House of Representatives

Explanatory Memorandum

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

General Outline and Financial Impact

Amendment of the Fringe Benefits Assessment Act 1986

Employees employed in foreign locations

Amends section 58L of the Fringe Benefits Tax Assessment Act 1986 ('the FBTAA') to overcome administrative difficulties arising out of the present requirement of that section that names of certain foreign localities must be prescribed by regulation.

The effect of the amendment will be to generally exempt from fringe benefits tax a travel benefit provided by an employer in respect of any employee working outside of Australia to enable the employee to obtain suitable medical treatment.

Date of effect: Royal Assent.

Proposal announced: Not previously announced.

Financial Impact: Negligible.

Car parking benefits

Amends the definitions "all-day parking" and "commercial parking station" in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ('the FBTAA') so that night rates charged by commercial parking station operators and fees charged at kerbside parking meters cannot be used to value car parking benefits provided by an employer to an employee.

Date of effect: 1 April 1994.

Proposal announced: Assistant Treasurer's Press Release of 28 October 1993.

Financial Impact: The amendments will prevent an unintended loss to revenue. For the 1993-94 year of income it is not possible to quantify the effect on revenue resulting from these amendments.

Non-government schools

Amends section 65J of the Fringe Benefits Tax Assessment Act 1986 ('the FBTAA) so that certain non-government schools which have been established under Commonwealth, a State or Territory legislation will qualify as rebatable employers for the purposes of that section.

Date of effect: 1 April 1994

Proposal announced: Not previously announced.

Financial Impact: Negligible

Amendment of the Income Tax Assessment Act 1936

Tax-exempt infrastructure borrowings

Will allow tax-exempt infrastructure borrowings to be spent on:

a)

the construction of infrastructure facilities on land leased from the Crown under a commercial lease.

b)

paying interest that accrues and falls due on direct infrastructure borrowings while the facility is being constructed.

Date of effect:

a)

The amendments that are in relation to the construction of facilities on Crown land held on a commercial lease will apply to borrowings made after 23 June 1993.

b)

The amendments in relation to interest on direct infrastructure borrowings that falls due while the facility is being constructed will apply to borrowings made after 17 August 1993.

Proposal announced:

a)

Treasurer's Press Release of 23 June 1993

b)

1993-94 Budget, 17 August 1993

Financial Impact:

a)

Nil

b)

The cost to the revenue will be:

1993-94	1994-95	1995-96	1996-97
$3m	$10m	$30m	$30m

Pensions and annuity rebates

Amends the Income Tax Assessment Act 1936 to extend the rebate that applies to superannuation pensions and roll-over annuities paid from a taxed source to:

•

superannuation pensions and roll-over annuities purchased by rolling over an eligible termination payment (ETP) representing the commutation of a deferred annuity; and

•

superannuation pensions and roll-over annuities purchased by rolling over an ETP representing the commutation of a pension from an untaxed superannuation fund.

Date of effect: 1 July 1988.

Proposal announced: The Treasurer's Press Release No 84 of 23 July 1993.

Financial impact: Insignificant.

Leases of luxury cars

Increases the income returned under the "finance method" by lessors of luxury cars to take account of the depreciation limit on such cars. This will ensure that the depreciation limit is not avoided by lessors using the "finance method" to return income.

Date of effect: To apply from 8 July 1993 to leases existing at that date and leases entered into on or after that date.

Proposal announced: Treasurer's Press Release No. 78 of 8 July 1993.

Financial impact: The annual revenue at risk is $60m.

Exemptions for pensions and allowances

Extends the income tax treatment of bereavement payments to:

•

bereavement lump sum payments in relation to the Carer Pension in particular circumstances; and

•

bereavement payments to recipients of Job Search Allowance, Newstart Allowance, Sickness Allowance and Special Benefit.

Provides for income tax treatment of:

•

the Mature Age Allowance similar to that provided for the Age Pension; and

•

the Mature Age Partner Allowance similar to that provided for the Wife Pension.

Date of effect:

Bereavement payments: 1 July 1993

Mature Age Allowance and Mature Age Partners Allowance: 20 March 1994.

Proposal announced:

Bereavement payments: 1993-94 Budget, 17 August 1993.

Mature Age Allowance and Mature Age Partner Allowance: Not previously announced.

Financial Impact:

The nature of the bereavement payment measures is such that it is not possible to make a reliable estimate of the cost to revenue.

The revenue cost of the Mature Age Allowance and the Mature Age Partner Allowance (apart from the associated bereavement payments) is estimated to be $5million in each income year 1994-95, 1995-96 and 1996-97.

Payment of instalments by companies and certain trustees

Includes in the new company tax instalment arrangements rules for grouping instalment taxpayers for the purposes of those arrangements.

The Bill will also make an amendment to the penalty provision of the new company tax instalment arrangements and some other minor technical amendments.

Date of effect: 1995-96 year of income for grouping amendments

1994-95 year of income for other amendments

Proposal announced: The Prime Minister's 'Investing in the Nation' statement of 9 February, 1993.

Financial Impact: The amendments will not result in any change to the original estimates provided when the new company tax instalment arrangements were introduced.

Penalties for over-franking dividends

Amends the penalty for deliberate overfranking of dividends to ensure its intended operation in cases where franking deficit tax is offset by an initial payment of company tax.

Date of effect: For calculations of franking additional tax payable in respect of dividends deliberately overfranked that have been paid after [date of introduction] , the date of introduction of this Bill.

Proposal announced: Not previously announced.

Financial Impact: Insignificant.

Heritage conservation rebate

Provides for a rebate of twenty cents in the dollar for approved expenditure on conservation work on buildings listed in Commonwealth, State or Territory heritage registers.

Date of effect: Royal Assent

Proposal announced: 1993-94 Budget, 17 August 1993

Financial impact: The cost to the revenue will be:

Savings banks

Removes the exemption from income tax and withholding tax for certain savings banks.

Date of effect:

For income tax, from the 1994-95 year of income.

For withholding tax, from 1 July 1994.

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

Financial impact: These amendments are not expected to have any revenue impact.

Exclusion of low income rebate from provisional tax arrangements

Amends the provisional tax provisions to exclude entitlement to the low income rebate from provisional tax calculations, leaving the rebate to be provided on assessment.

Date of effect: The calculation of provisional tax (including instalments) payable for the 1994-95 and later years of income; and variations to provisional tax for the 1993-94 and later income years (for variation requests received on or after introduction of the Bill).

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

Financial impact: This measure will maintain the original revenue costs for the rebate and avoid a one-off cost increase in the order of $110 million, to the estimated cost of $530 million, for 1994-95.

Amendment of the Superannuation Guarantee (Administration) Act 1992

Superannuation Guarantee amendments

Amends the Superannuation Guarantee (Administration) Act 1992 to:

•

make it clear that certain statutory authorities whose enabling legislation otherwise exempts them from Commonwealth taxation will be liable for the Superannuation Guarantee charge

•

exclude lump sum payments for accrued annual leave, accrued long service leave and accrued sick leave on termination of employment from the definition of ordinary time earnings

•

allow the Fund Benchmark Salary Rate contained in an industrial agreement between an employer in the maritime industry and the Maritime Union of Australia to be an acceptable notional earnings base*

•

remove any doubt that payments made to contractors wholly or principally for their labour are salary or wages*

•

allow an employer, in order to satisfy the employer's Superannuation Guarantee responsibility, to make payments directly to a deceased employee's legal personal representative where the employee dies before the employer makes contributions to a superannuation fund on behalf of the employee*

•

defer the requirement that employers meet their Superannuation Guarantee obligations on a quarterly basis until the 1994-95 financial year

•

ensure that the notional earnings base and ordinary time earnings of an employee whose status changes part way through a contribution period are calculated by reference to payments for that part of the period for which Superannuation Guarantee contributions have to be made*

•

clarify the circumstances in which a notional earnings base specified in an industrial award can be used for Superannuation Guarantee purposes and allow for flat dollar contributions for part-time employees to be referenced to the appropriate proportion of the notional earnings base rather than to the full notional earnings base

•

make the definition of permanent incapacity or invalidity in the Superannuation Guarantee (Administration) Act consistent with the definition of permanent incapacity or invalidity in other taxation and occupational superannuation legislation.

Date of effect: The amendments marked with an asterisk (*) will apply from 1 July 1992. The remaining amendments will apply from 1 July 1993.

Proposal announced: The Treasurer's Statement on National Savings and Superannuation of 17 August 1993 and the Treasurer's Press Release No 91 of 3 August 1993. The proposal relating to the maritime industry industrial agreement has not been previously announced.

Financial impact: Nil.

Employees employed in foreign locations

Overview

1.1 The Bill will amend section 58L of the Fringe Benefits Tax Assessment Act 1986 ('the FBTAA') to overcome administrative difficulties arising out of the present requirement that names of certain foreign localities be prescribed by regulation.

Summary of the amendments

Purpose of the amendments

1.2 Section 58L operates to exempt from FBT a benefit provided by an employer in meeting the cost of travel of an employee who must travel away from a workplace in a foreign location in order to obtain certain medical treatment. The exemption also applies to the spouse or child of the employee and, where an escort is necessary, to the escort of a sick person.

1.3 The amendment will remove the present requirement of section 58L that the foreign locations, in which an employee must be working for the exemption to apply, be prescribed by regulation.

Date of effect

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

Background to the legislation

1.5 Section 58L of the FBTAA exempts from FBT a benefit provided by an employer to employees working in certain prescribed foreign locations for travel from their work place to obtain suitable medical treatment.

1.6 The exemption applies to the costs of transport, accommodation and meals consumed by the employee which are in connection with transport between their workplace and place of treatment.

1.7 Paragraph 58L(1)(f) extends the exemption to travel undertaken by the spouse or child of the employee to obtain such treatment. Under paragraph 58L(1)(g), where it is necessary for the employee or a family member receiving treatment to be accompanied or visited by a family member or to be escorted by another person, the costs of travel of the family member or escort may also be exempt.

1.8 Under paragraph 58L(1)(j) the exemption will only apply if the place at which the treatment takes place is either:

(a)

the place nearest to the overseas workplace at which suitable medical treatment could be provided; or

(b)

the place at which such medical treatment could be provided at least cost.

1.9 The relevant foreign locations to which the exemption applies are set out in paragraph 58L(1)(d) and include:

(i)

a prescribed foreign country;

(ii)

a prescribed part of a foreign country; or

(iii)

a prescribed territory, dependency or colony (however described) of a foreign country.

1.10 The Regulations to prescribe the foreign locations referred to in paragraph 58L(1)(d) are required to use the same categories listed in that paragraph. As such, the Regulations are required to specify in respect of each foreign locality whether it is a foreign country, a part of a foreign country or territory, colony or dependency of a foreign country.

1.11 The Explanatory Memorandum to the amending legislation which inserted section 58L made it clear that the qualifying foreign locations are intended to be developing countries.

1.12 Considerable administrative difficulties have arisen in relation to providing a list of foreign locations to be included in the Regulations. In particular, it is difficult to list foreign locations according to the categories listed in paragraph 58L(1)(d). Such difficulties arise because of changes in the description and territorial boundaries of a foreign location (e.g. the former Yugoslavia) and also from a change of names (such as Cambodia to Kampuchea to Cambodia).

Explanation of the amendments

1.13 This Bill will amend subparagraphs 58L(1)(d)(i)-(iii) to remove the requirement that the foreign locations referred to in those subparagraphs be prescribed [Clause 5].

1.14 The effect of the amendment will be that, subject to the conditions set out in section 58L, the exemption will apply in respect of any employee working outside of Australia, where there is no suitable medical treatment available at the overseas location where the work is carried out.

Transitional provision

1.15 A transitional provision will be inserted which removes the requirement that foreign locations be prescribed under section 58L from 1 July 1986 (which is the date from which section 58L became operative) to the date of assent of the amendment.

1.16 However, the transitional provisions will apply only where the benefit is in respect of medical treatment provided in a foreign country which is certified in writing by the Minister for Foreign Affairs to be a developing country [Clause 6].

Car Parking benfits

Overview

2.1 This Bill will amend the definitions of "all-day parking" and "commercial parking station" in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ('the FBTAA') so that night time rates charged by commercial parking station operators and fees charged at kerbside parking meters cannot be used when determining the taxable value of a car parking benefit under section 39C of the FBTAA.

Summary of the amendments

Purpose of the amendments

2.2 The amendments will change the wording of the definitions of "all-day parking" and "commercial parking station" in subsection 136(1) of the FBTAA. These definitions are used in section 39C of the FBTAA which sets out a method for determining the taxable value of a car parking benefit.

2.3 These definitions allow employers to determine the taxable value of a car parking benefit provided to an employee by reference to night time fees set by commercial parking station operators and also by reference to fees charged at kerbside parking meters. The use of these fees result in a lower taxable value for a car parking benefit. A further consequence is that car parking in some non-CBD areas may be subject to FBT where there are kerbside parking meters.

2.4 The definitions will be amended so that the taxable value of a car parking benefit determined under section 39C of the FBTAA can only be determined by reference to daylight period rates and kerbside parking meters are excluded from being commercial parking stations.

Date of effect

2.5 The amendment applies from 1 April 1994 for fringe benefits tax purposes and from 1 July 1994 for income tax purposes.

Background to the legislation

2.6 Under section 39A of the FBTAA a car parking benefit exists during a daylight period where an employer provides to an employee any car parking facilities on business or associated premises which are owned, controlled or leased, in whole or in part, by the employer. However, a benefit will only exist where certain criteria are satisfied. The criteria are that:

•

a permanent commercial car parking facility available for all day parking is located within 1 kilometre of the employer provided car parking facilities;

•

the car is parked at, or in the vicinity of, the employee's primary place of employment for more than 4 hours between 7.00 am and 7.00 pm on a particular day;

•

the car is owned or leased by the employee or an associate of the employee, or is provided to the employee by the employer or any other person;

•

the provision of car parking facilities is in respect of the employment of the employee;

•

the provision of car parking facilities is not excluded by Regulation; and

•

the car is used by the employee for travel between home and work.

2.7 Under section 39C of the FBTAA the taxable value of a car parking benefit is the lowest fee for all-day parking charged by any commercial parking station operator within a 1 kilometre radius of the car parking facilities provided by the employer. The value is reduced by any contribution made by the employee towards the benefit.

2.8 The terms "all-day parking" , "commercial parking station" and "daylight period" are defined in subsection 136(1) of the FBTAA as follows:

"all-day parking" means parking of a single car for a continuous period of 6 hours or more;

"daylight period" means a period between 7.00 am and 7.00 pm on a particular day; "commercial parking station" means a permanent commercial car parking station facility where any or all of the car parking spaces are available in the ordinary course of business to members of the public for all-day parking on payment of a fee.

Explanation of amendments

2.9 This Bill will amend the definitions of "all-day parking" and "commercial parking station" in subsection 136(1) of the FBTAA so that the taxable value of a car parking benefit determined under section 39C can only be based on parking fees charged between 7.00 am and 7.00 pm on a particular day and kerbside parking meters are excluded from being a commercial parking station [Clause 8].

Glossary of commonly used terms

Non-Government Schools

Overview

3.1 This Bill will amend section 65J of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) so that certain non-profit, non-government schools established under Commonwealth, State or Territory legislation will be listed as rebatable employers.

Summary of the amendments

Purpose of the amendments

3.2 From 1 April 1994, fringe benefits tax (FBT) will be levied on the tax inclusive value of a fringe benefit and any FBT payable will become deductible for income tax purposes. This method, known as the 'grossing up' method, ensures that, broadly, the same amount of tax is paid on a fringe benefit as would be paid on the wages that would be required, after payment of income tax, to purchase those benefits.

