Senate

Explanatory Memorandum

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

General Outline and Financial Impact

AMENDMENTS TO THE INCOME TAX ASSESSMENT ACT 1936

Reportable payments system

Inserts a new Division to provide a legislative framework for the introduction of a tax file number based reportable payments system in respect of specified transactions called reportable payments.

Date of effect: 1 November 1994

Proposal announced: Foreshadowed in the Government's statement on tax policy, as circulated by the Treasurer on 16 September 1992.

Financial impact: Increased revenue of up to $100 million per annum is expected from the measure.

Foreign investment funds and controlled foreign companies

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Ensures that double taxation does not arise from the interaction of the controlled foreign company (CFC), transferor trust and foreign investment fund (FIF) measures where a taxpayer has an interest in a CFC which is held through a non-resident trust estate.

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Provides that the attributable portion of a dividend under the CFC measures is reduced to the extent the dividend was paid out of profits upon which a taxpayer has been taxed previously under the FIF measures.

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Ensures that no more than 100% of the calculated profit of a FIF is attributed to Australian residents who hold an interest in the FIF.

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Ensures that FIF income derived by a non-resident trust is included in the assessable income of an Australian taxpayer who has transferred property to the trust to the extent the trust does not distribute its profits.

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Provides currency conversion rules for FIF losses arising under the market value and cash surrender value methods for determining FIF income.

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Modifies the calculation and availability of an allowable deduction that may be claimed where a taxpayer has incurred a FIF loss under the market value or deemed rate of return methods for determining FIF income.

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Aligns the treatment of corporate limited partnerships (including dividends paid by corporate limited partnerships) under the foreign tax credit, foreign loss, CFC and FIF provisions with the treatment of companies (and dividends paid by companies) under those provisions.

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Ensures that profits which have been taxed under the FIF measures are only traced for tax relief purposes in relation to a resident taxpayer and not in relation to a CFC.

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Removes the modifications which currently apply when calculating the FIF income of a CFC where a FIF makes an interim distribution to the CFC.

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Addresses the potential double taxation of profits of a resident public unit trust which may arise because of concessional treatment provided to small investors who hold units in the trust.

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Corrects a drafting error in the exemption from the FIF measures provided for companies engaged in several activities.

Date of effect: The amendments will apply from the commencement of the FIF measures (i.e., 1 January 1993) where they operate to the advantage of taxpayers. Other amendments will apply prospectively, generally from the 1994-95 year of income.

Proposal announced: Not previously announced.

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

Regional headquarters - Income tax concessions

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Provides an exemption from dividend withholding tax for certain foreign source dividend income flowing through Australian resident companies.

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Allows deductibility of certain business relocation expenses associated with the setup of a regional headquarters company in Australia.

Date of effect: 1 July 1994

Proposal announced: The measures were announced on 4 May 1994

in the Working Nation White Paper on Employment and Growth.

Financial impact: The dividend withholding tax exemption is estimated to cost the revenue $10 million in 1994-95, 1995-96, 1996-97 and 1997-98. The deductibility of setup costs will have an estimated cost to the revenue of nil in 1994-95, $6 million in 1995-96 and 1996-97, and $2million in 1997-98.

Social Security payments

Home child care allowance and dependant rebate

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Exempts home child care allowance payments from income tax.

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Removes a taxpayer's entitlement to the dependent spouse rebate where the taxpayer's spouse qualifies for the home child care allowance.

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Excludes the home child care allowance from separate net income and alters the separate net income test for partial rebate entitlements.

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Makes necessary consequential amendments to the current zone rebates and rebates for members of the defence forces serving overseas and United Nations armed forces.

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Makes consequential amendments to the provisional tax provisions.

Date of effect: The amendments will apply to home child care allowance payments made on or after 29 September 1994 and to assessments of income tax for the 1994-95 and later years of income.

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

Partner allowance

Provides similar taxation treatment for the new partner allowance to that afforded to other comparable social security allowances and benefits.

Date of effect: 29 September 1994

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

Financial impact: The impact on revenue of removing the dependent spouse rebate is a gain to revenue of $360 million in 1994-95, $870 million in 1995-96 and $1050 million in 1996-97. These gains are offset by outlays on the home child care allowance. The cost of introducing the partner allowance is not significant.

Eligible investment fund income of registered organisations

Amends Division 8A to include in the assessable income of a registered organisation income derived from certain assets of the organisation. The purpose of the amendment is to ensure that the provisions of Division 8A are not circumvented by the holding of assets separate from the eligible insurance business of the organisation (for instance by the establishment of a separate fund) as a result of the High Court decision in Independent Order of Odd Fellows of Victoria v FC of T (91 ATC 5032; (1991) 22 ATR 783).

Date of effect: The amendments will apply to income derived on or after 1July 1994 by a registered organisation from eligible investment assets.

Proposal announced: Not previously announced.

Financial impact: There is insufficient data available on which a reliable estimate of the revenue impact of this amendment can be made. However, the measure has the potential to prevent a significant future loss to revenue.

Provisional tax

Amends the definition of provisional tax uplift factor so that the factor is 8% for the 1994-95 year of income and 10% for later years of income unless the Parliament provides otherwise.

Date of effect: The amendments will apply in relation to the calculation of provisional tax (including instalments) payable for the 1994-95 year of income and later years of income.

Proposal announced: 1994-95 Budget, 10 May 1994.

Financial impact: The estimated cost to revenue is nil. The measure defers $170 million of revenue from 1994-95 to 1995-96.

Repealed provisions - short-term asset sales and home loan interest rebate

Repeals provisions relating to short-term asset sales and the home loan interest rebate which have been inoperative for over six years and three years respectively. A 'saving' provision is introduced to ensure that the repealed provisions will still apply in any assessments that would be affected by the repeals.

