHD(5) and 221YHDA(2) of ITAA to provide legislative support for the previous practice of rounding amounts deducted from prescribed payments to whole dollars [Clauses 28 and 29] . To legitimise the existing practice, the amendment will apply in respect of prescribed payments made on or after 1 January 1993 [Clause 30] .

19.12 The second amendment was to the T(IO)A to remove a reference to repealed PPS provision subsection 221YHK(1) [Clause 159] . This provision contained the penalties for when a PPS payer failed to furnish a deduction form as required. The new simplified PPS arrangements removed the need for deduction forms. The amendment will apply in respect of prescribed payments made on or after 1 January 1993 [ Clause 160 ] .

19.13 The third amendment was to paragraph (g) of the definition of "income tax" in subsection 3(1) of the C(TO)A to replace the reference to subsections 221YHD(1) and 221YHD(1D) with a reference to subsection 221YHDC(2). These are the references to the amounts deducted from prescribed payments before and after the simplification measures were introduced. The amendment is technical in nature and will apply in respect of prescribed payments made on or after Royal Assent of the Bill [Clauses 5 and 6] .

Consequential amendments to Insolvency legislation

19.14 The amendment proposes to amend the definition of "relevant tax" in subsection 3(1) of T(IO)A to include an amount payable to the Commissioner under subparagraph 222AJA(3)(b)(i) of the ITAA [Clause 162] . As noted in the Background above, this subparagraph refers to the flat penalty amount in respect of the non remittance of an estimate of an unremitted deduction.

19.15 This amendment ensures that a taxpayer who receives a refund of a penalty imposed under subparagraph 222AJA(3)(b)(i) as a result of a successful objection will be entitled to interest on any overpaid tax.

Glossary of commonly used terms