3.3 Section 65J provides a tax rebate of 48% of the FBT payable under the grossing up method for certain non-profit, non-government organisations. These organisations (known as 'rebatable employers') are listed in subsection 65J(1).

3.4 Certain non-profit, non-government schools have not been included as rebatable employers as a result of the wording used in paragraph 65J(1)(b). This paragraph was intended to cover all non-profit, non-government schools. The non-government schools that have not been included are those which have been established under Commonwealth, State or Territory legislation.

3.5 The amendment will ensure that these non-government schools are listed as rebatable employers under subsection 65J(1).

Date of effect

3.6 The amendment is to apply with effect from 1 April 1994.

Background to the legislation

3.7 As a result of amendments made to the FBTAA by the Taxation Laws Amendment (Fringe Benefits Tax Measures) Act 1992, FBT will be levied on the tax inclusive value of a fringe benefit, i.e., the sum of the fringe benefit and the tax to be paid on the benefit. Also, the Income Tax Assessment Act 1936 has been amended to allow any FBT payable to be deductible for income tax purposes. This method of taxing fringe benefits, known as the 'grossing up' method, is to apply from 1 April 1994.

3.8 The 'grossing up' method of taxing fringe benefits has been introduced to ensure that, where fringe benefits are provided in lieu of wages, broadly the same amount of tax in total is paid on the fringe benefit as would be paid on wages that would be required, after the payment of income tax, to purchase the benefit.

3.9 Under the amending legislation, section 65J was also inserted into the FBTAA. This section provides a tax rebate of 48% of the FBT liability for certain non-profit, non-government organisations. Organisations eligible for the rebate ("rebatable employers") are listed in subsection 65J(1) and the formula for the rebate is set out in subsection 65J(2). The rebate ensures that the amount of FBT payable by rebatable employers after 1 April 1994 will be similar, although not identical, to that due under the pre 1 April 1994 legislation.

3.10 One of the rebatable employers listed in paragraph 65J(1)(b) is 'a public educational institution (other than an institution of the Commonwealth, a State or a Territory)'. The meaning of "institution of the Commonwealth, a State or Territory" as set out in subsection 65J(3) includes an institution established by a law of the Commonwealth, a State or Territory. The listing in paragraph 65J(1)(b) was intended to include non-profit, non-government schools.

3.11 Some non-government schools have been established under State Legislation. The Grammar Schools Act (Qld) 1975-84 which establishes certain schools in Queensland is an example of such legislation. Because these schools have been established under state legislation they do not qualify as a rebatable employer under paragraph 65J(1)(b).

Explanation of the amendments

3.12 Section 65J is being amended so that non-profit, non-government schools which have been established by Commonwealth, State or Territory legislation will qualify as rebatable employers.

3.13 The amendment will insert a paragraph into subsection 65J(1) which will include these schools as rebatable employers. These schools are described as non-profit schools (including a pre-school but not including a tertiary institution) which are institutions of the Commonwealth, a State or Territory but are not conducted for or on behalf of the Commonwealth, a State or Territory [Clause 11] .

Tax-exempt infrastructure borrowings

Overview

4.1 The Bill will allow tax-exempt infrastructure borrowings to be used to construct infrastructure facilities on commercial leases of Crown land and to pay interest costs incurred and paid on infrastructure borrowings during the construction period.

Summary of the amendments

Purpose of the amendments

4.2 The proposed amendments will allow tax-exempt infrastructure borrowings to be spent on:

•

constructing infrastructure facilities on land leased from the Crown under a commercial lease (Treasurer's Press Release of 23 June 1993); and

•

paying interest that accrues and falls due on direct infrastructure borrowings while the facility is being constructed (1993-94 Budget announcement).

Date of effect

4.3 Construction of facilities on Crown land held on a commercial lease - post 23 June 1993 borrowings [Subclause 18(1)] .

4.4 Payment during the construction phase of interest accrued during that phase - post 17 August 1993 borrowings [Subclause 18(2)] .

Background to the legislation

4.5 Infrastructure borrowings are borrowings which may be raised to finance the construction of specified public infrastructure facilities, viz. roads, railways, seaports and electricity generating facilities. The interest paid on these borrowings is neither assessable to the lender nor deductible to the borrower. Division 16L of the Income Tax Assessment Act 1936 (the Act) establishes what are infrastructure borrowings and provides for their taxation treatment.

Crown leases

4.6 A company constructing an infrastructure facility must intend to own, use and effectively control the use of the facility for a period of 25 years from the time the facility first produces assessable income. A company constructing an infrastructure facility on land that is leased does not own the land. Accordingly, at law, the company is not the owner of any fixture attached or constructed on that land.

4.7 However, if the company is constructing the facility on land that is leased from the Commonwealth, a State or a Territory, and the lease is granted under a statute, the company is treated as being the owner of the facility for the purposes of infrastructure borrowings (subsection 159GZZZZB(2)).

4.8 Amending the definition of "Crown lease" to include commercial leases will enable infrastructure borrowings to be used to finance the construction of a facility on Crown land, and it is appropriate to negotiate a commercial lease of the land, rather than a statutory lease.

Interest on infrastructure borrowings

4.9 Another requirement that must be satisfied by a company intending to raise infrastructure borrowings is that the whole of the monies raised must be spent on the construction of one or more infrastructure facilities, or on the construction or acquisition of one or more facilities that are related to the infrastructure facility (subsection 159GZZZZA(1)). Interest incurred on money borrowed to finance the construction of an infrastructure facility is not considered to be money spent on the construction of a facility. Such interest cannot be paid with infrastructure borrowings.

Explanation of the amendments

Crown lease - new definition

4.10 The present meaning of Crown lease for the purposes of infrastructure borrowings is a lease of land granted by the Crown under a statutory law of the Commonwealth, a State or a Territory. The new definition of "Crown lease" will cover all leases granted by the Commonwealth, a State or Territory. It will include commercial leases granted by an authority of the Commonwealth, a State or a Territory, provided that if any income is derived by the authority at the time the lease was granted, the income is exempt from income tax under one of the provisions listed in section 160K [Clause 15] .

Crown leases - requirements relating to infrastructure facilities on the leased land

4.11 If a company is constructing an infrastructure facility on land that it holds under a lease from a government body, the company will be treated as the owner of a facility if the terms of the lease are such that the company has security of tenure for at least the construction period and a period of 25 years from the time the facility first produces assessable income.

4.12 In the case of a facility being constructed on land that is the subject of a statutory lease, there is no change to the requirements to be satisfied for the company to be treated as owning the facility. These requirements are:

•

the lease does not expire for at least 25 years from the day the facility is expected to become income producing; or

•

if the lease is due to expire before that time, that the company expects, because of law, custom or otherwise, that the lease will be renewed or extended, and that the renewed or extended lease will not expire for at least 25 years from the day the facility is expected to become income producing [Clause 17 - new paragraph 159GZZZZB(2)(a)] .

4.13 If the company intends to construct a facility on land that is leased under an agreement with the Commonwealth, a State or a Territory, or a tax-exempt authority of the Commonwealth, a State or a Territory, the requirements to be satisfied depend on whether the lease expires before the end of the 25 year assessable use period.

4.14 Where the lease is not due to expire before the end of the expected 25 year assessable use period, the company will be treated as owning the facility if both the lessor and lessee intend that the company (the lessee) will hold the lease for the whole of the construction period and the 25 year assessable use period, on the same terms and conditions under which the lease was held at the time construction of the facility commenced [Clause 17 - new subparagraph 159GZZZZB(2)(b)(i)] .

4.15 Where the lease has an expiry date earlier than the end of the 25 year assessable use period, the company will be treated as owning the facility if:

•

the lessee has an option (or successive options) to renew the lease, and both the leasor and the company intend that the lease will be renewed on the same terms and conditions under which the lease was held at the time construction of the facility commenced; and

•

both the lessor and lessee intend that the company (the lessee) will continue to hold the lease for the whole of the period of 25 years from the day the facility first becomes income producing, on the same terms and conditions under which the lease was held at the time construction of the facility commenced [Clause 17 - new subparagraph 159GZZZZB(2)(b)(ii)] .

Interest on Infrastructure Borrowings

4.16 Interest incurred on funds borrowed to finance construction is not considered to be money spent on the construction of the facility. Therefore, funds raised by way of infrastructure borrowings which are used to pay interest incurred on construction costs have hitherto been regarded as having been used for an ineligible purpose.

4.17 The eligible purposes for which moneys raised by infrastructure borrowings may be spent will be expanded to include interest paid on direct infrastructure borrowings. Money raised under a direct infrastructure borrowing will be able to be spent on paying interest on an earlier direct infrastructure borrowing where the interest:

•

accrues during the construction period; and

•

is paid during the construction period [Clause 16] .

Pensions and annuity rebates

Overview

5.1 The Bill will amend the Income Tax Assessment Act 1936 (the Act) to extend the rebate that applies to superannuation pensions and roll-over annuities paid from a taxed source to:

•

superannuation pensions and roll-over annuities purchased by rolling over an eligible termination payment (ETP) representing the commutation of a deferred annuity; and

•

superannuation pensions and roll-over annuities purchased by rolling over an ETP representing the commutation of a pension from an untaxed superannuation fund.

Summary of the amendments

Purpose of the amendments

5.2 The purpose of the proposed amendments is to overcome some technical deficiencies in the existing law and to ensure that the pension and annuity rebate provisions operate as intended.

Date of effect

5.3 The amendments will apply to superannuation pensions and annuities which first commenced to be paid on or after 1 July 1988.

Background to the Legislation

5.4 A rebate of tax is available for superannuation pensions paid from taxed superannuation funds and annuities purchased wholly with rolled-over ETPs that first commenced to be payable on or after 1 July 1988. The rebate is intended to compensate for the fact that, from 1 July 1988, income tax is imposed on superannuation funds and on the superannuation business of life insurance companies and registered organisations.

5.5 The level of the rebate depends on when the superannuation pension or annuity first commenced to be payable and the source of the ETP rolled-over to purchase the pension or annuity.

5.6 Generally speaking, the rebate is calculated by multiplying the post-June 1983 portion of the purchase price of the assessable pension or annuity by the final percentage for the pension or annuity.

5.7 To determine the final percentage for the pension or annuity, rebatable superannuation pensions and rebatable ETP annuities are broken into the following components under section 159SN and section 159SV of the Act respectively:

•

a commutation component - that part of the purchase price of the pension or annuity attributable to a commutation type ETP (excluding any amount that is specified component). A commutation type ETP is an ETP arising from the commutation of a pension or annuity entitlement. The final percentage of a commutation component is based on the rebate percentage that applied to the original pension or annuity and will range from 3% to 15%, depending on when the underlying pension or annuity first commenced to be payable;

•

a specified component - that part of the purchase price of the pension or annuity attributable to an ETP, other than a commutation type ETP, rolled-over from an untaxed source. The final percentage of a specified component is 15% reflecting the fact that the post-June 1983 component of such an ETP is included in the assessable income of a roll-over fund; and

•

an ordinary component - that part of the purchase price of the pension or annuity that is not a commutation component or a specified component. The final percentage of an ordinary component ranges from 3% to 15% depending on when the pension or annuity first commenced to be payable.

5.8 Under the current rebate arrangements a rebate is not available if:

•

a superannuation pension or roll-over annuity is purchased with an ETP arising from the commutation of a deferred annuity and no annuity payments were made under the deferred annuity contract. If a deferred annuity is commuted prior to any annuity payments being made under the deferred annuity contract, the underlying annuity never commences to be payable. Therefore the underlying annuity is not a rebatable superannuation pension or a rebatable ETP annuity and the underlying percentage is nil;

•

a superannuation pension or roll-over annuity is purchased with an ETP arising from the commutation of a superannuation pension from an untaxed source even though on entry into the roll-over fund the post-June 1983 component of such an ETP is included in the assessable income of the roll-over fund. The level of the rebate is based on the underlying percentage. The underlying percentage is nil because the underlying superannuation pension was paid from an untaxed superannuation fund.

Explanation of the Amendments

Superannuation pensions and roll-over annuities purchased by rolling over an ETP arising from the commutation of a deferred annuity

5.9 The definition of commutation type ETP in subsection 159SJ(1) of the Act will be amended to exclude ETPs received on the commutation of a deferred annuity. A deferred annuity is defined in subsection 27A(1) to mean an annuity other than an immediate annuity. An immediate annuity is an annuity that is presently payable. Consequently, a superannuation pension or roll-over annuity purchased with an ETP received on the commutation of a deferred annuity will be an ordinary component and receive the same treatment as a superannuation pension or roll-over annuity purchased with an ETP rolled-over from an approved deposit fund [Clause 20; Amended definition of commutation type ETP in subsection 159SJ(1)] .

Example

5.10 Deborah received an ETP from a taxed superannuation fund in 1989. She elected to roll-over the ETP to purchase a deferred annuity. In 1992 Deborah commuted the deferred annuity entitlement before the annuity commenced to be paid and received a commutation type ETP. She rolled-over the ETP to purchase a roll-over annuity which first commenced to be payable on 1 May 1992. The annuity will be an ordinary component and Deborah will be entitled to a rebate of 12% of the post-June 1983 portion of the purchase price of the annuity.

Superannuation pensions and roll-over annuities purchased by rolling over of an ETP arising from the commutation of a superannuation pension from an untaxed source

5.11 The definition of specified component in paragraph 159SN(b) and paragraph 159SV(b) of the Act will be amended so that an ETP received on the commutation of a superannuation pension from an untaxed source which is rolled-over to purchase a superannuation pension or roll-over annuity will be a specified component and get the benefit of a 15% rebate on the post-June 1983 portion of the purchase price of the pension or annuity. [Clause 21 and Clause 22; Amended paragraph 159SN(b) and paragraph 159SV(b)]

Example

5.12 Janet retired from her job in the public service on 15 August 1991 and received an entitlement to a superannuation pension from a public sector superannuation scheme. Janet elected to commute her pension entitlement and received an ETP from an untaxed source. She rolled-over the ETP to purchase a roll-over annuity. On entry into the roll-over fund, the post-June 1983 component of the ETP is included in the assessable income of the roll-over fund. The annuity will be a specified component and Janet will be entitled to a rebate of 15% of the post-June 1983 portion of the purchase price of the annuity.

Application of the amendments

5.13 The amendments, which will always be of benefit to taxpayers, will apply to superannuation pensions and roll-over annuities which first commenced to be paid on or after from 1 July 1988 and apply until 30 June 1994. [Clause 23] Amendments made by Taxation Laws Amendment (Superannuation) Act 1992 will remove the current arrangements and replace them with effect from 1 July 1994 with a system that is both simpler and more generous.

Leases of luxury cars

Overview

6.1 The Bill will insert a new section 26AK in the Income Tax Assessment Act 1936 to require an amount resulting from the application of a formula contained in the section to be included in the assessable income of lessors of luxury cars who use the "finance method" to return the lease income.

Summary of the amendment

Purpose of the amendment

6.2 To increase the income returned under the "finance method" by lessors of luxury cars to take account of the depreciation limit on such cars, thus ensuring that the depreciation limit is not avoided by lessors using the "finance method" to return income.

Date of Effect

6.3 The amendment will apply from 8 July 1993 to leases existing at that date and leases entered into on or after that date.

Background to the legislation

6.4 Section 57AF of the Income Tax Assessment Act limits the depreciable cost of motor cars and station wagons to a certain price for taxation purposes. The depreciation cost limit, which is indexed each year, is $48,415 for the year ending 30 June 1994.

6.5 When a car is leased, the lessor, being the owner of the car, normally claims depreciation on that car, subject to the depreciation limits, as a deduction and includes in gross income the lease payments received from the lessee. This method of accounting for income for tax purposes is known as the gross rentals method.