Date of effect: Royal Assent.

Proposal announced: Not previously announced.

Financial impact: None.

Deductions for bequests of significant cultural value made to certain institutions

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Amends the gift provisions to allow a deduction for a testamentary gift of property made to certain institutions under the Cultural Bequests Program.

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Exempts the gifts from the application of the capital gains tax provisions.

Date of effect: Tax deductions and capital gains tax exemptions will be available for relevant gifts made by people who die on or after 1 July 1994.

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

Financial impact: Approvals each year are capped at a notional revenue cost of $2 million per year, commencing in the 1994-95 income year.

Gifts - Technical amendments

Amends the gift provisions to correct two minor typographical errors that occurred during the recent restructuring of the gift provisions.

Date of effect: 1 July 1993.

Proposal announced: Not previously announced.

Financial impact: None.

Superannuation - Reasonable benefits limits

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Ensures that the non-rebatable proportion of a pension or annuity is taxed as an excessive component on the commutation or roll-over of the whole or part of the pension or annuity entitlement.

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Allows information held by the Commissioner of Taxation to be used to identify the tax file number of a deceased person and enable a final reasonable benefit limit (RBL) determination to be made in relation to the assessment for RBL purposes of a death benefit eligible termination payment (ETP).

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Requires superannuation funds to report payments of less than $5000.

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Ensures that the Insurance and Superannuation Commissioner does not have to report payments of less than $5000.

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Ensures that the qualifying portions of ETPs previously received by a person are counted in determining whether a superannuation pension or annuity that does not meet the pension and annuity standards is to be assessed against the person's lump sum RBL.

Date of effect: The amendments will apply to ETPs paid on or after 1July1994 and to pensions or annuities where the first day of the period to which the pension or annuity relates is on or after 1July1994.

Proposal announced: Not previously announced.

Financial impact: None.

Taxation of Australian branches of foreign banks

Implements new measures for the taxation of Australian branches of foreign banks. The new measures will provide for the recognition of loans, derivative transactions and foreign exchange transactions between an Australian branch and its head office or overseas branches of the bank for the purposes of determining the liability of the foreign bank to tax in Australia. The new measures will also apply non-resident interest withholding tax to interest paid or credited by an Australian branch to the foreign bank.

Date of effect: The provision that treats certain foreign banks as Australian entities and Australian residents for withholding tax purposes will be repealed with effect from 18 June 1993.

The amendment relating to interest withholding tax on intra-bank interest will take effect on the first day of a taxpayer's income year beginning after the date of introduction of the Bill (30 June 1994).

The amendments allowing a foreign bank branch to receive and transfer both revenue losses and capital losses will apply to assessments in respect of the first year of income following the year of income in which the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 commenced and for all later years of income. The Financial Corporations (Transfer of Assets and Liabilities) Act 1993 commenced on22December1993.

The other foreign bank branch taxation measures will take effect in respect of a taxpayer's first year of income following the date of introduction of the Bill (30 June 1994).

Proposal announced: The Treasurer's Banking Policy Statement of 18June1993.

Financial impact: The new measures are estimated to cost the revenue $10 million in 1994-95, $15 million in 1995-96, $20 million in 1996-97 and $20 million in 1997-98.

AMENDMENTS TO THE INCOME TAX (MINING WITHHOLDING TAX) ACT 1979

Mining withholding tax

Amends the Income Tax (Mining Withholding Tax) Act 1979, which imposes income tax on certain payments made to Aboriginal communities and groups, to reduce the rate of mining withholding tax from 5.8 per cent to 4 per cent.

Date of effect: Date of introduction of the Bill (30 June 1994).

Proposal announced: 1994-95 Budget, 10 May 1994

Financial impact: The measure is estimated to cost the revenue less than $1 million in 1994-95, 1995-96, 1996-97 and 1997-98.

AMENDMENTS TO THE SALES TAX LAWS

Child care concessions

Limitation of exemption for luxury motor vehicles for exempt child care bodies

Amends the Sales Tax Assessment Act 1992 and the Sales Tax (Exemptions and Classifications) Act 1992 to limit the value of the exemption for motor vehicles for use in providing child care to the portion of the taxable value of a motor vehicle up to and including the luxury vehicle threshold, except in special circumstances.

Date of effect: The day after the date of introduction of the Bill (1July1994).

Proposal announced: Not previously announced.

Financial impact: Negligible.

Credit for exempt child care bodies

Amends the Sales Tax Assessment Act 1992 to provide a credit for sales tax borne before the child care body became entitled to exemption, provided that certain conditions are satisfied. The credit is designed chiefly to apply to the 12 month period before a child care body first begins to provide child care.

Date of effect: Royal Assent.

Proposal announced: Not previously announced.

Financial impact: None.

Credit for parts used in the alteration of goods intended for export

Amends the Sales Tax Assessment Act 1992 to provide a credit for tax borne on parts, fittings or accessories used in the repair, renovation or upgrading of goods to be exported whilst ensuring that the same goods are taxed if they return to Australia.

Date of effect: 1 January 1993 for the credit and Royal Assent for the taxing of reimported goods.

Proposal announced: Not previously announced.

Financial impact: Small.

Parts used to repair faulty goods replaced under warranty

Amends the Sales Tax Assessment Act 1992 to reduce the clawback of sales tax credit involved with goods that have been replaced under warranty, repaired and resold. The reduction will be the amount of sales tax borne on the parts used in the repair.

Date of effect: Date of introduction of the Bill (30 June 1994).

Proposal announced: Not previously announced.

Financial impact: Negligible.

Periodic quotation

Amends the Sales Tax Assessment Act 1992 to allow both registered and unregistered persons to supply a single quotation for all their exempt purchases in a period, where that period does not exceed one year. The Bill will also provide for the quotations to be made to both registered and unregistered suppliers.