6.6 Under the finance method, the lease is treated as if it were a loan from the lessor to the lessee, with lease payments dissected on an actuarial basis into a principal component and an interest component. Only the interest component is brought to account as income in the lessor's hands.

6.7 However, Justice Beaumont of the Federal Court decided in the case of Citibank Ltd. v. Federal Commissioner of Taxation 92 ATC 4822; (1992) 24 ATR 437, that Citibank Ltd. could use the finance method to return lease income received from finance leases of luxury cars, without adjusting its assessable income to reflect the section 57AF depreciation cost limit. Although the decision of Justice Beamont has been overturned by the Full Federal Court, 93 ATC 4691, the taxpayer is seeking special leave to appeal to the High Court.

6.8 The Treasurer announced on 8 July 1993 that the legislation would be amended to ensure that lessors who use the finance method to return lease income arising from the leasing of luxury motor vehicles would be required to make an adjustment to their income to take account of the depreciation limit.

Explanation of the amendment

6.9 The legislation is being amended to ensure that the income of lessors who use the finance method to return income from luxury car leases is increased to take account of the depreciation limit on such cars. The adjustment will put the lessor in much the same position, over the term of the lease, as if it had used the gross rentals less depreciation method of returning its lease income.

6.10 This change is not intended to indicate a Government or Taxation Office view on whether the finance method is, or may be, an appropriate way for lessors to return lease income.

6.11 The required adjustment is identical to that set out in Taxation Ruling No. IT 2105.

6.12 The lessor who uses the finance method excludes part of the cost of the car from its income. That part is the difference between the cost of the car and the residual value, which is treated as the principal being repaid by the lease instalments. [New subsection 26AK(5)]

6.13 Where the car costs more than the depreciation limit, the share of the excess proportionate to the share of the car's cost which the finance method excludes from income must be added to the lessor's income [Clause 24] . The adjustment formula includes that share of the excess in income on a straight line basis. So the amount included in income depends on the proportion of days in the lease which relate to the particular year of income [Clause 25; new section 26AK] .

6.14 The adjustment formula is

(C - RV) (C - DL)/ C


where C is the cost of the vehicle,

RV is the residual value under the lease agreement, and

DL is the relevant depreciation limit.

When does the change apply?

6.15 The proposed section only applies to lessors who get income from leasing motor vehicles to which the depreciation limits apply. [New paragraph 26AK(1)(a); definition of "eligible car", subsection 26AK(8)]

6.16 It applies to lessors who use the finance method to return income from a lease of such a motor vehicle [new paragraph 26AK(1)(b)], if they would otherwise have been entitled to depreciation for the vehicle, and if that depreciation would actually have been reduced by the operation of the limit [new paragraph 26AK(1)(c)]. This does not require that the lessor would have been entitled to a deduction on account of depreciation; for instance, the motor vehicle might have been (notionally) fully written off by the particular year of the lease, so the deduction on account of depreciation would be nil.

How does the change work?

6.17 The proposed section includes an amount in the lessor's income. That amount is a part of the excess of the cost of the motor vehicle over the depreciation limit. For this purpose, the depreciation limit is the amount that would have been the cost of the car for the purposes of section 57AF, had that section applied to the lessor [definition of 'depreciation limit', new subsection 26AK(2)]; the cost of the motor vehicle is the amount that would be the cost if section 57AF did not apply [definition of 'cost', new subsection 26AK(2)].

6.18 The amounts included in assessable income won't usually total the whole excess of cost over the depreciation limit. Lessors who use the finance method only exclude part of the cost of a motor vehicle from assessable payments. That part is the difference between the cost of the motor vehicle and its residual value - that is, the residual value it is given for the purposes of the lease [definition of 'residual value', new subsection 26AK(2)]. So it is only that proportion of the excess that must be included in assessable income.

6.19 The proposed section includes an amount in assessable income for a particular year of income on the basis of the proportion of the lease that relates to that year of income. This is worked out according to the ratio of eligible lease days to total lease days. Total lease days include all the days covered by the lease, ignoring both early termination and any possible extension or renewal [definition of 'total lease days', new subsection 26AK(2); new subsection 26AK(7)].

What are eligible lease days?

6.20 Eligible lease days for a particular year of income include the days during the year on which the lease was in effect. Eligible lease days for a particular year also include a number of days to cover payments made on early termination to substitute for the remaining lease payments. A lease could be terminated early during a particular year of income. If payments are made on an early termination to substitute for the remaining lease payments, the lessor has the benefit of payments equal to a proportion of those lease payments. In that case, the additional income of the lessor includes an additional amount, to cover the proportion of the remaining days in the lease for which an equivalent additional payment is made [definition of 'eligible lease days', new subsection 26AK(2)].

6.21 These additional days are calculated as a proportion of the number of days from the termination of the lease to the end of what would otherwise be its period [definition of 'post-termination days', new subsection 26AK(3)]. That proportion is based on the ratio between the payments made to substitute for the remaining lease payments, and those remaining payments [new subsection 26AK(3)]. However, any payments to make up a guaranteed residual value or acquire the property at that value are not included in either figure. This is because such payments are neither periodic payments under the lease, nor payments in lieu of such payments.

6.22 As the number of days in a year on which the lease was in effect could include all the days in the year, there can be more days than a year's worth of eligible lease days for a particular year of income, but only if additional days are included because of early termination of the lease.

When do the changes take effect?

6.23 Because the new provisions are only to include additional income from the date of the Treasurer's announcement, several provisions operate from that date, 8 July 1993. The new provisions first apply to a lessor for the year of income which includes 8 July 1993, a wording which ensures that taxpayers with substituted accounting periods are not advantaged over other taxpayers [paragraph 26AK(1)(d)]. The eligible lease days do not include days before 8 July 1993, or days arising through an early termination of the lease before 8 July 1993 [definition of 'eligible lease days', subsection 26AK(2)].

Clarifying provisions

6.24 Some other provisions help to clarify the operation of the provisions. Because the depreciation limit is worked out on the basis that would have applied had the lessor declared gross rentals for income tax purposes, that method, the gross rental method, is specified [new subsection 26AK(6)]. It applies to the method under which income includes all the periodic payments of the lessee.

6.25 To avoid possible dispute over the ordinary meaning of 'lease', new subsection 26AK(8) includes a definition extending to any arrangements described as finance leases by accounting principles, and giving corresponding meanings to 'lessor' and 'lessee'. Any such arrangements, whether properly leases or not, would be likely to be accounted for using the finance method.

Example

6.26 Assume that a lessor purchases a car for $90,000. The car is leased out under a lease with a residual value of $30,000. To make the calculation simpler, it is assumed that the depreciation limit for that particular year is $50,000.

6.27 In effect the amount of the cost of the car which is to be paid to the lessor, the "principal" on the loan, is the difference between the cost of the car and the residual value. So the "principal" is cost minus residual value (C - RV).

6.28

C - RV = $90,000 - $30,000 = $60,000


The excess of the cost of the car over the depreciation limit is C - DL.

C - DL = $90,000 - $50,000 = $40,000


The income of the lessor will be increased by

(C - RV) (C - DL) / C
= $60,000 x $40,000 / $90,000 = 2/3 x $40,000 = $26,666


6.29 This amount is to be included in the assessable income of the lessor over the period of the lease.

I lease a luxury car. Will I be affected by this change?

6.30 No. Only the lessor will be affected by the change.

What happens if the lease is terminated early?

6.31 If the lessee needs to pay an additional amount to the lessor in the event of an early termination, the income adjustment which the lessor needs to make will be altered. The number of "lease days in year" will be increased. As the additional amount which the lessee may need to pay may be less than the lease payments which it replaces, it would be inequitable for the lease days to be increased by the unexpired days of the lease. The proposed amendment provides a formula to adjust the additional number of days appropriately.

Could this lead to the number of "lease days in year" exceeding 365?

6.32 Yes.

What if the lease is renewed or extended?

6.33 Perhaps a simple extension of the term of a lease, with no change to the rate of periodic payments or to the residual value, is not a further lease. In that case the new section 26AK would include in income the correct proportion of the excess of cost over the depreciation limit, spread over the original term. The extension would not lead to the inclusion of any more additional income.

6.34 If a supposed renewal or extension of a lease specified a new residual value, this would amount to a fresh lease. The new section 26AK would apply to that new lease, with a cost of the property equal to the residual value under the previous lease and a new residual value. It would not apply on the basis of the original cost of the motor vehicle under the former lease.

Exemptions for pensions and allowances

Overview

7.1 The Bill will amend the Income Tax Assessment Act 1936 (the Act) to:

(a)

exempt from income tax, in certain circumstances, particular bereavement payments paid under the Social Security Act 1991 (SSA91); and

(b)

provide for the same income tax treatment of the Mature Age Allowance and the Mature Age Partner Allowance paid under SSA91as is provided for the Age Pension and Wife Pension, respectively.

Summary of the amendments

Date of effect

7.2 Bereavement Payments: 1 July 1993 [Clause 34] .

7.3 Mature Age Allowance and Mature Age Partner Allowance: 20 March 1994 [Clause 40] .

Part A: Bereavement payments

Background to the legislation - general

7.4 Bereavement payments may be payable following the death of a social security pensioner, allowee or beneficiary or a person associated with such a person, for example, a partner. The purpose of the payments is to provide financial assistance over a period of fourteen weeks following the date of the death, referred to as the "bereavement period" .

7.5 At present, the income tax law provides for tax treatment of only certain bereavement payments relating to pensions. The following diagram shows the bereavement period and points relating to bereavement payments and their tax treatment. The significant points on the diagram are:

•

bereavement notification day - the day on which the Department of Social Security (DSS) becomes aware of the death.

•

first available bereavement adjustment payday (FABAP) - the first payday after the bereavement notification day for which it is practicable to terminate or adjust payments under SSA91.

7.6 The first available bereavement adjustment payday effectively divides the bereavement period into two periods:

•

bereavement rate continuation period (BRCP) in relation to which a bereavement lump sum may be payable; it ends before the FABAP unless the FABAP occurs on or after the last day of the bereavement period; where the latter occurs, BRCP coincides with the bereavement period.

•

bereavement lump sum period in relation to which a bereavement lump sum may be payable; it begins on the first available bereavement adjustment payday and ends on the last day of the bereavement period.

7.7 In broad terms, there are three modes of payment that the existing income tax treatment of bereavement payments comprehends:

•

continued payment , where, following the date of death, the surviving pensioner is entitled to a payment in respect of the partner on each of the paydays in the BRCP at the rate at which the deceased would have received payment if the death had not occurred; this payment is exempt from income tax.

•

bereavement lump sum payment , where a bereavement lump sum is payable to the surviving partner, taking into account the continued payments (if any) to which the surviving partner is entitled before the FABAP. All or proportion of a bereavement lump sum may be exempt from tax. Exempt Bereavement Calculator A (Calculator A) in section 24ABZB of the Act provides the steps to determine the "tax-free amount". Where the tax-free amount exceeds the lump sum payment the excess may be set off against other social security payments received during the bereavement period and which are assessable.

•

application of an "exclusion provision" , where the new single rate of pension received by the surviving partner exceeds or is equal to the combined rate of pension if the person had not died; in these circumstances no bereavement amount is payable. The difference between the post-bereavement payment and the amount that would have been received by the surviving partner if the person had not died is exempt. The rest of the payment is assessable.

7.8 The following notes set out the background to and explanations of the proposed amendments to the income tax law under two headings:

(1)

bereavement lump sum payments to certain carers; and

(2)

bereavement payments to recipients of Job Search Allowance, New Start Allowance, Sickness Allowance and Special Benefit.

(1) Bereavement lump sum payments to certain carers

Background to the legislation

7.9 This Part concerns only bereavement lump sum payments made under section 136A of the Social Security Act 1991 (SSA91). Subsection 24ABF(1) of the Income Tax Assessment Act 1936 already provides for the tax treatment of continued payment to the persons affected by section 136A. Exclusion provisions do not apply to persons eligible for lump sum payments under section 136A of SSA91.

7.10 A carer pension may be payable to a person who cares for a severely handicapped person. Part or whole of the bereavement payment may be payable to the carer as a lump sum. Calculator A determines the proportion of the lump sum to be exempt from income tax.

7.11 An amendment of the Social Security Act 1991 (SSA91) provides that, under section 236A of that Act, a bereavement lump sum is payable to a person where:

•

the person is receiving a carer's pension; and

•

the person is caring for another person who is not the person's partner; and

•

the person being cared for dies; and

•

immediately before the death of the person being cared for either:

(a)

the person being cared for was not a member of a couple; or

(b)

the person being cared for was a member of a couple and the partner of the person being cared for was not receiving a social security pension or benefit or a service pension.

7.12 Under existing income tax legislation, there is no provision for the tax treatment of this bereavement lump sum payment for carers.

Explanation of the amendments

7.13 The amendments will provide for a "tax-free amount" of a bereavement lump sum payment paid to a carer to be exempt from income tax [Clause 28] . This tax-free amount will be calculated by a new Exempt Bereavement Calculator AA (Calculator AA) formula.

7.14 Section 24ABZC will provide for new Calculator AA [Clause 33] . An example will illustrate the application of Calculator AA.

Example: Application of Calculator AA

7.15 Person A cared for person B, who was not a member of a couple. The law precluded B from receipt of a pension on residency grounds. B died and A immediately notified the Department of Social Security(DSS) of the death. There are 7 pensioner pay days in the bereavement lump sum period. Both A and B were below pension age.

7.16 The rate of carer pension paid to A is $280 per pensioner pay day. A receives bereavement lump sum payment of $1,960 ($280 x 7) payable under section 236A of the SSA91.

7.17 Calculate the tax-free amount as follows:

Step 1:

As both carer and caree were under pension age the amount of $1,960 would be exempt had the caree not died. The notional exempt amount for the taxpayer is $1,960.

Step 2:

Residency grounds preclude the caree from receipt of pension. As the caree receives no payments under the SSA91 the notional amount for the caree is nil.

Step 3:

Add the notional exempt amount for the taxpayer and the notional amount for the caree: $1,960 + 0 = $1,960. This is the tax-free amount.

7.18 The whole of the lump sum of $1,960 is exempt from income tax.

(2) Bereavement payments for allowees and beneficiaries

Background to the legislation

7.19 Bereavement payments may be payable in regard to the bereavement period of 14 weeks:

•

where a member of a couple dies; and

•

one or both were recipients of Job Search, New Start and Sickness Allowances or Special Benefit.

7.20 In broad terms, the surviving partner will receive the same amount as the couple would have received by way of allowance or benefit if the death had not occurred.

Qualification for bereavement payment to allowees or beneficiaries

7.21 An allowee or beneficiary must be a long-term social security recipient as defined in the SSA91 and a member of a couple whose partner dies. Additional criteria relate to the partner. Immediately before the death, the partner must have been a social security or service pensioner or a long-term social security recipient. A partner may qualify as a long-term social security recipient, for example, if his or her partner has the allowance or benefit increased because he or she is dependent. Both partners must be 21 years or over or have dependent children.

7.22 At present these bereavement payments are not exempt from income tax.

Explanation of the amendments

7.23 In the Act, separate sections deal with each of Job Search, Newstart and Sickness Allowance and Special Benefit. The sections determine how much of the normal payment of these allowances and benefit received is assessable.

7.24 The Bill proposes to amend these sections of the Act to provide for:

•

exemption from tax of continued payment , in certain circumstances, following the death of a partner;

•

the tax treatment of bereavement lump sum payments ;

•

treatment of payments to a surviving partner that are at a rate greater than or equal to the combined pre-bereavement rate ( exclusion provision ).

7.25 In broad terms, in regard to the bereavement period, it is the intention that the surviving partner should pay no more tax on the allowance or benefit than he or she would have paid if the death had not occurred. There are three sets of circumstances prior to the death that must be dealt with:

(1)

both partners were recipients of allowance or benefit and one dies; or

(2)

there was one recipient whose allowance or benefit was increased because of a "benefit-increase partner" (ie one who was fully dependent on the recipient) and the benefit-increase partner dies; or

(3)

there was one recipient whose allowance or benefit was increased because of a benefit-increase partner and the recipient dies.

Continued payment

(1) Both partners were recipients and one dies

7.26 The surviving partner is entitled, during the BRCP, to continued payment equal to that which the deceased partner would have received on each payday before the next available adjustment payday. Under the amendments such payments will be exempt from income tax.

7.27 At the same time, in addition, the surviving partner would continue to be entitled to the allowance or benefit at his or her pre-bereavement rate. This is not a bereavement payment. It will be assessable but subject to beneficiary rebate under section 160AAA of the Act.

7.28 The provisions relating to these continued payments where both partners had been recipients may be summarised as follows:

Example

7.29 A, a long-term Newstart allowee, receives a fortnightly payment of $260. His wife, B, also a long-term Newstart allowee, receives a fortnightly payment of $260. B dies. A does not notify DSS of the death until after the end of the bereavement period. The seven payments on behalf of B during the bereavement period will be exempt from tax. There will be no lump sum payment.

(2) Recipient's benefit or allowance increased because of benefit-increase partner who dies.

7.30 Where an allowee's payment is increased because of a dependent partner and the partner dies the recipient is entitled to continue to receive the same amount in regard to each payday in the BRCP. Any supplementary amounts, such as rent assistance, to which the recipient is entitled will be exempt from tax. As the full amount of the allowance or benefit was assessable before the death, this will also be so for continued payment. (Under section 160AAA of the Act, the recipient will be entitled to a beneficiary rebate to reduce or extinguish the tax on the payment in the usual way).

7.31 There is no need to make any specific provision in the Act to make the continued payment assessable. The sections in the SSA91 that provide for the continued payment in the BRCP are as follows:

Example

7.32 F, a Newstart allowee has his fortnightly payment of $260 increased to $511 because he supports his wife, G. G dies and F does not notify DSS of the death till after the end of the bereavement period. F receives $511 for 7 paydays in the bereavement period. The payments are assessable. (F would be entitled to a beneficiary rebate to reduce or extinguish the tax on the amount in the usual way).

(3) Recipient 's benefit or allowance increased because of benefit-increase partner and recipient dies.

7.33 Where the recipient dies, the benefit-increase partner will be entitled to continued payments at the pre-bereavement rate until the first available adjustment payday. Before the death the benefit-increase partner received no allowance or benefit and therefore paid no tax on it. Accordingly he or she will pay no tax on continued payment entitlement in regard to the BRCP. Again, any supplementary amounts, such as rent assistance, to which the recipient would have been entitled will be exempt from tax.

7.34 The provisions relating to these continued payments where the benefit-increase partner is the surviving partner are summarised as follows:

7.35 The following table summarises the situation in regard to continued payment for different circumstances:

7.36 When the partner allowance (see Part B of this chapter) comes in to effect on 29 September 1994 there will no longer be benefit-increase partners. The bereavement provisions in SSA91 applicable to these persons will no longer apply. It will not be necessary to amend the Act

Lump sum bereavement payments

7.37 The amendments provide that the part of a bereavement lump sum payment that does not exceed the tax-free amount is to be exempt from income tax [Clauses 29, 30, 31, 32] . The proposed Exempt Bereavement Calculator AB (Calculator AB) formula in proposed section 24ABZD will determine the tax-free amount relevant to:

•

the situation where both partners were recipients and one dies; and

•

the situation where the allowance or benefit was increased because of a benefit-increase partner and the partner dies. Calculator AB contains three steps [Clause 33] .

7.38 In Step 1 the only exempt payments will be supplementary amounts such as rent assistance.

7.39 Where both the partners received the allowance or benefit, in Step 2 the notional amount for the partner will be that which the deceased would have received if the deceased had not died. This will be exempt from income tax. Again, supplementary amounts will also be exempt.

7.40 Where the normal benefit or allowance paid to the recipient is increased because the partner is dependent on the taxpayer the notional amount for the partner determined in Step 2 will be:

•

where the benefit increase partner dies: nil; and

•

where the recipient dies: the amount the deceased would have received if the death had not occurred.

7.41 In Step 3, add the amounts determined by means of Steps 1 and 2 to arrive at the tax-free amount.

7.42 During the bereavement lump sum period, the surviving partner will be entitled to the benefit or allowance at the single rate. This will be assessable. It is not a bereavement payment but a normal payment of allowance or benefit and is subject to beneficiary rebate under section 160AAA of the Act.

7.43 The results of the operation of Exempt Bereavement Calculator AB are summarised in broad terms in the following table:

7.44 Where the allowance or benefit was increased because of a benefit-increase partner and the recipient dies the bereavement lump sum payment to which the surviving partner is entitled will be entirely exempt from income tax.

7.45 The provisions relating to bereavement lump sum payments in various circumstances may be summarised as follows:

7.46 The following examples show the tax treatment of the relevant bereavement payments.

Example (a): Lump sum bereavement amount - benefit increase partner dies - application of Calculator AB

7.47 X is a recipient of a Sickness Allowance and receives a fortnightly payment of $260. Because he supports a partner, Y, the payment increases by $251 to $511. X and Y are both aged over 21 and below pension age. Y dies and X notifies DSS of the death. There are 2 paydays for X in the BRCP. During the BRCP, X is entitled to the allowance at the same rate as if the partner had not died. He would be entitled to a beneficiary rebate under section 160AAA of the Act that would reduce or extinguish the tax on this amount. During the bereavement lump sum period he is entitled to normal Newstart at the single rate of $281 per fortnight. He receives a lump sum of $1,150 [($511 - $281) x 5]. Calculate the tax-free amount as follows:

Step1:

If Y had not died none of the payment that would have been received by X during the bereavement lump sum period would be exempt from income tax. The notional exempt amount for the taxpayer will be nil.

Step 2:

If Y had not died, the amount she derived during the bereavement lump sum period would be nil. This is the notional amount for the partner.

Step 3:

The tax-free amount is nil.

7.48 The taxpayer will be assessable on the bereavement payment of $1,150 but probably would be eligible for beneficiary rebate at the married rate. It would reduce or extinguish any tax on the lump sum and continued payment. (The payment of Newstart Allowance at the single rate during the bereavement lump sum period would be subject to the beneficiary rebate under section 160AAA of the Act).

Example (b): Lump sum bereavement amount - partner not a benefit-increase partner - application of Calculator AB

7.49 Mr Dash receives Newstart Allowance of $260 per fortnight. Mrs Dash, his partner, also receives Newstart Allowance of $260 per fortnight. Their ages are 40 and 38 respectively. Mr Dash dies and Mrs Dash immediately notifies DSS of the death. During the BRCP, Mrs Dash will be entitled to continued payment at the rate of $260 per fortnight in addition to her own payment of $260 per fortnight. The continued payment will be exempt and her own payment will be subject to beneficiary rebate under section 160AAA of the Act. During the bereavement lump sum period the allowance is payable at the single rate of $281 per fortnight. This amount will be assessable but subject to beneficiary rebate under section 160AAA of the Act. Mrs Dash receives a bereavement lump sum payment of $1,673[($520 - $281)x 7].

7.50 Calculator AB applies as follows.

Step 1:

The amount that would have been derived by Mrs Dash during the bereavement lump sum period was not exempt. The notional exempt amount for the taxpayer is nil.

Step 2:

If he had not died Mr Dash would have derived $1,820 ($260 x 7) during the bereavement lump sum period. This is the notional amount for the partner.

Step 3:

The tax-free amount is $1,820.

7.51 The lump sum payment of $1,673 is exempt and there is a further tax-free amount of $147 ($1820 - $1673) to set off against Mrs Dash's single rate allowance received during the bereavement period.

Example (c): Bereavement lump sum payment - including exempt supplementary amount - application of Calculator AB.

7.52 M is a recipient of a Sickness Allowance and receives a fortnightly payment of $260. Because he supports a partner, N, the payment increases to $511. M also receives rent assistance of $100 per fortnight. They are both aged over 21 and below pension age. N dies and M immediately notifies DSS of the death. Following the death, M will be entitled to the allowance at the single rate of $281 per fortnight increased by rent assistance, which is now $60 per fortnight. M receives a lump sum of $1,890 [$611 - $341) x 7].

7.53 Calculate the tax-free amount as follows:

Step 1:

During the bereavement lump sum period the taxpayer would have derived rent assistance of $700 ($100 x 7) which is exempt. This is the notional exempt amount for the taxpayer.

Step2:

If N had not died, the amount derived by N during the bereavement lump sum period would be nil. This is the notional amount for the partner.

Step 3:

The tax-free amount is $700.

7.54 The tax-free amount of $700 is exempt from income tax. The balance of the lump sum bereavement payment ($1,190) is assessable. The payments of $60 per week for rent assistance are exempt and the fortnightly payment of $281 is assessable. Again, however, M probably would be entitled to a beneficiary rebate that would reduce or extinguish the tax otherwise payable.

Example (d): Lump sum bereavement amount - recipient dies leaving a surviving benefit-increase partner

7.55 Mr Blank received Newstart Allowance which is increased to $511 per fortnight because he supports a partner. They are both aged over 21 and under pension age. The recipient dies. There are two paydays in the BRCP. During the BRCP, the surviving partner is entitled to two continued payments of $511 which are exempt from tax. During the bereavement lump sum period the surviving partner is entitled to normal Newstart Allowance at the single rate of $281 per fortnight. (This will be subject to beneficiary rebate under section 160AAA of the Act). She receives a lump sum of $1,150 [($511 -$281) x 5]. The lump sum will be exempt from tax.

Exclusion provision

7.56 The exclusion provisions apply where the new single rate of allowance or benefit equals or exceeds the married rate of allowance or benefit received if the person had not died. In these circumstances the survivor is entitled to the single rate of benefit or allowance and is not entitled to receive bereavement payments. The Act refers to this as an "exclusion provision".

7.57 The otherwise assessable amount that exceeds that which would have been assessable to the surviving pensioner if the person had not died, is exempt from tax for each of the 7 payments after the death. Section 24A of the Act contains references to the paragraphs of SSA91 relevant in relation to exclusion provision dealt with in this Part [Subclause 27] and which are summarised in the following table:

7.58 The amendments will treat as assessable that amount of the allowance or benefit that would have been assessable if the partner had not died [Clauses 29, 30, 31, 32].

7.59 The exclusion provisions in the Act relation to allowances and benefit dealt with in this Part will be as tabulated below.

Example (a): Application of exclusion provision - no supplementary amounts

7.60 A couple each received $120 Newstart Allowance per payment, all of which was assessable. Following the death of one member of the couple, the surviving member is entitled, as an unmarried person to a single adult allowance of $281. However, $161 is exempt ($281 - $120). This exemption applies only for seven allowance payments following the death so that $1,127($161x7) is exempt from tax. The surviving partner probably would also be eligible for beneficiary rebate.

Example (b): Application of exclusion provision - with supplementary payments

7.61 The members of a couple each receive, per fortnight, $120 assessable Newstart Allowance plus $30 rent assistance. Their combined fortnightly income is therefore $300. Following the death of one of the couple the surviving partner is entitled, as an unmarried person, to an assessable Newstart payment of $280 plus $33 rent assistance per fortnight. The total fortnightly payment to the survivor is $313. As this exceeds the pre-bereavement income level of the couple, the surviving partner would not be eligible for bereavement payments.

7.62 Of the basic fortnightly allowance payable in the bereavement period, $160 is exempt ($280 - $120). The $33 per week in rent assistance is also exempt. For each of the 7 payments after the death, the surviving partner receives $313, of which $193 is exempt and $120 is not exempt. Over the bereavement period, payments of $1,351 ($193 x 7) are exempt and $840 ($120 x 7) not exempt. The surviving partner would also be eligible for beneficiary rebate at the single rate.

Non-bereavement payments in bereavement lump sum period

7.63 Reference has been made to non-bereavement payments during the bereavement period. Some of these payments can affect the level of bereavement lump sum payments when applicable to the bereavement lump sum period. For the sake of clarity, features of the non-bereavement payments for surviving partners are set out in Table 9.

Part B: Mature Age Allowance and Mature Age Partner Allowance

Background to the legislation

7.64 In the 1993-94 Budget the Government announced the introduction of the Mature Age Allowance (MAA) to allow persons aged 60 to age pension age who have been unemployed, and in receipt of income support, for 12 months or more to transfer to a more generous allowance where there are no job-seeking activity requirements.

7.65 The Government decided to also provide a measure similar to the Wife Pension - the Mature Age Partner Allowance (MAPA) - which would be payable to the partner of a recipient of the MAA.

7.66 Amendments to the SSA91 will provide for the MAA and the MAPA.

Explanation of the amendments

7.67 The Bill proposes income tax treatment of the MAA and MAPA, similar to the tax treatment of the age pension and the wife pension respectively.

Mature Age Allowance (MAA)

7.68 The basic MAA payment will be taxable [Clause 39] . However, a proposed amendment of the Income Tax Regulations will extend the pensioner rebate to recipients of the MAA.

7.69 Supplementary amounts such as rent assistance paid to recipients of MAA will be exempt from tax [Clause 39] .

7.70 The Bill proposes to extend the tax treatment of pensioner bereavement payments to recipients of MAA. The continued payments relating to the BRCP will be exempt from income tax in the same way as for the age pension [Clause 39] .

7.71 The use of the Exempt Bereavement Payment Calculator A formula in section 24ABZB of the Principal Act will determine the tax-free amount relating to any bereavement lump sum payment [Clause 39] .

7.72 In the bereavement period, the survivor's income from social security pension, allowance or benefit may be greater than or equal to the combined income of the couple from such sources immediately before the death. In such circumstances SSA91 provides that there will be no bereavement payment (Operation of exclusion provision). The relevant reference in the SSA91 is subparagraph 660XKA(1)(e) [Subclause 36(b)] .

7.73 However, any excess of such income received during the bereavement period over the amount that would have been received if the death had not occurred will be exempt from income tax [Clause 39] .

Example

7.74 A is a recipient of the Mature Age Allowance and his spouse, B, a recipient of the Mature Age Partner Allowance. They each receive allowance payments of $260 per fortnight. A dies and the first available bereavement payday is the second payday after the death. In regard to the bereavement rate continuation period B is entitled to a bereavement payment of $260 that is exempt from income tax and a payment at a single rate of, say, $285 that is taxable. However, this amount is subject to the pensioner rebate, which would extinguish the tax on it.

7.75 B receives a Bereavement lump sum of $1,410 and continues to receive $285 each following payday. The tax-free amount is determined using Exempt Bereavement Payment Calculator A:

Step 1.

The relevant pension paydays are 6.

Step 2.

The pension payday exempt notional taxpayer amount is $260.

Step 3.

The exempt notional taxpayer amount is $1,560.

Step 4.

The pension payday notional partner amount is $260.

Step 5.

The notional partner amount is $1,560.

Step 6.

The tax-free amount is $3,120.

7.76 As the lump sum payment is only $1,410 the excess of the tax-free amount ($1,710) will be set off against other social security payments received by B in the bereavement period, which as a single pensioner during the bereavement period amount to $1,995. The taxpayer will be taxable therefore on the remainder of $285 but will be eligible for the pensioner rebate that will offset the tax on this amount.

Mature Age Partner Allowance (MAPA)

7.77 MAPA will be payable to the partner of a mature age allowee. Where the recipient is above pension age, supplementary amounts, such as rent assistance, will be exempt and the balance will be assessable for income tax. If the recipient is below pension age the entire payment is exempt [Clause 39] . The age of the recipient's partner does not affect the taxability of the payment.