Date of effect: Royal Assent.

Proposal announced: Not previously announced.

Financial impact: None.

Extension of the credit for post-trial sales and leases

Amends the Sales Tax Assessment Act 1992 to allow for multiple trial loans, leases or demonstrations in exempt circumstances before an ultimate sale or lease for the remainder of the statutory period, to any exempt person.

Date of effect: Royal Assent.

Proposal announced: Not previously announced.

Financial impact: Negligible.

Incentives for regional headquarters

Exemption for regional headquarters

Amends the Sales Tax (Exemptions and Classifications) Act 1992 to allow an exemption for certain imported second-hand computer and related equipment, for use in newly-established regional headquarters in Australia by approved companies.

Credits for regional headquarters

Amends the application of the Sales Tax Assessment Act 1992 to provide credits for tax borne on dealings with certain imported second-hand computer and related equipment, for use in regional headquarters in Australia by approved companies, if a dealing occurs between 15December 1993 and the date that the Bill receives Royal Assent.

Date of effect: Royal Assent.

Proposal announced: 18 January 1994

Financial impact: The nature of the measure is that a reliable estimate cannot be provided.

Take-away food containers

Amends the Sales Tax (Exemptions and Classifications) Act 1992 to ensure that containers used to deliver take-away food and beverages, and certain ice-cream and biscuit goods are excluded from exemption.

Date of effect: Date of introduction of the Bill (30 June 1994).

Proposal announced: Not previously announced.

Financial impact: Negligible.

Wireless transceivers for use with the Royal Flying Doctor Service of Australia

Amends the Sales Tax (Exemptions and Classifications) Act 1992 to reinstate the exemption for wireless transceivers used by persons mainly to make contact with radio services conducted by the Royal Flying Doctor Service or other similar services. Amends the Sales Tax Assessment Act 1992 to provide a transitional credit for dealings after 30 June 1993 and before the Bill receives Royal Assent.

Date of effect: The amendment to the exemption will apply to dealings with goods from the date that the Bill receives Royal Assent. The credit will apply to dealings with goods after 30 June 1993 and before the Bill receives Royal Assent.

Proposal announced: Not previously announced.

Financial impact: None.

CHAPTER 1 - REPORTABLE PAYMENTS SYSTEM

Overview

1.1 The amendments contained in Division 2 of Part 2 of the Bill provide a legislative framework for a reportable payments system (RPS) in respect of specified transactions within certain industries. Regulations will specify the transactions to which the system will apply.

Summary of the amendments

Purpose of the amendments

1.2 The amendments propose to introduce a new Division 1AA into Part VI of the Income Tax Assessment Act 1936 (the Act). Division 1AA will provide the legislative framework for a tax file number (TFN) based RPS in which details of certain payments of assessable income are reported to the Commissioner. [Clause 4 and new section 220AA]

Date of effect

1.3 The amendments will apply to payments made on or after 1November 1994. [New paragraph 220AF(1)(c), new subsection 220AJ(4)]

Background to the legislation

1.4 The Government's tax policy statement, circulated by the Treasurer on 16 September 1992, outlined strategies to assist taxpayers in meeting their taxation obligations and, where necessary, to enforce greater compliance with the taxation laws. To achieve an increased level of compliance, the statement foreshadowed an extension of information reporting using the TFN system.

Explanation of the amendments

1.5 Division 2 of Part 2 of the Bill will introduce new Division 1AA into Part VI of the Act. New Division 1AA contains the provisions for the RPS [clauses 4 and 5] . The new RPS will introduce a TFN based reporting system in relation to certain transactions within specified industries. Details of particular transactions (called "reportable payments" [new section 220AC] )will be reported annually to the Commissioner of Taxation. Some aspects of the new RPS are modelled on the existing arrangements contained in Part VA and the pay-as-you-earn (PAYE) and prescribed payments system (PPS) arrangements in Divisions 2 and 3A of Part VI of the Act.

1.6 The proposed RPS is outlined in new subdivision A [new sections 220AA and 220AB]. The main features are contained in new subdivisions B to H of new Division 1AA and include:

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the introduction of new terms and definitions for interpretative purposes [new subdivision B] ;

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the introduction of a tax file number declaration form to enable a payee to quote his or her TFN to a payer before a reportable payment is made [new subdivision E] ;

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the inclusion of a specific TFN reporting exemption for persons receiving certain specified pensions or benefits [new subdivision F] ;

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provisions which outline the obligations of payers who receive TFN or pensioner exemption declarations [new subdivision G] ;

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an explanation of the obligations of payers making reportable payments to payees who have not quoted their TFN or been deemed to have quoted their TFN. In these circumstances payers will be required to deduct an amount from the reportable payment and remit the deduction to the Commissioner [new subdivision C] . New subdivision H provides that deductions will be refunded in special circumstances;

•

provision for information to be provided by payers in relation to reportable payments made by the payer [new subdivision D] such as;

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an annual report to the Commissioner in respect of reportable payments made to each payee; and

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a receipt or similar document to a payee as soon as practicable after making the payment. The document will detail the amount of the reportable payment and the deduction made.

1.7 New subdivisions I to M in Division 1AA contain the penalty and recovery provisions which will apply where payers, who are required to make deductions from reportable payments, fail to do so, or make deductions and fail to remit the deductions made to the Commissioner. New subdivision L provides payees with credits in respect of amounts deducted from reportable payments.

New definitions and scope for the RPS

1.8 In addition to usual terms such as payer, payee, payment and those associated with quoting TFNs, new definitions for an "exempt inter-corporate payment" and a "reportable payment" are also introduced. [New section 220AC]

1.9 The definition of "reportable payment" contained in new section 220AC specifies that the RPS will not extend to payments which currently fall within the PPS or PAYE arrangements or payments made between companies in a wholly owned company group. These latter payments are referred to as exempt inter-corporate payments and rely on the definition of "subsidiary" in section 221ED in relation to the PAYE arrangements. Where a payer and a payee in relation to a reportable payment are members of the same wholly owned company group, the RPS provisions will not apply.

1.10 The new arrangements will also apply to payments which are not made directly to a payee but which are reinvested, accumulated, capitalised or otherwise dealt with on behalf of the payee or at the direction of the payee. [New section 220AD]

Scope

1.11 Regulations will specify the transactions to which the RPS will apply [new section 220AC, definition of 'reportable payment'] . Initially it is expected that those regulations will describe certain payments in the fishing and clothing industries which represent assessable income to the recipient. This format is consistent with the way that prescribed payments are currently described for the purposes of the PPS provisions.

1.12 Subject to a specific exemption for payments made by or to a retailer for the sale of fish, it is anticipated that reportable payments in the fishing industry will include:

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payments made for the sale or supply of fish where the fish is acquired by the payer for sale or supply to another person, or for use in carrying on a business; and

•

payments (other than salary or wages under the PAYE provisions) which relate to the taking or catching of fish.

For example, a payment made by a fish wholesaler to the owner of a fishing boat in return for fish will be a reportable payment under the proposed arrangements. However, a payment by the wholesaler to a fish processor who processes the fish and returns it to the wholesaler would not be a reportable payment. A retailer's payment to a processor for packaged fish would not be reportable because of the retailer exemption whereas the payment by the processor to the fishing boat owner would represent a reportable payment.

1.13 It is anticipated that reportable payments in the clothing industry will include:

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payments relating to a process which forms part of the manufacture of an item of clothing; and

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payments (other than salary or wages under the PAYE provisions) which relate to an agreement to carry out, or to organise to be carried out, a process in the manufacture of clothing.

For example, a payment by a manufacturer (other than a payment of salary or wages) to a contractor who either makes up or arranges for the making up of a specified article of clothing will be a reportable payment. The payment may be excluded from the scope of salary or wages because it is paid to an entity (ie a partnership or company) rather than to an individual. A payment by a retailer for 100 skirts "off a manufacturer's rack" will not be a reportable payment.

1.14 However, a payment which does not relate to the manufacture of an item of clothing will not be a reportable payment. For example, the alteration of a pair of trousers (which will occur after the manufacture of the item is completed), or the attachment of price tags by a retailer.

Quotation of TFNs in respect of reportable payments

1.15 The proposed RPS provisions which deal with the quoting of TFNs are similar to those provisions regarding the quotation of a TFN on an employment declaration (section 202CB in Division 3 of Part VA) and a PPS declaration (section 221YHB in Division 3A of Part VI). The RPS arrangements contain the following features in respect of TFN declarations:

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in order to quote a TFN under the RPS, a payee must complete a "tax file number declaration form" [new sections 220AL and 220AM] ;

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where the Commissioner is satisfied that a payee has quoted an incorrect TFN on a declaration, the Commissioner may notify the payer of the correct TFN of the payee [new section 220AO] ;

•

where a payer is so notified the payer must include the correct number on annual reports under new section 220AJ ; and

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a payee is taken to have quoted a TFN by making a pensioner exemption declaration under new section 220AP .

Obligations on payees to provide correct information in declarations made under the RPS

1.16 The effectiveness of the proposed RPS arrangements will depend on the TFN and pensioner exemption declarations made by payees to the payers. The Taxation Administration Act 1953 provides for penalties on conviction (of up to $2,000 for the first offence) in situations where persons make false or misleading statements in relation to the operation of the taxation laws. Therefore if a payee was to provide false or misleading information on a TFN or pensioner exemption declaration form, the payee will be committing an offence and, if convicted, will be penalised.

TFN declaration

1.17 A TFN declaration form that has been given to a payer will remain in force until:

•

29 days pass from the date that the declaration is made to the payer in which no circumstance arises which requires the payer to forward the declaration to the Commissioner pursuant to new section 220AQ (see later notes) [new paragraph 220AN(1)(a)] ; or

Where the declaration has been forwarded to the Commissioner pursuant to new section 220AQ :

•

one year has elapsed in which no reportable payment is made by the payer to the payee [new paragraph 220AN(1)(b)] ;

•

the payee makes another TFN declaration to the payer [new paragraph 220AN(1)(c)] ; or

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the Commissioner determines that all or a class of TFN declarations ceases to be in force [new paragraph 220AN(1)(d)] .

1.18 The declaration will also cease to be in force if, the Commissioner is satisfied that the TFN quoted in the declaration is not the TFN of the payer and is satisfied that the payer does not have a TFN [new subsection 220AN(2)] .

Pensioner exemption

1.19 New section 220AP provides that recipients of reportable payments who are paid certain pensions or benefits will not be required to quote their TFN under the RPS. The pensions and benefits to which the exemption applies are listed in new subsection 220AP(1) and are identical to those set out at subsection 202EA(5), which relates to employment declarations.

1.20 By new subsection 220AP(2) if, in relation to a reportable payment, a person has made a "pensioner exemption declaration" (as defined by new subsection 220AP(3) ) which states that they are the recipient of a pension or benefit, the pensioner or beneficiary will be taken to have quoted their TFN in relation to the payment.

1.21 A payer who has made a reportable payment to a payee who has made a pensioner exemption declaration, will be required to specify in the annual report to be forwarded to the Commissioner pursuant to new section 220AJ that the payee is a person who is entitled to receive a pension or benefit.