7.78 The use of the Exempt Bereavement Payment Calculator A in section 24ABZB of the Principal Act will determine the tax-free amount of any bereavement lump sum payment that will be exempt from tax. The balance of the lump sum payment will not be exempt [Clause 39] .

7.79 As with the wife pension, exclusion provisions do not apply to the MAPA.

7.80 The following table summarises the tax treatment of MAA and MAPA:

Payment of instalments by companies and certain trustees

Overview

8.1 This Bill will amend the Income Tax Assessment Act 1936 (ITAA) to provide rules for grouping instalment taxpayers for the purpose of the new company tax instalment arrangements. These company tax instalment arrangements, which were introduced in the Taxation Laws Amendment Act (No. 2) 1993, provide for quarterly payments of company tax commencing from the 1994-95 year of income. The new arrangements are contained in Division 1C of Part VI of the ITAA.

8.2 This Bill will also make an amendment to the penalty provision of Division 1C.

Summary of the amendments

Purpose of the amendments

8.3 The amendments will provide rules to prevent instalment taxpayers within large groups taking advantage of the more generous payment arrangements for smaller instalment taxpayers. Broadly, where an instalment taxpayer is part of a group that has combined likely tax for a payment year exceeding $300,000, and that instalment taxpayer's likely tax is not less than $8,000, the instalment taxpayer will be required to pay according to the rules for large instalment taxpayers.

8.4 The penalty provision of the new company tax instalment arrangements will also be amended to ensure that the penalty for under-estimation of tax cannot be avoided by lodging two estimates in quick succession.

8.5 The Bill will also make some minor technical amendments to Division 1C of Part VI of the ITAA.

Date of effect

8.6 The grouping rules will apply from the 1995-96 year of income. The other amendments will apply from the 1994-95 year of income.

Background to the legislation

8.7 Under the new company instalment arrangements, the timing and amount of instalments due depend upon the amount of the instalment taxpayer's likely tax for the payment year. This information is set out in the following table:

8.8 As the table shows, instalment taxpayers are categorised into 'small', 'medium' and 'large'. These categories are based on the amount of the instalment taxpayer's likely tax on the first day of month 9. As indicated by the timing and amount of payments, the new arrangements are more concessional for 'small' instalment taxpayers than for 'medium' instalment taxpayers. In turn, 'medium' instalment taxpayers receive more concessional treatment than 'large' instalment taxpayers.

8.9 Months are reckoned from the start of the current year of income. For example, if the current year starts on 1 July 1995 then month 12 will be June 1996 and month 15 will be September 1996.

8.10 Instalment taxpayers include not only companies but also trustees of certain trusts and funds.

8.11 Table 2 in subsection 221AZN(1) sets out what an instalment taxpayer's likely tax is at a particular time. Broadly, this table provides that if a taxpayer has lodged an estimate, the likely tax is the estimated amount (or the last estimated amount if 2 estimates have been lodged). If the taxpayer has not lodged an estimate, the likely tax is the previous year's tax amount. If a taxpayer has not lodged an estimate and there is not a previous year's tax amount, but there is an earlier year's tax amount, the likely tax is the earlier year's tax amount. In any other case, the likely tax is nil.

8.12 Division 1C of Part VI of the ITAA provides for penalties for the under-estimation of instalments payable.

8.13 The company tax instalment arrangements apply from:

•

the 1994-95 year of income - for small or medium instalment taxpayers;

•

the 1995-96 year of income - for large instalment taxpayers.

Explanation of the amendments

Grouping provisions

8.14 Larger instalment taxpayers are able to arrange themselves in such a way that they can take advantage of the more generous payment arrangements for smaller instalment taxpayers under Division 1C. That is, if a large instalment taxpayer structures itself into a series of related medium instalment taxpayers, it can defer payment of instalments by 3 months.

8.15 This Bill will amend Division 1C so that, broadly, all instalment taxpayers within a group whose combined likely tax for a payment year exceeds $300,000 will be required to pay according to the rules for large instalment taxpayers for that year [Clause 45] . However, instalment taxpayers with likely tax of less than $8,000 (i.e. a small instalment taxpayer) will not be covered by this requirement even though their likely tax will be included in the combined likely tax of the group.

8.16 Amendments will be made to the definitions of 'large taxpayer' and 'medium taxpayer' contained in section 221AZH of Division 1C to ensure that the classification of an instalment taxpayer as either 'large' or 'medium' is subject to the application of the grouping provisions [Clause 43] . An amendment with the same purpose is made to paragraph 221AZK(3)(a) which provides for the classification date for instalment taxpayers [Clause 44] .

8.17 The amendments will treat instalment taxpayers as part of the same group if:

•

one has a controlling interest in the other;

•

one has a controlling interest in several other taxpayers;

•

one has a controlling interest in another instalment taxpayer, which in turn has a controlling interest in other taxpayers [Section 221AZMB].

8.18 An instalment taxpayer ( the controlling taxpayer ) will be taken to have a controlling interest in another instalment taxpayer ( the related taxpayer ) if:

•

the related taxpayer is a company and the controlling taxpayer:

(i)

is in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the related taxpayer; or

(ii)

has the power to appoint the majority of directors of the related taxpayer; or

(iii)

the related taxpayer or the directors who are entitled to exercise a majority of the voting power at meetings of the related taxpayer are accustomed, or under an obligation, whether formally or informally, to act in accordance with the directions, instructions or wishes etc. of the controlling taxpayer.

•

the related taxpayer is a trust and the controlling taxpayer:

(i)

is beneficially entitled to, or is able, directly or indirectly, to control 50% of the interests in the trust property or income; or

(ii)

has the power to appoint or remove the trustee, or any of the trustees of the related taxpayer; or

(iii)

the trustee of the related taxpayer is accustomed or under an obligation, whether formally or informally, to act according to the directions, instructions or wishes of the controlling taxpayer [Section 221AZMC].

8.19 The 'controlling interest test' will be applied on the same date that instalment taxpayers determine if they are 'medium' or 'large', i.e. the first day of the 9th month [Section 221AZMA].

Penalties for under-estimation of tax

8.20 Subsection 221AZP(1) provides for penalties for the under-estimation of tax under the new company tax instalment arrangements.

8.21 Under subsection 221AZO(1), an instalment taxpayer can lodge up to two estimates for any year. The amount of an instalment due, for a medium or large instalment taxpayer, is based on these estimates. If an instalment taxpayer has not lodged an estimate, the amount upon which instalments are levied will be the previous year's tax amount or the tax amount of the most recent earlier year. An instalment taxpayer may lodge an estimate, up until and including its 3rd instalment payment, of its income tax payable in the current year of income.

8.22 As set out in subsection 221AZP(1), if an estimate made by the instalment taxpayer turns out to be more than 10% below a specified amount (referred to as the base amount) a penalty is payable. Under subsections 221AZP(2) & (3) the penalty applies to the difference between an estimated amount and the base amount.

8.23 The base amount is specified in paragraphs 221AZP(1)(a) and (b) as effectively being the lesser of the following amounts:

(a)

the likely tax for the current year, immediately before the taxpayer lodged the estimate;

(b)

the actual tax payable.

8.24 In the case of a first estimate, the penalty is applied to the period starting on the date the estimate is lodged (or the date the first instalment was due, if later) and ending on the date another estimate is lodged (or the date of the last instalment, if earlier). The base amount will be the lesser of the previous year's tax amount and the actual tax payable.

8.25 In the case of a second estimate, the penalty is applied to the period starting on the date of lodgement of the second estimate (or the date the first instalment was due, if earlier) and ends on the date of the last instalment. The base amount is the lesser of the amount of the first estimate and the actual tax payable.

8.26 Paragraph 221AZP(1)(a) can operate in such a way that the penalty for the under-estimation of tax can be avoided. This can be achieved by lodging two estimates in quick succession, and for the second estimate to be at least 90% of the value of the first. As the penalty period for the first estimate ceases when the second estimate is lodged there will be no penalty from the date when the second estimate is lodged (as it is at least 90% of the first estimate).

8.27 Paragraph 221AZP(1)(a) will be amended accordingly so that the base amount which applies to a second estimate is the same as that for the first estimate, i.e., the lesser of the previous year's taxable income or the taxable income of the most recent year [Clause 46] .

Other minor amendments

8.28 These amendments will remedy an incorrect citation of Division 1C in subsection 166A(2) [Clause 42] and insert the word 'the' in paragraph 221AZT(a) between 'if' and 'taxpayer' [Clause 47] .

Penalties for over-franking dividends

Overview

9.1 The provision imposing penalty for deliberate overfranking of dividends, franking additional tax (FAT), will be amended to ensure its proper application in cases where franking deficit tax is able to be offset by an initial payment of company tax. Consequently, the penalty will be applied consistently in all cases where a company deliberately overfranks a dividend and this gives rise to a franking deficit in a franking account at the end of a franking year.

9.2 The amendments and this explanation take into account changes to the imputation system proposed in Taxation Laws Amendment Bill (No. 3) 1993.

Summary of the amendments

Purpose of the amendments

9.3 To ensure that FAT is calculated by reference to the amount of franking deficit tax (FDT) that would be payable but for allowing an offset of the initial payment of tax.

Date of effect

9.4 The amendments apply to FAT payable as a result of the deliberate overfranking of a dividend that is paid after 14 December 1993, the date of introduction of this Bill.

Background to the legislation

9.5 Since the introduction of the imputation system FAT has applied where a company deliberately overfranks a dividend. Dividend overfranking occurs when the franked amount of a dividend paid during the franking year exceeds the required franking amount.

9.6 FAT applies where:

•

the overfranking gives rise to a franking deficit in the relevant franking account at the end of a franking year; and

•

the deficit is more than 10% of the total franking credits arising in that account during that year.

9.7 The penalty is 30% of the FDT which is payable in respect of the relevant franking deficit. FDT is not, of itself, a penalty. It is a payment to make up the amount of company tax that has been imputed by the payment of franked dividends. There is provision for the 30% penalty to be remitted in appropriate circumstances.

9.8 When the initial payment system for the collection of company tax was introduced, the imputation system was amended to allow an initial payment of company tax based on a company's own estimate to be offset against any FDT liability. The two payments are due around the same time. The effect of the offset is that a company is liable to pay FDT only to the extent the FDT liability exceeds the initial payment. Thus, where the initial payment exceeds the FDT liability, no FDT is payable.

9.9 At the time the offset arrangement was introduced there was no change in the policy in relation to deliberate overfranking of dividends. That is, subject to the 10% threshold, in all cases where the overfranking gives rise to a franking deficit at the end of the franking year a company should be liable to a penalty.

9.10 But the penalty is calculated as a percentage of the FDT liability. Where the initial payment is offset, the amount of actual FDT payable is reduced with the consequence that the FAT payable is also reduced.

9.11 In this regard the penalty provision is deficient.

Explanation of the amendments

9.12 Section 160ARX will be amended so that FAT is calculated as an amount equal to 30% of the FDT otherwise payable but for the operation of subsection 160AQJ(2).

9.13 Subsection 160AQJ(2) is the provision that allows for the offsetting of an initial payment of tax in specified circumstances. The ability to offset an initial payment against an FDT liability will not be affected by the amendments to section 160ARX. It is only for the purposes of calculating FAT that the unreduced amount of FDT is taken into account.

9.14 There are other proposed amendments to the imputation system contained in Taxation Laws Amendment Bill (No. 3) 1993. Broadly, a company will be required to maintain two franking accounts, a class A and class B franking account, from the begining of its 1994-95 franking year. FAT will be imposed in exactly the same circumstances where a dividend has been overfranked but using either the class A or class B franking account.

9.15 The amendments proposed by this Bill need to take into account the operation of the two franking accounts.

9.16 Therefore, FAT will be calculated as 30% of any class A or class B FDT, as the case may be, otherwise payable but for the offsetting of an initial payment of tax [Subclause 50(1), amended subsection 160ARX(1) and subclause 50(2), amended subsection 160ARX(2)] .

9.17 The changes to the application of FAT may apply in respect of a company's 1993-94 franking year, prior to the two franking accounts operating. Consequently, the amendments will ensure the changes to the FAT provisions will apply to the 1993-94 franking year when a single account will operate. That is, FAT will be calculated as 30% of the FDT otherwise payable with no reference to the class A or class B FDT otherwise payable [Subclause 50(3), amended section 160ARX] .

Application

9.18 The changes to section 160ARX will apply to a FAT calculation for the franking year during which this Bill is introduced and for all later franking years [Subclause 51(3)] .

9.19 There will be a special application provision for the franking year during which the Bill is being introduced. For all companies this is the 1993-94 franking year.

9.20 The amendments will apply to the 1993-94 franking year only if the overfranked dividend was paid after 14 December 1993, the date of introduction of this Bill [Subparagraph 51(a)(ii)] .

9.21 This will ensure that the changes to the application of FAT will not apply to the 1993-94 franking year where the overfranking occurred before the introduction of the amending legislation.

Example

9.22 On 1 March 1994 Company X, a 30 June balancing company, pays a fully franked dividend of $610. The franking account balance at the time the dividend was paid was nil, therefore, the required franking amount for the dividend was nil.

9.23 No other entries were posted to the franking account. The franking deficit at the end of the 1993-94 franking year was $610 with a consequent FDT liability of $390 (subsection 160AQJ(1)). However, on 28 July 1994 the company made an initial company tax payment of $500 based on its own estimate of tax. Under subsection 160AQJ(2) the amount of FDT payable by the company was therefore reduced to nil.

9.24 Under the proposed amendments, section 160ARX will operate so that the company will be liable to pay FAT of $117 (30% of $390) in respect of the 1993-94 franking year.

9.25 If the company had paid the same dividend on, say, 1 October 1993, before the introduction of the amendments, FAT could not be imposed.

Heritage conservation rebate

Overview

10.1 The Bill will provide a tax rebate for expenditure on certain conservation work on heritage listed properties.

Summary of proposed amendments

Purpose of amendments

10.2 To provide a rebate of 20 cents in the dollar for approved expenditure incurred on conservation work for buildings listed in Commonwealth, State or Territory heritage registers.

Date of Effect

10.3 Royal Assent

Background to the legislation

10.4 The introduction of the rebate for expenditure on heritage conservation work is to provide an incentive for the owners of heritage listed properties to invest in the conservation of those properties in the interests of the nation's heritage.

Explanation of amendments

10.5 The amendments will provide a rebate to taxpayers who have been issued with a final certificate that relates to a specified amount of heritage conservation expenditure. The rebate will be allowed in the taxpayer's assessment for the year of income in which the final certificate was applied for. The rebate will be allowable for approved expenditure of at least $10,000 on certain conservation work to buildings and structures listed on specified heritage registers.

Entitlement to the heritage conservation rebate

Heritage conservation rebate - individuals and companies

10.6 A taxpayer, other than a partnership or trustee, who has been issued with a final certificate will be entitled to a rebate for eligible heritage conservation works. The taxpayer will be entitled to a rebate of 20% of the amount of expenditure specified in the final certificate. The rebate will be allowable in the taxpayer's assessment for the year of income in which the final certificate was applied for, not the year of income in which the certificate was issued. Thus any delay in issuing certificates will not affect the year of income in which the rebate is allowable [Clause 53 - new section 159UQ] .

Heritage conservation rebate - partnerships

10.7 An association of persons (other than a company) carrying on business as partners or in receipt of income jointly is a partnership for income tax purposes (subsection 6(1)) and is treated as a taxpayer (section 90). A partnership will be eligible to apply for a provisional certificate and, provided that all the requirements are satisfied, to be issued a final certificate.