1.22 New subsection 220AP(4) specifies the time at which a pensioner exemption declaration will be taken to have been made is when the pensioner gives the declaration form to the payer. By new subsection 220AP(5) the pensioner exemption declaration will remain in force (and therefore the payee will be taken to have quoted their TFN in respect of any reportable payment made in the period) from that date until:

•

29 days pass in which no circumstance arises which requires the payer to forward the declaration to the Commissioner pursuant to new section 220AQ (see notes below) [new paragraph 220AP(5)(a)] ; or

Where the declaration has been forwarded to the Commissioner pursuant to new section 220AQ :

•

12 months has elapsed in which no reportable payment is made by the payer to the payee [new paragraph 220AP(5)(b)] ;

•

the payee makes another pensioner declaration or a TFN declaration to the payer [new paragraphs 220AP(5)(c) and (e)] ;

•

the Commissioner determines that all or a class of pensioner declarations ceases to be in force [new paragraph 220AP(d)] ; or

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the pensioner or beneficiary becomes no longer entitled to receive a pension or benefit in relation to which the exemption applies [new paragraph 220AP(5)(f)] .

1.23 Where a pensioner declaration has ceased to have effect because the payee is no longer entitled to receive a pension or benefit, the payee is required to inform the payer in writing that the declaration is no longer in force as soon as is practicable [new subsection 220AP(7)] .

1.24 The Commissioner is also empowered to inform the payer and the payee that a pensioner exemption declaration is no longer in force, and to explain the reasons for and the consequences of the cessation [new subsection 220AP(6)].

Payers' obligations in relation to TFN and pensioner exemption declaration forms

1.25 The obligations of payers are identical in relation to both TFN declaration forms and pensioner exemption declaration forms. These obligations are set out in new section 220AQ .

1.26 In all cases a payee must have completed the TFN declaration form or pensioner exemption declaration form prior to the receipt of a reportable payment in order for their TFN to be taken to have been quoted in relation to the payment. [New sections 220AL and 220AP]

1.27 The obligations of the payer in dealing with the declarations will vary depending on whether or not there have been previous dealings (but not necessarily the making of reportable payments) between the payer and the payee. This distinction is intended to avoid the situation in which a potential payer is required to action declarations from people with whom they have had no previous dealings and to whom they may never make a reportable payment.

Where the payer and payee have had prior dealings

1.28 A payee may provide a TFN or pensioner exemption declaration form to a payer or potential payer at any time. By new subsection 220AQ(1) , if the payee has entered into an arrangement which could give rise to a reportable payment by the payer within the previous 12 months (whether or not any payment was actually made in the period) the payer must complete and forward the original form so that it reaches the Commissioner within a period of 14 days. The Commissioner has a discretion to extend the period.

1.29 For these purposes the term "arrangement" is defined broadly in new section 220AC to include any understanding or undertaking, whether or not legally enforceable or intended to be legally enforceable.

1.30 The TFN or pensioner exemption declaration will not apply to deem a TFN to have been quoted in relation to any reportable payments made in the 12 month period before the declaration was given to the payer.

Where there have been no prior dealings

1.31 New subsection 220AQ(2) applies where a TFN or pensioner exemption declaration form is provided by a person who has had no dealings with the potential payer in the previous 12 months that could be described as an arrangement that could give rise to a reportable payment (whether it did so or not). If a reportable payment is made by the payer to that person within a period of 28 days from when the declaration was made, the payer must forward the original declaration form so that it reaches the Commissioner within a period of 14 days from the date of the payment.

What will happen where an incorrect TFN is provided?

1.32 In relation to TFN declaration forms:

•

where the Commissioner is satisfied that a payee has quoted an incorrect TFN on a declaration, the Commissioner may notify the payer of the correct TFN of the payee [new section 220AO] ;

•

where a payer is so notified, the payer must include the correct number on annual reports under new section 220AJ ;and

•

where the Commissioner is not satisfied a payee has a TFN, then the Commissioner may notify the payer (and the payee) that the payee is to be treated as not having quoted a TFN [new subsection 220AN(2)] .

Consequences where no TFN has been quoted or been deemed to have been quoted to the payer of a reportable payment

1.33 Where a payee has not quoted their TFN, or been deemed to have quoted their TFN, to a payer in respect of a reportable payment, the new RPS will require the payer to deduct a percentage of the reportable payment made [new section 220AF] . The percentage of the reportable payment to be deducted will initially be 48.4%. This percentage represents the top marginal tax rate plus medicare levy and is consistent with the percentage deducted from payments of salary or wages, prescribed payments and interest payments to payees who have not quoted their TFN in relation to those payments.

Payer obligations

1.34 In circumstances where:

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a payee's TFN is not quoted in respect of a reportable payment or the payee has not made a pensioner exemption declaration [new sections 220AL and 220AP] ; and

•

a payer makes a deduction (of 48.4%) from a reportable payment [new section 220AF] ;

the payer will be required to:

•

provide the payee with a written document detailing the amount of the reportable payment and the deduction made [new section220AH] ; and

•

send all amounts deducted in a given month, together with a remittance statement, to the Commissioner within 14 days after the end of the month in which the deductions were made [new sections 220AG and 220AI] .

Under the RPS, payees will not receive a group certificate or payment summary form from the payer (as is the case with the PAYE and PPS arrangements) detailing payments received and deductions made in a year of income. The payer's document or documents (where there has been more than one deduction made from a reportable payment) received under new section 220AH can be used by the payee to substantiate his or her credit to be claimed in respect of deductions made [new sections 220AZ, 220AZA and 220AZB] .

General provisions

Payer annual reports

1.35 Under the RPS, payers will be required to provide an annual report to the Commissioner in relation to all payees who have received reportable payments during a financial year whether or not the payees TFN has been quoted or has been deemed to have been quoted in relation to the payment [new section 220AJ] . The information contained in the annual reports will be matched with the information provided by taxpayers in their annual tax return. The taxpayer's TFN will be the key to the income matching process.

Signing of documents under the new RPS

1.36 The four documents requiring the signature of the payer under the proposed RPS are the:

•

TFN declaration under new sections 220AM and 220AQ ;

•

Pensioner exemption declaration under new sections 220AP and220AQ ;

•

payer monthly statement accompanying deductions to be sent to the Commissioner under new section 220AI ; and

•

receipt or other similar document issued to the payee under new section 220AH when a payer is required to make a deduction from a reportable payment under new section 220AF .

1.37 New section 220AE provides that where the payer is a natural person, the signature will be the natural person's or a person declared in the regulations to be a signatory. Where the payer is not a natural person, such as in the case of a Government Body, company or partnership, the documents are to be signed by a person declared in the regulations to be a signatory.

Payer records

1.38 Payers must retain copies of annual reports and monthly statements sent to the Commissioner for at least 5 years after the end of the financial year in which the reportable payments to which they relate were made [new section 220AK] . Although the information contained in the receipt provided to the payee and detailing a reportable payment and deduction made in accordance with new section 220AH will also be contained in the annual report, the normal record keeping requirements (5years) under section 262A would apply to the copy of the receipt to be provided by the payer pursuant to new section 220AH .

Refund provisions

1.39 New section 220AR will enable the Commissioner to refund a deduction where he or she is satisfied that:

•

there are special circumstances involved [new paragraph 220AR(4)(a)] ; and

•

it would be fair and reasonable to do so having regard to matters which would include the purpose of the RPS and the reasons why the deduction was made [new paragraph 220AR(4)(b)] .

An example of a situation in which a deduction may be refunded is where a payer, not realising the payee's TFN had been quoted, has made a deduction from a reportable payment and forwarded the deduction to the Commissioner.

1.40 A refund will generally not be allowed in a year of income following the year in which the deduction was made. In these circumstances, it could be expected that an assessment for the year of income in which the deduction was made has been, or soon will be, made and that the payee would have already received (or will soon receive) a credit for the deduction made through the assessment process.

1.41 No credit will be available to a taxpayer at the end of the year of income in relation to amounts which have been deducted but subsequently refunded under these provisions. [New subsection 220AR(5)]

Penalty, credit, recovery and miscellaneous provisions

1.42 As discussed above, the new RPS requires payers to make deductions [new section 220AF] from reportable payments when the payee has not quoted his or her TFN or completed a pensioner exemption declaration form.

1.43 The legislation contains penalty provisions for situations where a payer does not deduct an amount from a reportable payment as required, or deducts an amount and does not remit the amount deducted to the Commissioner.

1.44 The penalty, credit, recovery and miscellaneous provisions are contained in new subdivisions I to M and include:

•

penalties for failure to make deductions and failure to forward those deductions to the Commissioner as required [new subdivision I - new sections 220AS to 220AW] ;

•

civil protection to payers who make deductions [new subdivision J - new section 220AX] ;

•

provisions to enable the Commissioner to recover amounts payable under the new RPS [new subdivision K - new section 220AY] ;

•e

provision for tax credits to payees for deductions made [new L - new sections 220AZ to 220AZC] ;

•

other miscellaneous matters [new subdivision M - new sections 220AZD to 220AZH] .

1.45 The legislative framework in these new subdivisions in Division 1AA is generally similar to the existing arrangements contained in the PAYE and PPS provisions in Divisions 2 and 3A of Part VI of the Act. However, the development of these Divisions over different periods has resulted in some minor differences in comparable provisions.

1.46 The following paragraphs discuss the differences in relation to the new RPS provisions.

Recovery of amounts payable

1.47 In relation to the recovery of amounts owing under the PAYE provisions, the production of a certificate stating that:

•

the person named in the certificate is an employer [paragraph 221R(2)(a)]; and

•

a specified sum is owing at the date of the certificate [paragraph 221R(2)(b)];

is prima facie evidence of the matters stated in the certificate.

1.48 In contrast, the PPS provisions [section 221YHN] apply the provisions of section 8ZL of the Taxation Administration Act 1953 to a proceeding to recover amounts owing. Section 8ZL, which deals with prosecutions for prescribed taxation offences, enables prima facie evidence of any relevant matter (other than the intent of the defendant) to be given by statement or averment contained in a claim by the Commissioner.

1.49 The recovery proceedings under the proposed RPS in subdivision K of new Division 1AA [new section 220AY] will combine elements of both the PAYE and PPS provisions to recover amounts. The combination of the PAYE evidentiary certificates [new subsection 220AY(7)] and the PPS averment statements [new subsection 220AY(6)] will provide an administratively convenient method of presenting evidence to a Court. As the evidence facilitated by these provisions is still only prima facie, it will in no way limit or restrict a taxpayer in presenting evidence as a defence.

Application to partnerships and unincorporated bodies

1.50 Under the PAYE arrangements, an employer, in the case of a partnership, includes each partner [subsection 221A(1)]. Section 221X further provides that a partner cannot be punished for a contravention by the partnership of a provision where another member of the partnership has already been punished for that contravention.

1.51 In the PPS, a paying authority is defined [subsection 221YHA(1)] as a person who makes, or is liable to make, a prescribed payment. Further, the PPS arrangements contain special provisions relating to partnerships [section 221YHZ]. Section 221YHZ deals with offences committed by, and obligations imposed on, the partnership. As well, the section provides that each partner is jointly and severally liable for amounts payable by the partnership to the Commissioner.

1.52 An unincorporated body (for example an association or club) comes within the definition of "company" in subsection 6(1) of the Act. An unincorporated body is thus an employer for PAYE purposes [subsection 221A(1)] and a paying authority for PPS purposes [subsection 221YHA(1)].