10.8 Each partner in a partnership will be entitled to the rebate for approved heritage conservation work done on a property owned by the partnership. The share of the rebate to which each partner will be entitled, will be determined on the basis of their share of the net income of the partnership for the year of income in which the rebate is allowable, that is the year of income in which the final certificate is applied for. If the partnership has no net income for the year in which the final certificate is applied for, no rebate will be allowable to the partners [Clause 53 - new section 159UR] .

Jointly owned property

10.9 In the case of a property that is jointly owned but the joint owners do not constitute a partnership for tax purposes, each joint owner of the property will be eligible to seek a provisional certificate for proposed heritage conservation work on the jointly owned property. A joint owner of a property (that is not partnership property) will qualify for entitlement to the rebate on the same basis as an individual or company taxpayer.

Heritage conservation rebate - trusts

10.10 Where a final certificate has been issued to a trustee of a trust estate, the rebate will be allowable to beneficiaries of the trust or, in certain circumstances, it will be the trustee who will be entitled to the rebate. To qualify for the rebate the trust must have a net income for the year of income in which the trustee applied for the final certificate [Clause 53 - new subsection 159US(1)] .

10.11 A beneficiary will be entitled to a rebate in its assessment for a year of income if :

•

the beneficiary is presently entitled to a share of the net income of the trust for that year of income; and

•

the share of the net income constitutes assessable income of the beneficiary (under section 97) [Clause 53 - new subsection 159US(2)] .

10.12 Circumstances under which the trustee will be entitled to the rebate are:

•

the trustee is assessable on the share of the net income of a beneficiary who is under a legal disability (under section 98) for the year of income in which the trustee applied for the final certificate. The beneficiary's share of the rebate will be allowable in the assessment to the trustee on account of the beneficiary for that year of income [Clause 53 - new subsection 159US(3)] ; or

•

the trustee is assessable on the income of a trust to which no person is presently entitled (under section 99 or 99A), for the year of income in which the trustee applied for the final certificate. The trustee will be entitled to the rebate in the assessment of the trust for that year of income [Clause 53 - new subsection 159US(4)] .

Heritage conservation rebate - corporate unit trusts and public trading trusts

10.13 Trustees of corporate unit trusts and public trading trusts are taxed as if they were companies (Division 6B and Division 6C). Accordingly, the trustee of a corporate unit trust or a public trading trust is a taxpayer and may apply for a provisional certificate in the same way as any other taxpayer. Such a trustee who has been issued with a final certificate will be entitled to a rebate for eligible heritage conservation works of 20% of the amount of expenditure specified in the final certificate, in the assessment of the trust for the year of income in which the final certificate was applied for [Clause 53 - new section 159UT].

Administration of the scheme

10.14 The scheme will be administered by the Department of the Arts and Administrative Services. Concepts central to the administration of the scheme are:

•

maximum approval limit;

•

closing date;

•

provisional certificate criteria and procedures;

•

provisional certificate;

•

final certificate.

Maximum approval limit

10.15 The maximum approval limit will be the total amount for which provisional certificates may be issued in the financial year. The Minister for the Arts and Administrative Services will specify in writing the amount of the limit for each financial year. Provisional certificates will not be able to be issued for a financial year until the maximum approval limit for the particular year has been specified [Clause 53 - new section 159UD] .

10.16 The instrument specifying the maximum approval limit will be a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901 [Clause 53 - new paragraph 159UY(b)] .

Closing date

10.17 Each financial year the Minister for the Arts and Administrative Services will nominate the closing date by which applications for provisional certificates are to be lodged. This date will be notified in the Gazette and will not be less than 21 days later than the date of notification. The Minister will have the option of considering applications received after the closing day. In practice, it is likely that late applications will be considered if they are received before the ranking process commences [Clause 53 - new section 159UE] .

Provisional certificate criteria and procedures

10.18 The Minister for the Arts and Administrative Services will be required to specify in writing the criteria that proposed heritage conservation works must satisfy to be eligibile for admission to the scheme. These criteria will be the provisional certificate criteria . Proposed works that satisfy the provisional certificate (eligibility) criteria will then be ranked according to the provisional certificate procedures [Clause 53 - new section 159UF] .

10.19 These provisional certificate criteria and procedures will be specified in writing and will be a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901 [Clause 53 - new paragraph 159UY(c)] .

Provisional certificates

10.20 A provisional certificate will be the first step in a two step process for approving proposed heritage conservation works as rebatable.

A taxpayer may apply for a provisional certificate if:

•

the taxpayer intends to incur expenditure on "heritage conservation works" (see below); and

•

the taxpayer has either a freehold interest or holds a Crown lease over the the land on which the building or structure is situated [Clause 53 - new section 159UG] .

10.21 Heritage conservation works are defined as works done for the purpose of conserving, maintaining, preserving, restoring, reconstructing or adapting a building or structure of cultural significance that is listed in a heritage register that the Minister for the Arts and Administrative Services has prescribed as a recognised heritage register [Clause 53 - new section 159UB] .

10.22 However, expenditure incurred on the acquisition of depreciable plant or articles will not qualify as heritage conservation works [Clause 53 - new section 159UC] .

10.23 The Minister for the Arts and Administrative Services will prescribe heritage registers maintained by the Commonwealth, the States and Territories as recognised heritage registers in an instrument which will be a disallowable instrument for the purposes section 46A of the Acts Interpretation Act 1901 [Clause 53 - new paragraph 159UY(a)] .

10.24 An application for a provisional certificate must be made on an approved form and must state the amount of expenditure the taxpayer proposes to incur on the works and any other required information. The completed form should then be lodged with the Department of the Arts and Administrative Services [Clause 53 - new section 159UH] .

10.25 The Minister will have the power to seek further information from a taxpayer for the purposes of determining whether to issue a provisional certificate. Further consideration of the application may be deferred pending receipt of the information requested [Clause 53 - new section 159UI] .

10.26 Applications received in the required form will be examined. Those that satisfy the eligibility criteria (that is, the heritage conservation and other provisional certificate criteria - see above notes) will be ranked. The factors that will be taken into account in ranking these applications will be specified in provisional certificate procedures (see above notes). The value of proposed works for which provisional certificates will be able to be issued is limited to the amount the Minister has specified as the maximum approval amount (see notes on new section 159UD). The amount to be specified for the 1993-94 financial year is $9.5 million.

10.27 Where an application satisfies the conditions for the issue of a provisional certificate and the ranking procedures allow the Minister to issue a provisional certificate to the taxpayer, the taxpayer will be notified [Clause 53 - new subsection 159UJ(1)] .

10.28 When the taxpayer:

•

pays any required fee; and

•

gives the Minister a statement that all the necessary building and other approvals that are required for the work to be lawfully carried out have been obtained and signs that statement;

the Minister will issue a provisional certificate to the taxpayer [New subsections 159UJ(2) and (3)].

10.29 If after the application of the provisional certificate criteria and procedures, the Minister decides not to issue a provisional certificate, the Minister must notify the taxpayer accordingly [Clause 53 - new subsection 159UJ(4)] .

10.30 A decision not to issue a provisional certificate is not reviewable by the Administrative Appeals Tribunal.

Contents of a provisional certificate

10.31 The provisional certificate will contain the following information:

•

the name of the taxpayer (this will be the only person to whom a final certificate will be issued in respect of the work);

•

a description of the works to be carried out;

•

the standard to which the works must be completed to qualify for a final certificate; and

•

the amount of the proposed expenditure that will qualify for the rebate (this amount must be at least $10,000) [Clause 53 - new section 159UK].

Provisional certificate in force

10.32 Only expenditure on the heritage conservation work described in the provisional certificate that is incurred while the certificate is in force will be eligible for the rebate. Any expenditure incurred before the provisional certificate has issued will not be eligible for the rebate.

10.33 A provisional certificate will cease to be in force when the final certificate is issued for the work. However, the provisional certificate will also cease to be in force if any of the following events occur before the final certificate is issued:

•

the taxpayer disposes of his or her interest in the property;

•

the taxpayer dies;

•

if the taxpayer is a partnership, a company or a trust, the partnership is dissolved or the company or the trust is wound up; or

•

a final certificate is not applied for within 24 months of the issue of the provisional certificate, or if an extension has been granted (under new subsection 159UL(2), within the extended period [Clause 53 - new subsection 159UL(1)] .

10.34 The Minister will have the power to grant a taxpayer a 3 month extension of the provisional certificate period. The taxpayer must apply for the extension no later than one month before the end of the 24 month provisional certificate period [Clause 53 - new subsection 159UL(2)].

Final certificate

10.35 The holder of a provisional certificate may apply for a final certificate when the taxpayer has:

(a)

completed the works to the standard specified in the provisional certificate during the provisional certificate period; and

(b)

incurred expenditure of at least $10,000 during the provisional certificate period, that is while the provisional certificate was in force [Clause 53 - new subsection 159UM(1)] .

10.36 The application for a final certificate must be lodged on the approved form and specify the amount of expenditure covered by the provisional certificate actually incurred on eligible heritage conservation works while the provisional certificate was in force. The application for a final certificate must be lodged before expiry of the provisional certificate [Clause 53 - new subsection 159UM(2)] .

10.37 Where an application is made for a final certificate in respect of expenditure of at least $10,000 on heritage conservation works completed to the standard specified in the relevant provisional certificate, a final certificate will be issued [Clause 53 - new section 159UO] .

Taxpayer dies before applying for a final certificate

10.38 If a taxpayer dies after completing the work but before applying for a final certificate, an application made within 3 months of the death of the taxpayer will be treated as having been made immediately before the taxpayer's death. If the final certificate is issued, the rebate for the heritage conservation work will be allowable in the taxpayer's assessment for the period from the beginning of the year of income to the date of death.

10.39 The following conditions must be satisfied for an application for a final certificate to be made after the death of the taxpayer to whom it was issued:

•

the provisional certificate must still be in force, either because the 24 month period has not expired or an extension of the period has been granted;

•

the works must be completed to the standard specified in the provisional certificate; and

•

the taxpayer must have incurred expenditure of at least $10,000 during the period the provisional certificate was in force [Clause 53 - new subsection 159UN(1)].

10.40 The application for a final certificate to be issued in respect of heritage conservation works covered by a provisional certifcate that were completed before the death of the taxpayer may be made by:

•

an executor, administrator or other personal representative of the taxpayer; or

•

if the deceased taxpayer was a partner in a partnership that is the holder of a provisional certificate, one of the surviving partners of the partnership [Clause 53 - new subsection 159UN(2)].

Taxpayer dies before works completed

10.41 If the works covered by the provisional certificate are not completed when the taxpayer to whom the provisional certificate was issued dies, the provisional certificate will lapse. Any expenditure on heritage conservation works covered by the certificate incurred while the provisional certificate was in force will not be rebatable. The effect of the death of the holder of the provisional certificate is that conditions for the issue of a final certificate will never be able to be satisfied [Clause 53 - new paragraph 159UL(1)(a) and new sections 159UM and 159UN] .

10.42 The case is the same where a provisional certificate has been issued to a partnership and one of the partners dies before the works have been completed to the standard specified in the provisional certificate. The partnership terminates on the death of the taxpayer. Unless the works have been completed to the standard specified in the provisional certificate and the expenditure incurred before the death of the partner, no rebate will be allowable for the expenditure that has been incurred.

Transactions not at arms length

10.43 Where:

•

a taxpayer incurs heritage conservation expenditure covered by a provisional certificate;

•

the taxpayer is not dealing at arm's length with the party to whom the expenditure was incurred;

•

the Minister for the Arts and Administrative Services considers that the expenditure is greater than the expenditure that would have been incurred if the parties were dealing at arm's length;

the Minister will disregard the excess expenditure in specifying the amount of qualifying expenditure in the final certificate [Clause 53 - new section 159UP].

Review of decisions

10.44 A taxpayer will be able to apply to the Admininstrative Appeals Tribunal for a review of:

(a)

a decision of the Minister to refuse to issue a final certificate; or

(b)

the amount shown on the final certificate as the amount of eligible heritage conservation expenditure incurred by the taxpayer during the period the provisional certificate was in force [Clause 53 - new subsection 159UV(1)] .

10.45 A taxpayer will be notified in writing of a decision of the Minister to refuse to issue a final certificate (subsection 159UO(2)). The amount of eligible heritage conservation expenditure will be shown on the final certificate which will also be in writing. These notices will contain advice that the taxpayer may make an application for review of the decision to the Administrative Appeals Tribunal. The notice will also advise the taxpayer that, unless the information has already been supplied in writing, the taxpayer may make a request (under section 28 of the Administrative Appeals Tribunal Act 1975) for a statement setting out:

•

the findings on material questions of fact referring to the evidence or other material on which those findings were based; and

•

the reasons for the decision.

10.46 The Minister or (where the decision is made by a delegate) the delegate is required to furnish a statement to the applicant within 28 days [Clause 53 - new subsection 159UV(2)] .

10.47 The validity of any reviewable decision is not affected by any failure of the Minister or delegate to comply with the notification requirements [Clause 53 - new subsection 159UV(3)] .

Disclosure of information to recognised heritage bodies

10.48 Officers are prohibited from disclosing any information concerning the income tax affairs of any person acquired in the course of their duties unless the disclosure is specifically authorised (section 16(2)). For these purposes a person is an "officer" if the person:

•

has been appointed or employed by the Commonwealth or a State;

•

acquires information furnished under the Income Tax Assessment Act 1936 about the taxation affairs of a person because, or in the course, of that employment. (Definition of "officer" - subsection 16(1)).

10.49 A person who performs services for the Commonwealth is taken to be employed by the Commonwealth (subsection 16(1A)).

10.50 The Minister will be permitted to seek advice from recognised heritage bodies. It will be necessary for members of these bodies to have access to information furnished in relation to provisional and final certificates in order to provide informed advice to the Minister. The Minister will be authorised to disclose to recognised heritage bodies information furnished in support of the application for a provisional certificate to enable these bodies to provide appropriate advice [Clause 53 - new subsection 159UW(1)] .

10.51 Similarly, the Minister will be authorised to disclose information contained in a provisional certificate and information furnished in an application for a final certificate to a recognised heritage body from whom the Minister is seeking advice on whether the conditions for the issue of a final certificate have been satisfied [Clause 53 - new subsection 159UW(2)].

10.52 Members of any recognised heritage body to whom information has been disclosed are performing services for the Commonwealth and will be under the same secrecy obligatons as if the person was an officer [Clause 53 - new subsection 159UW(3)].

Minister's power to delegate

10.53 The Minister for the Arts and Administrative Services will be permitted to delegate most of his powers under proposed Subdivision AAD to officers of the Minister's Department who hold an office that has a classification declared by the Public Service Commissioner to be a Senior Executive classification [Clause 53 - new section 159UX].

10.54 The Minister will not be permitted to delegate the power to:

•

declare a heritage register to be a recognised heritage register (for the purposes of the definition of "heritage conservation works" new section 159UB);

•

declare a body to be a "recognised heritage body" (new section 159UB);

•

specify the maximum approval limit for a financial year (new section 159UD);

•

specify the closing date for applications for provisional certificates for a financial year (new section 159UE);

•

determine provisional certificate criteria and procedures (new section 159UF).

Tax treatment of rebatable expenditure

10.55 No income tax deduction will be allowable for expenditure incurred on heritiage conservation works that are covered by a provisional certificate. For example, expenditure that represents rebatable heritage conservation expenditure will not be deductible under section 53, even if it constitutes a repair to income producing property.

10.56 In determining whether expenditure incurred on the works qualifies for the rebate or is deductible, the expenditure will be treated as being rebatable until it reaches the amount of qualifying expenditure specified on the provisional certificate. Any deductible expenditure incurred after the expenditure reaches the qualifying limit specified in the provisional certificate will be deductible in the normal way.