1.53 In the case of an unincorporated body, the definition of employer under the PAYE provisions includes the manager or principal officer of the body [subsection 221A(1)]. Although not specifically referring to an unincorporated body or an officer in the body, the PPS provisions refer to an unincorporated body through the general definition of paying authority referred to above. The PPS provisions do not specifically refer to the person in the body who would be liable for amounts payable to the Commissioner.

1.54 For partnerships, the proposed RPS arrangements in subdivision M in new Division 1AA follow the PPS framework and new section 220AZF , like section 221YHZ in the PPS, contains special provisions which provide that:

•

obligations imposed on the partnership are imposed on each partner [new paragraph 220AZF(1)(a)] ;

•

each partner is jointly and severally liable for amounts payable by a partnership to the Commissioner [new paragraph 220AZF(1)(b)] ; and

•

each partner is taken to have committed an offence committed by the partnership [new paragraph 220AZF(1)(c)] .

1.55 In a prosecution against a partner, new subsection 220AZF(2) provides that a statutory defence is available if the partner shows (on the balance of probabilities) that the partner:

•

did not procure, counsel, abet or aid the offence; and

•

was not knowingly concerned in, or party to, the offence.

1.56 In the case of unincorporated companies, new section 220AZG in the proposed RPS arrangements includes special provisions to specify that obligations imposed on (and offences committed by) the unincorporated company are imposed on (and committed by) each member of the committee of management of the company.

Consequential amendments

1.57 Subdivision C of Division 2 of Part 2 in the Bill details the consequential amendments necessary as a result of incorporating New Division 1AA into Part VI. The amendments are technical in nature but are necessary because the new RPS requires payers to make deductions from reportable payments when a payee's TFN is not quoted.

1.58 The making of deductions, on account of payees, and the fact that payees could be individual taxpayers, a company or a partnership has an impact on other provisions in the Act and other Acts administered by the Commissioner.

1.59 For example, a taxpayer who is subject to provisional tax in respect of interest income where no TFN has been quoted to the investment body receives a credit in the provisional tax calculation for the tax deducted by the investment body. The TFN credit is allowed under section 221YHZK and reflected in the provisional tax calculation under paragraphs 221YCAA(2)(m) and (q).

1.60 In the same way, the RPS credits to be given to payees under new sections 220AZ, 220AZA and 220AZB for deductions made by payers under new section 220AF will require a consequential amendment to section 221YCAA. This consequential amendment is No. 5 in Part 2 of the Schedule in the Bill.

1.61 In addition, consequential amendments Nos. 2 to 4 and 6 to 12 of Part 2 of the Schedule are necessary so that deductions from reportable payments are treated, for provisional tax purposes, in the same way as PAYE and PPS deductions under Divisions 2 and 3A of Part VI in the Act.1.62 In recovering tax payable by a taxpayer under sections 215 [from trustees including liquidators] and under section 218 [from persons owing money to the taxpayer], the Commissioner is able to notify the trustee or person of the amount owed by the taxpayer. Consequential amendments under Item 1 in Part 1 of the Schedule will enable those notifications to include payments due to the Commissioner under the new RPS arrangements contained in Division 1AA.

1.63 Further consequential amendments are required to sections 221YAB and 221ZY in the Act. Both sections rely on amounts credited to a taxpayer for their application. Section 221YAB contains the tests which, if satisfied, will result in PAYE taxpayers coming within the provisional tax arrangements. Section 221ZY requires any credits under a "relevant provision" [including PAYE, PPS or TFN crediting provisions] to be applied against a Higher Education Contribution (HEC) or student Financial Supplement (FS) assessment debt before being applied, for example against the tax payable by the taxpayer, as required under the relevant crediting provision. Item 3 in Part 1 of the Schedule contains the consequential amendment to include RPS credits, for when deductions are made, with the other credits already affected by sections 221YAB and 221ZY.

CHAPTER 2 - FOREIGN INVESTMENT FUND AND CONTROLLED FOREIGN COMPANY MEASURES

Section 1 - Introduction

2.1 The foreign investment fund (FIF) measures came into effect on 1January 1993. The measures provide for the taxation, on an accruals basis, of investments held by Australian residents in non-controlled foreign companies, interests held by Australian beneficiaries in non-controlled foreign trusts and investments in foreign life policies (FLPs) by Australian policy holders. Also, as part of those measures, new rules governing the taxation of Australian beneficiaries of foreign trust estates were introduced with effect from the 1992-93 income year.

2.2 The FIF measures aim to remove the tax advantage of deferring Australian tax by accumulating income in offshore companies and trusts that are not controlled by Australian residents. They complement the controlled foreign company (CFC) and transferor trust measures which have been in operation since the 1990-91 income year.

2.3 The proposed amendments will:

•

ensure that profits which have been taxed under the FIF measures are only traced for tax relief purposes in relation to a resident taxpayer and not in relation to a CFC;

•

ensure that double taxation does not arise from the interaction of the CFC, transferor trust and FIF measures where a taxpayer has an interest in a CFC which is held through a non-resident trust estate;

•

ensure that FIF income derived by a non-resident trust is included in the assessable income of an Australian taxpayer who has transferred property to the trust to the extent the trust does not distribute its profits;

•

address the potential double taxation of profits of a resident public unit trust which may arise because of concessional treatment provided to small investors who hold units in the trust;

•

remove the modifications which currently apply when calculating the FIF income of a CFC where a FIF makes an interim distribution to the CFC;

•

align the treatment of corporate limited partnerships (including dividends paid by corporate limited partnerships) under the foreign tax credit, foreign loss, CFC and FIF provisions of the Act with the treatment of companies (and dividends paid by companies) under those provisions;

•

modify the calculation and availability of an allowable deduction that may be claimed where a taxpayer has incurred a FIF loss under the market value or cash surrender value methods for determining FIF income;

•

provide currency conversion rules for FIF losses arising under the market value and cash surrender value methods for determining FIF income;

•

ensure that no more than 100% of the calculated profit of a FIF is attributed to Australian residents who hold an interest in the FIF;

•

provide that the attributable portion of a dividend under the CFC measures is reduced to the extent the dividend was paid out of profits upon which a taxpayer has been taxed previously under the FIF measures; and

•

correct a drafting error in the exemption from the FIF measures provided for companies engaged in several activities.