10.57 Where otherwise deductible expenditure covered by a provisional certificate is incurred, the amount, if any, of the expenditure that is deductible will be calculated by applying a formula. Under this formula a deduction will be allowable for so much of the expenditure that exceeds the greater of:

•

NIL; and

•

the amount worked out under the formula:

(Qualifying expenditure limit specified in the provisional certificate) - (Total expenditure previously incurred by the taxpayer in relation to the works while the certificate was in force)


[Clause 53 - new subsection 159UU(1)]

10.58 The following example illustrates the application of the formula to calculate the amount of the otherwise deductible heritage conservation works expenditure that is allowable as a deduction:

Example

10.59 On 30 April 1994 a taxpayer is issued with a provisional certificate that specifies $20,000 as the qualifying expenditure limit.

10.60 As at 30 September 1994 the taxpayer has incurred expenditure of $15,000 covered by the provisional certificate.

(1)

10.61 On 15 October 1994 the taxpayer incurs additional expenditure of $3,000 on the works which would be deductible if it was not covered by the provisional certificate.

10.62 Applying the formula to the $3,000:

Is $3,000 greater than

•

NIL and:

•

($20,000 - $15,000) = $5,000?


ANSWER: No. Therefore, no part of the expenditure of $3,000 is deductible.

(2)

10.63 On 30 October 1994 the taxpayer incurs further additional expenditure of $7,000 on the works which would be deductible if it was not covered by the provisional certificate.

10.64 Applying the formula to the $7,000:

Is $7,000 greater than

•

NIL and:

•

($20,000 - $18,000) = $2,000?


ANSWER: $7,000 is greater than $2,000 by $5,000. Therefore the taxpayer is entitled to a deduction of $5,000.

(3)

10.65 On 14 November 1994 the taxpayer incurs further additional expenditure of $6,000 on the works which would be deductible if it was not covered by the provisional certificate.

10.66 Applying the formula to the $6,000:

Is $6,000 greater than

•

NIL and:

•

($20,000 - $25,000) = -$5,000?
NIL is greater than -$5,000. Therefore, the taxpayer is entitled to a deduction for the amount of $6,000 (that is, the amount by which $6,000 exceeds NIL).

10.67 Where otherwise deductible expenditure is incurred on heritage conservation works, and a final certificate will not be issued for the work, the deductions that were not allowable because the expenditure was incurred on heritage conservation works will be allowable in the taxpayer's assessment for the year of income in which the provisional certificate ceases to be in force [Clause 53 - new paragraph 159UU(2)(c)] .

10.68 For example, a taxpayer incurs otherwise deductible expenditure covered by a provisional certificate of $8,000 in the 1994-95 year of income and $7,000 in the 1995-96 year of income. The provisional certificate expires in the 1995-96 year of income. The taxpayer will be entitled to a deduction of $15,000 in the assessment for the 1995-96 year of income.

10.69 If any otherwise deductible expenditure incurred while the provisional certificate is in force would have qualified for deduction in a later year, and a final certificate is not applied for while the provisional certificate is in force, the deduction will be allowable in the later year of income. It will not be allowable in the assessment for the year of income in which the provisional certificate ceased to be in force [Clause 53 - new paragraph 159UU(2)(d)] .

10.70 For example, if particular expenditure incurred in a year of income was to be deductible over four years of income, and the provisional certificate ceased to be in force in the second year of income, the deduction for the third and fourth years of income would be allowable in the taxpayer's assessments for those years of income and not the second year of income.

Capital allowances - Division 10C and 10D

10.71 Currently deductions are allowable for expenditure of a capital nature that is incurred on the construction of a building, or the construction of an extension, alteration or improvement to a building or part of a building where the building was used wholly or principally for the purpose of:

(a)

operating a hotel, motel, guest house or apartments used wholly or principally for the provision of short-term accommodation for travellers (Division 10C); and

(b)

income producing or research and development activities (Division 10D).

10.72 Expenditure on heritage conservation works may constitute qualifying expenditure for the purposes of Division 10C or 10D and entitle the owner to a deduction at the rate of 2.5% or 4% depending on the use of the building. Where heritage conservation work constitutes qualifying capital expenditure under Division 10C or 10D the expenditure will be specifically excluded from being qualifying expenditure for those purposes (section 124ZB and section 124ZG). [Clauses 54 and 55]

Capital gains and losses

10.73 In calculating a capital loss on the disposal of an asset, deductions which are allowable in respect of any element of the cost base of the asset are excluded from the cost base in determining the capital loss arising under Part IIIA of the Act (section 160ZK). Accordingly, if a capital loss is incurred on the disposal of a building for which deductions for capital expenditure on the building were allowed or are allowable under Division 10C or 10D, the cost base of the asset is reduced by the amount of the deduction allowed or allowable.

10.74 Capital expenditure on a building that is eligible heritage conservation works expenditure for the purposes of Subdivision AAD of Division 17 does not qualify for deductions under Division 10C or 10D (see above). However, if the building is disposed of at a capital loss, an adjustment will be made to the reduced cost base to exclude the amount of the deduction that would have been allowable under Division 10C or 10D if the capital expenditure had not been eligible heritage conservation works expenditure. [Clause 56]

Example

10.75 A taxpayer buys a house listed on a heritage register in January 1994 for $100,000. Renovations are done to convert the premises into a restaurant, which then becomes an income producing property. The restaurant opens for business on 1 July 1994.

10.76 The capital cost of the renovations of $80,000 is qualifying expenditure under section 124ZG of Division 10D. Expenditure of $20,000 is incurred on restoring the original veranda. A provisional certificate for the work on restoring the veranda issued on 15 April 1994. The qualifying expenditure specified for that work on the certificate is $20,000. The whole of the expenditure of $20,000 was incurred while the provisional certificate was in force.

10.77 The property was sold on 30 June 1997 for $160,000.

10.78 For the 3 years of income ended 30 June 1995, 1996 and 1997 the deductions that would be allowable at 2 1/2% under Division 10D are:

10.79 The reduced cost base of the building is calculated as follows.

Savings banks

Overview

11.1 The Bill will remove the exemption from income tax and withholding tax for certain savings banks.

Summary of the amendments

Purpose of amendments

11.2 The current exemption from income tax for savings banks conducted exclusively for the benefit of depositors is to be repealed. The corresponding exemption from dividend, interest and royalty withholding tax for certain non-resident savings banks will also be repealed.

Date of effect

11.3 For income tax, from the 1994-95 year of income.

11.4 For withholding tax, from 1 July 1994.

Background to the legislation

11.5 Currently, paragraph 23(i) of the Income Tax Assessment Act 1936 (the Act) exempts from income tax the income of a savings bank conducted exclusively for the benefit of depositors. This exemption will be removed because of the recent integration of savings bank activity into trading bank business under the Bank Integration Act 1991. Since this integration, the distinction between savings and trading banks is no longer valid.

11.6 Paragraph 128B(3)(a) of the Act exempts from withholding tax the income of a non-resident savings bank that is exempt under paragraph 23(i) and is exempt from income tax in its country of residence. As a result of removing the income tax exemption for savings banks, the exemption from withholding tax is no longer necessary.

Explanation of the amendments

Income tax exemption for savings banks

11.7 Paragraph 23(i) of the Act provides an exemption from income tax for a savings bank conducted exclusively for the benefit of depositors. This paragraph will be deleted [Clause 58] .

Withholding tax exemption for certain non-resident savings banks

11.8 Paragraph 128B(3)(a) of the Act provides an exemption from dividend, interest and royalty withholding tax for a savings bank that is exempt from Australian income tax under paragraph 23(i) and is also exempt from income tax in its country of residence. The reference in this paragraph to paragraph 23(i) will be deleted [Clause 62] .

Provisions containing a reference to paragraph 23(i)

11.9 Section 102M of the Act refers to paragraph 23(i) in its definition of "exempt entity". This reference to paragraph 23(i) will be deleted [Clause 59] .

11.10 Section 121F of the Act refers to paragraph 23(i) in its definition of "relevant exempting provision". This reference to paragraph 23(i) will be deleted [Clause 60] .

11.11 Section 124ZA of the Act refers to paragraph 23(i) in its definition of "exempt body". This reference to paragraph 23(i) will be deleted [Clause 61] .

11.12 Section 160K of the Act refers to paragraph 23(i) in its definition of "relevant exempting provision". This reference to paragraph 23(i) will be deleted [Clause 63] .

11.13 Section 269B of the Act refers to paragraph 23(i). This reference to paragraph 23(i) will be deleted [Clause 64] .

Application of amendments

11.14 The amendments made to the Act by this Division, other than to paragraph 128B(3)(a), apply from the 1994-95 year of income.

11.15 The amendment to paragraph 128B(3)(a) applies to income derived on or after 1 July 1994. This commencement date is subject to the transitional arrangements [Clause 65] .

Transitional arrangements

11.16 The withholding exemption provided by paragraph 128B(3)(a), in respect of interest which is exempt under section 23(i), will continue to apply in respect of those borrowers who had a contractual obligation to borrow before 1 July 1994 [Clause 66] .

11.17 The transitional arrangement will not be available in the following circumstances:

•

The interest was paid on funds borrowed by the borrower on or after 1 July 1994 and the borrower was not required to borrow the funds under a contract entered into before that date.

•

The interest was paid on funds borrowed under a "roll-over" of a previous loan on or after 1 July 1994. A "roll-over" is generally an agreement between a borrower and lender to renew a loan on the expiry of an existing loan.

•

The interest was paid on funds borrowed under an extension occurring on or after 1 July 1994 of a loan.

Exclusion of low income rebate from provisional tax arrangements

Overview

12.1 This Bill will exclude the low income rebate from provisional tax calculations. The rebate will be provided, where applicable, on assessment.

Summary of the amendments

Purpose of the amendment

12.2 To remove the low income rebate from the provisional tax arrangements so that the rebate is provided only on assessment.

Date of effect:

12.3 The amendments will apply in relation to:

•

calculations of provisional tax (including instalments) payable for the 1994-95 and later income years; and

•

requests to vary provisional tax, for the 1993-94 and later income years, which are received on or after introduction of the Bill.

Background to the legislation

12.4 The Taxation (Deficit Reduction) Act (No.3) 1993, which received the Royal Assent on 27 October 1993, inserted new section 159N in the Act. Section 159N provides a rebate of up to $150, in the 1993-94 and later income years, for taxpayers whose taxable income is less than $24,450.

12.5 The 1993-94 Budget statement indicated that the rebate will be provided on assessment in respect of the 1993-94 and subsequent income years. These amendments to the provisional tax arrangements are necessary to achieve that result. They supplement the measures contained in the Budget legislation which introduced the rebate.

12.6 Application of the existing provisional tax legislation will result in provisional taxpayers benefiting from the low income rebate in the year the taxable income is received, whereas Pay-As-You-Earn taxpayers will not benefit from the rebate until the following income year (on assessment). This is because:

•

the calculation of provisional tax for 1994-95 and later years would be reduced having regard to rebates to which the taxpayer was entitled to on assessment in the preceding year of income [paragraph 221YCAA(2)(m)]; and

•

provisional taxpayers can elect to vary down their provisional tax to reflect their rebate entitlements for a particular year of income [section 221YDA].

12.7 Allowing the rebate on assessment will result in PAYE and provisional taxpayers being treated in a similar manner. However, provisional taxpayers who have requested a variation before the date of introduction of these amendments will not be disadvantaged as the amendments will apply in respect of variation requests received on or after introduction of the amendments.

Explanation of the amendments

12.8 The Bill proposes to amend paragraph 221YCAA(2)(m) of the Act so that the low income rebate provided under section 159N will not be treated as a "qualifying reduction" in the calculation of provisional tax in respect of the 1994-95 and later income years [Clause 68 and subclause 70(1)] .

12.9 The Bill also proposes to amend paragraph 221YDA(1)(da) and subparagraph 221YDA(2)(a)(ii) to exclude the low income rebate entitlement from requests to vary provisional tax down and subsequent calculations of provisional tax in respect of the 1993-94 and later years of income [Paragraphs (a) and (b) of clause 69 and subclause 70(3)] . However, estimates included in statements furnished to the Commissioner before introduction of this Bill will not be affected by the amendments [Subclause 70(2)] .

Superannuation Guarantee amendments

Summary of the amendments

Liability of Commonwealth authorities

Purpose of the amendment

13.1 The proposed amendment will make it clear that certain statutory authorities whose enabling legislation otherwise exempts them from Commonwealth taxation will be liable for the Superannuation Guarantee charge [Clause 73] .

Date of Effect

13.2 1 July 1993

Background to the legislation

13.3 The Superannuation Guarantee scheme is intended to apply to all employers (including, although with some modifications, the Commonwealth and tax exempt Commonwealth authorities) in respect of their full time, part time and casual employees, with only limited exemptions available. It is not appropriate that these exemptions should extend to the Superannuation Guarantee charge liability payable by statutory organisations, as employers, even though they may have provisions within their enabling legislation purporting to exempt them from various Commonwealth, State and Territory taxes.

Explanation of the amendment

13.4 Both the Commonwealth and tax-exempt Commonwealth authorities are employers for the purpose of the Superannuation Guarantee (Administration) Act 1992 (SGAA). However, the Commonwealth cannot impose the Superannuation Guarantee charge upon itself. New section 5 (which, apart from removing the reference to tax-exempt Commonwealth authorities, is the same as existing section 5) ensures that the Commonwealth is treated the same as other employers by providing that all provisions of the SGAA (other than those imposing liability for the charge or penalties or allowing appeal and review rights) are taken to apply to the Commonwealth [Clause 74; New section 5] .

13.5 A Commonwealth authority, which is defined to mean an authority or body that is established by or under a law of the Commonwealth, which is exempt from taxes under the laws of the Commonwealth will not be exempt from the Superannuation Guarantee charge unless the law or provision expressly in its enabling legislation exempts the authority from liability to pay the charge [Clause 75; New section 5A] .

Ordinary time earnings

Purpose of the amendment

13.6 The proposed amendment will exclude lump sum payments for accrued annual leave, accrued long service leave and accrued sick leave on termination of employment from the definition of ordinary time earnings [Clause 76] .

Date of Effect

13.7 1 July 1993

Background to the legislation

13.8 Under the SGAA an employer's contributions are measured against the employee's notional earnings base. The expression notional earnings base is the earnings of the employee by reference to which the employer's superannuation contribution is calculated. Several earnings bases are available for an employer to use, such as the base set out in the superannuation fund deed, industrial award or an agreement with the employee.

13.9 If there is no acceptable earnings base relevant to a particular employee, then the employee's ordinary time earnings are used. The principal reason for adopting ordinary time earnings as a default base was to achieve consistency with the award superannuation system.

13.10 Subsection 6(1) of the SGAA provides that ordinary time earnings, in relation to an employee, means:

(a)

the total of:

•

earnings in respect of ordinary hours of work; and

•

earnings consisting of over-award payments, shift loading or commission; or

(b)

if the total ascertained in accordance with paragraph (a) would be greater than the maximum contribution base for the contribution period - the maximum contribution base. The maximum contribution base, which is increased annually by an indexation factor based on movements in Average Weekly Ordinary Time Earnings, is $20 160 per quarter for the 1993-94 income year.

13.11 Ordinary hours of work, as stated above, may be specified in a statute or under an industrial award. If an employee is not covered by an award but has agreed to work a certain number of hours, those hours are the employee's ordinary hours of work. However, if there is no specific agreement, the ordinary hours of work will be the hours actually worked and any hours of paid leave.

13.12 Lump sum payments on termination of employment in respect of accrued long service leave, accrued sick leave and accrued recreation leave are currently included in the definition of ordinary time earnings.

Explanation of the amendment

13.13 The definition of ordinary time earnings in subsection 6(1) of the SGAA will be amended to exclude the following lump sum payments made to employees on termination of their employment:

•

lump sum payments in lieu of unused sick leave;

•

lump sum payments in lieu of unused annual leave, within the meaning of subsection 26AC(1) of the Income Tax Assessment Act 1936 (ITAA); and

•

lump sum payments in lieu of unused long service leave, within the meaning of subsection 26AD(1) of the ITAA.

[Clause 77; Amended definition of ordinary time earnings in subsection 6(1)]

Industrial award

Purpose of the amendment

13.14 The proposed amendment will allow the Fund Benchmark Salary Rate contained in an industrial agreement between an employer in the maritime industry and the Maritime Union of Australia to be an acceptable notional earnings base [Clause 78] .

Date of Effect

13.15 1 July 1992

Background to the legislation

13.16 Employers in the Maritime industry make contributions to the Seafarer's Retirement Fund, which was established on 3 May 1973, based on the earnings of a standard employee. This earnings base, which is known as the Fund Benchmark Salary Rate, is set in the Seafarer's Retirement Fund industrial agreement rather than in an industrial award.

Explanation of the amendment

13.17 The definition of industrial award in subsection 6(1) of the SGAA will be extended to allow the Fund Benchmark Salary Rate contained in an industrial agreement between an employer in the maritime industry and the Maritime Union of Australia in respect of contributions to the Seafarer's Retirement Fund to be an acceptable notional earnings base for Superannuation Guarantee purposes [Clause 79; Amended definition of industrial award in subsection 6(1)] .

13.18 The proposal that this amendment operate with effect from 1 July 1992 has been agreed with representatives of the affected employer and employee groups.

Contractors

Purpose of the amendment

13.19 The proposed amendment will remove any doubt that payments made to contractors wholly or principally for their labour are salary or wages and is intended to ensure that the Superannuation Guarantee scheme operates as intended [Clause 80] .

Date of Effect

13.20 1 July 1992

Background to the legislation

13.21 An employee is defined in subsection 12(3) of the SGAA to include a contractor who works under a contract which is wholly or principally for the labour of a person. A contract is considered to be wholly or principally for labour if more than half of the value of the contract is for labour. It was clearly intended that payments for labour under such contracts were to be subject to Superannuation Guarantee contributions.

13.22 However, as such payments are not specifically included in the definition of salary or wages in section 11, some employers are of the view that such payments are not to be taken into account for the purposes of calculating the Superannuation Guarantee shortfall.

Explanation of the amendment

13.23 Section 11 of the SGAA will specifically include as salary or wages payments made to contractors for their labour under a contract that is wholly or principally for the person's labour. This will remove any doubt that such payments are salary or wages for Superannuation Guarantee purposes [Clause 81; New paragraph 11(1)(ba)] .

13.24 This amendment is being made with effect from 1 July 1992 as the definition of an employee in subsection 12(3) of the SGAA includes a contractor who works under a contract that is wholly or principally for the labour of a person and makes it abundantly clear that these contractors were always intended to be within the scope of the Superannuation Guarantee arrangements.

Payments to the estate of a deceased employee

Purpose of the amendment

13.25 An employer will, in order to satisfy the employer's Superannuation Guarantee responsibility, be able to make payments directly to a deceased employee's legal personal representative where the employee dies before the employer makes contributions to a superannuation fund on behalf of the employee [Clause 82] .

Date of Effect

13.26 1 July 1992

Background to the legislation

13.27 The SGAA specifies the amount of the superannuation contribution that an employer must provide for his or her employees if the employer wishes to avoid the Superannuation Guarantee charge. A problem arises when the employee dies before the employer makes contributions to a superannuation fund in order to satisfy the Superannuation Guarantee requirements. Most superannuation funds are unwilling or unable to accept these contributions after the death of an employee. In this situation the employer has no choice but to pay the charge to the Australian Taxation Office (ATO).

Explanation of the amendment

13.28 Payments to the legal personal representative of a deceased employee will be deemed to be contributions to a complying superannuation fund for the benefit of the employee for Superannuation Guarantee purposes where:

•

the employee has died; and

•

if the employee had not died, the employer would have made a contribution to a complying superannuation fund for the benefit of the employee in order to satisfy the employer's Superannuation Guarantee responsibility.

[Clause 83; New subsection 23(9A)]

13.29 This amendment is being made with effect from 1 July 1992 as it reduces the compliance costs of the measures for affected parties.

Contribution periods

Purpose of the amendment

13.30 The requirement that employers meet their Superannuation Guarantee obligations on a quarterly basis will be deferred until the 1994-95 financial year. Consequently employers could contribute the minimum level of superannuation support prescribed for their employees for 1993-94 on or before 28 July 1994 [Clause 84] .

Date of Effect

13.31 1 July 1993

Background to the legislation

13.32 The level of superannuation support that an employer needs to provide in respect of each employee is measured on the basis of a contribution period. Subsection 6(1) of the SGAA defines contribution period to mean, so far as is relevant:

'a period of 3 months commencing on 1 July, 1 October, 1 January or 1 April in the 1993-94 year or any later year'.

13.33 From the 1993-94 income year, it was intended that the contributions were to be made on a quarterly basis. However, in order to develop and implement solutions to some concerns surrounding the Superannuation Guarantee legislation, particularly relating to small amounts, the introduction of quarterly contributions is to be deferred until the commencement of the 1994-95 income year.

Explanation of the amendment

13.34 Contributions made to a complying fund by an employer for the benefit of an employee in the period commencing on 1 July 1993 and ending on 28 July 1994 may be taken into account under section 23 of the SGAA as if they were made in any of the contribution periods in the 1993-94 income year. The provision is similar to subsection 23(6) which operated in respect of contributions for the 1992-93 income year [Clause 85; New subsection 23(6A)] .

13.35 The contributions may be made in the form of one or more payments during the year. Subsection 23(8) applies so that contributions which are taken into account in one contribution period cannot be taken into account in another contribution period. Therefore, a contribution made on 10 July 1993, for example, cannot be taken into account for both the 1992-93 and the 1993-94 years.

Reduction of notional earnings base and ordinary time earnings

Purpose of the amendment

13.36 The proposed amendment will ensure that the notional earnings base and ordinary time earnings of an employee whose status changes part way through a contribution period (because, for example, they turn age 65 during a contribution period) are calculated by reference to payments for that part of the period for which Superannuation Guarantee contributions have to be made [Clause 86].

Date of Effect

13.37 1 July 1992

Background to the legislation

13.38 Sections 27 and 28 of the SGAA exclude certain payments from the salary or wages of an employee for the purposes of calculating the shortfall. For example, salary and wages for that purpose do not include payments to:

•

employees who are 65 or over;

•

employees under 18 who are working part time; and

•

employees who are remunerated for certain work performed overseas.

13.39 It is the intention of the SGAA that the Superannuation Guarantee charge not apply to salary or wages which are excluded under section 27 or section 28 for the purposes of calculating the shortfall under section 18 or section 19.

13.40 The current provisions do not adequately deal with situations where only part of the salary or wages received by an employee are excluded by section 27 or section 28. This situation arises where, for example, an employee turns age 65 part way through a contribution period (paragraph 27(1)(a)) or the salary or wages prescribed for the purposes of paragraph 27(1)(e) represents only part of the salary or wages paid by the employer to the particular employee.

13.41 In such cases, the exclusions from salary or wages for the purposes of section 18 or section 19 do not flow on to the calculation of the reduction in charge percentage under section 23. Consequently, the reduction of the charge percentage (which is based on the amount of contribution expected as a percentage of the notional earnings base) is incorrect because the notional earnings base is not reduced by the amount of salary or wages excluded under section 27 or section 28.

Explanation of the amendment

13.42 The notional earnings base of an employee will specifically exclude any payments that are excluded from salary or wages under section 27 and section 28 for the purpose of calculating the Superannuation Guarantee shortfall under section 18 or section 19 [Clause 87; New subsection 23(11)] .

13.43 Similarly, if the employer is contributing to a fund which does not have a notional earnings base, the ordinary time earnings of the employee will specifically exclude any amounts which are excluded from salary or wages under section 27 and section 28 for the purpose of calculating the Superannuation Guarantee shortfall under section 18 or section 19 [Clause 87; New subsection 23(12)] .

13.44 Consequently, employers will be liable for the Superannuation Guarantee charge only on salary or wages that are not excluded by section 27 or section 28.

Example: Calculation of the Superannuation Guarantee shortfall taking into account the reduced salary and wages for notional earnings base purposes

13.45 To illustrate the operation of the proposed amendment, assume an employer has a contribution period commencing on 1 July 1993 and ending on 30 September 1993. The amount of the employee's salary or wages in the contribution period, of $20 000, is reduced by $10 000 (because, for example, the employee turned 65 half way through the contribution period). Based on a reduced salary of $10 000, the appropriate amount of employer superannuation contributions to avoid the Superannuation Guarantee charge is $300 (assuming a charge percentage of 3%). The Superannuation Guarantee shortfall is calculated as follows:

13.46 If the notional earnings base had not been reduced, the employer would have a shortfall of $150 and be liable for the Superannuation Guarantee charge.

13.47 This amendment is being made with effect from 1 July 1992 because it was never intended that the Superannuation Guarantee charge should apply to salary or wages excluded under section 27 or section 28 of the SGAA.

Flat dollar contributions and part-time employees

Purpose of the amendment

13.48 The proposed amendment will clarify the circumstances in which a notional earnings base specified in an industrial award can be used for Superannuation Guarantee purposes. A notional earnings base specified in an industrial award can be used only if the award was in place immediately before 21 August 1991 and contained flat dollar contribution provisions at that time.

13.49 The proposed amendment will also allow for flat dollar contributions for part-time employees to be referenced to the appropriate proportion of the notional earnings base rather than against the full notional earnings base [Clause 88] .

Date of Effect

13.50 1 July 1993

Background to the legislation

Flat dollar awards

13.51 Section 25A of the Act was introduced to ensure that certain industries would not be disadvantaged because the employer contributed a flat dollar superannuation amount under an existing award rather than linking the superannuation contributions to the earnings of a particular employee.

13.52 The intention of the Government has always been to limit the use of these flat dollar awards as they defeat the policy objective of aligning the employee's post-retirement income to a percentage of his or her pre-retirement income.

13.53 Nevertheless, there has been a view among some employers that section 25A is accessible to all awards that were in operation immediately prior to 21 August 1991 so that any award in place at that time could be amended to provide a flat dollar arrangement.

Part-time employees

13.54 It was always intended that notional earnings bases would be adjusted for part-time employees. In this regard the Supplementary Explanatory Memorandum which accompanied Taxation Laws Amendment (Superannuation) Act 1992, which inserted section 25A, states at page 6 that:

"The deemed notional earnings base provision in section 25A assumes both the employee for whom the employer is contributing and the standard employee are full time employees. Where this is not the case an appropriate adjustment would be made to the notional earnings base. For example, if an employee is a part time worker (working 20 hours per week) and the standard employee is based on the full time rate (say, 40 hours per week), the employee's notional earnings base will be reduced proportionally. That is, the employee's notional earnings base will be half of the standard employee's earnings."

13.55 It has been suggested that section 25A as presently drafted does not allow the intended apportionment of the notional earnings base.

Explanation of the amendments

Flat dollar awards

13.56 The proposed amendment will ensure that only awards that contained the two conditions set out in paragraph 25A(1)(a) and paragraph 25A(1)(b) of the SGAA prior to 21 August 1991 will be able to specify flat dollar award superannuation contributions for Superannuation Guarantee purposes.

13.57 The two conditions, both of which must have been in place prior to 21 August 1991, are:

•

that the industrial award specifies a flat dollar superannuation contribution in relation to a class of employees; and

•

that the award (or another arrangement) provides that with every adjustment in earnings of a member of a specified class there is an adjustment in the flat dollar contributions made by reference to that increase.

[Clause 89; New paragraph 25A(1)(c), paragraph 25A(1)(d) and paragraph 25A(2)(b)]

Part-time employees

13.58 New subsection 25A(3) will ensure that the notional earnings base of part-time employees is the appropriate proportion of the adjustment earnings as defined in paragraph 25A(1)(b).

13.59 If the employee is a full-time employee, the notional earnings base in relation to the contribution period will be the adjustment earnings in relation to the period.

13.60 If the employee is a part-time employee, the notional earnings base in relation to the contribution period will be the amount worked out using the formula:

(Number of hours employed / Full-time employee hours) / Adjustment earnings
where:

•

Number of hours employed is the number of hours for which the employee is employed in the period;

•

Full-time employee's hours is the number of ordinary hours of work for which an equivalent full-time employee would be employed in the period under the award; and

•

Adjustment earnings is the adjustment earnings in respect of the period.

[Clause 89; New subsection 25A(3)]

13.61 A part-time employee is defined in subsection 6(1) of the SGAA to mean a person who is not employed for more than 30 hours a week.

13.62 An equivalent full-time employee for the purpose of working out the factor Full-time employee's hours is an employee employed in exactly the same circumstances as the relevant part-time employee except that he or she is employed on a full-time basis. Therefore, if a part-time employee commences employment part way through a contribution period, for example, the factor Full-time employee's hours would be the number of ordinary hours of work for which a full-time employee would be employed in the period under the award assuming that he or she commenced employment at the same time as the part-time employee.

13.63 Similarly, the adjustment earnings for the period will be the adjustment earnings for a full-time employee for the period of actual employment.

Example

13.64 If the adjustment earnings of a full time employee is $15 000 for a class 3 engine driver who works full time (528 hours in the July to September 1993 quarter), then a part time employee under the award who works a 3 day week (320 hours in the July to September 1993 quarter) would have a notional earnings base of:

(320 / 528) * $15 000 = $9 090.90


13.65 If that part-time employee had commenced employment on 1 September 1993, the number of hours employed by that part-time employee would be 112 hours. The adjustment earnings of a full time employee for the period 1 September 1993 to 30 September 1993 is $5 000. The equivalent number of hours worked by a full-time employee would be 176 hours. Therefore, the employee would have a notional earnings base of:

(112 / 176) * $5 000 = $3 181.81


Retirement of employee due to permanent incapacity or invalidity

Purpose of the amendment

13.66 The definition of permanent incapacity or invalidity in the SGAA is to be made consistent with the definition of permanent incapacity or invalidity in other taxation and occupational superannuation legislation.

13.67 The Commissioner of Taxation will be able to pay the shortfall component directly to a person who has retired due to incapacity or invalidity only if the person has given written notice of his or her retirement to the Commissioner together with a copy of a certificate signed by 2 registered medical practitioners certifying that the person is unlikely to be able to work again in a capacity for which he or she is reasonably qualified by education, training or experience [Clause 90].

Date of Effect

13.68 1 July 1993

Background to the legislation

13.69 If a person under the age of 55 has been forced to retire from work because of illness, section 66 of the SGAA requires the Commissioner to pay the shortfall component directly to that person. To claim the direct payment the retired person must return the voucher he or she receives from the ATO to the issuing ATO Branch along with:

•

a notice in writing, signed by the retiree which advises that he or she has actually retired, and

•

a copy of the certificate signed by the two registered medical practitioners.

13.70 The word illness for the purposes of section 66 has not been defined in the SGAA but should be consistent with existing taxation and occupational superannuation legislation.

Explanation of the amendment

13.71 The Commissioner will be able to pay the shortfall component directly to a person who has retired due to incapacity or invalidity only if the person has given written notice of his or her retirement to the Commissioner together with a copy of a certificate signed by 2 registered medical practitioners certifying that the person is unlikely to be able to work again in a capacity for which he or she is reasonably qualified by education, training or experience [Clause 91; New section 66] .