These amendments will apply retrospectively where they operate to the advantage of taxpayers. A detailed explanation of each of the amendments commences following section 3 of this chapter.

Section 2 - General overview of the FIF measures

2.4 The FIF measures apply to Australian resident taxpayers who, at the end of an income year, have an interest in a foreign company or trust. The measures also apply to taxpayers who hold a FLP at any time during a year of income.

2.5 Broadly, the FIF measures operate to approximate a resident taxpayer's share of the undistributed profits of a FIF (called FIF income) and to assess the taxpayer on those profits. This treatment is designed to remove the deferral of Australian tax on the profits of a FIF which may otherwise arise where those profits are accumulated offshore rather than remitted to Australian investors.

2.6 The FIF measures provide a number of exemptions from FIF taxation. These exemptions are designed to exclude from the FIF measures interests in FIFs which are not the target of the measures. Where an exemption does not apply, the amount of FIF income to be included in a taxpayer's assessable income is determined using one of the following three taxing methods:

(i)

the market value method;

(ii)

the deemed rate of return method; or

(iii)

the calculation method.

2.7 In the case of FLPs, the amount of FIF income will be determined under the cash surrender value method or the deemed rate of return method.

2.8 Under these methods of taxation, a taxpayer's interest in a FIF is measured in relation to notional accounting periods of a FIF commencing on 1 January 1993 and for subsequent periods. The notional accounting period of a FIF is generally the same as a taxpayer's year of income. However, a taxpayer may elect to use the period for which the annual accounts of the FIF are made.

2.9 The assessable income arising under the FIF measures is included in the taxpayer's assessable income for the income year in which the notional accounting period of the FIF ends.

Section 3 - General overview of the CFC measures

2.10 Broadly, the CFC measures operate to tax the Australian controllers of a CFC on a current basis when profits are derived by the CFC, i.e., on an accruals basis. The measures tax the Australian controllers on their share of the passive and other tainted profits (generally, income from transactions with related parties) of the CFC where those profits are not taxed at a rate comparable to that which would have applied if the profits had been taxed in Australia. This treatment is designed to remove the deferral of Australian tax on the profits of a CFC which may otherwise arise if those profits are accumulated offshore rather than remitted to its Australian controllers.

2.11 The CFC measures include a share of the attributable income of a CFC in the assessable income of an Australian controller. This share is based upon the interests held by the Australian controller in the CFC.

2.12 The attributable income of a CFC is calculated on the basis that the CFC is a resident of Australia. However, the profits of the CFC which are taken into account for the purposes of this calculation are generally the low-taxed passive and other tainted profits of the CFC. In this regard, the FIF income of a CFC is specifically included in the calculation of the CFC's attributable income.

Section 4 - FIF attribution credits - CFCs

Summary of the amendments

Purpose of the amendments

2.13 The amendments will ensure that profits which have been taxed under the FIF measures are only traced for tax relief purposes in relation to a resident taxpayer and not in relation to a CFC. [Clause 8]

Date of effect

2.14 The amendments will apply for statutory accounting periods of CFCs ending after 30 June 1994. [Clause 10]

Background to the legislation

2.15 Attribution accounts are used in the CFC and FIF measures to trace profits which have been taxed under those measures. The object of tracing these profits is to identify when distributions (e.g., dividends) are paid out of profits which have been previously taxed on an accruals basis. This allows relief from double taxation to be provided so that, for instance, a distribution is not taxed to the extent it is referable to profits which have been taxed on an acruals basis. Similarly, a capital gain on the disposal of an interest in a CFC or a FIF is reduced to the extent that the CFC or FIF has an attribution surplus (i.e., retained profits which have been accruals taxed under the CFC or FIF measures) in relation to a taxpayer at the time of the disposal.

2.16 There are separate attribution account systems for the purposes of keeping track of profits which have been taxed under the CFC and FIF measures. In this regard, the CFC attribution account system currently ensures that Australian controllers of a CFC are not taxed again on FIF income included in a CFC's attributable income (paragraphs 371(1)(aa) and 371(1)(ab)). However, in addition to an Australian controller being treated under the CFC attribution account system as having been taxed on the FIF income of a CFC, the FIF attribution system treats the CFC as having been taxed on that FIF income. Technically, this treatment can lead to double counting of income attributed under the FIF measures as is demonstrated by the following example.

Example

2.17 A CFC has an interest in a FIF which gives rise to FIF income of $100 being included in the attributable income of the CFC. An Australian company (Ausco) is attributed 100% of the CFC's attributable income including the $100 FIF income. This is illustrated by the following diagram:

Consequences

2.18 An attribution credit of $100 would arise for the FIF in relation to Ausco (paragraph 371(1)(aa) and subsection 371(2A)). However, it is not clear that a FIF attribution credit of $100 does not also arise for the FIF in relation to the CFC (paragraph 605(1)(a) and subsection 605(2)).

2.19 It was not intended that a FIF attribution credit would arise for a FIF in relation to a CFC because a CFC is not taxed on FIF income. It should be noted in this regard that FIF income is only included in the attributable income of a CFC in order to determine the amount to be included in the assessable income of its Australian controllers under the CFC measures - the CFC is not itself taxed on that FIF income.

2.20 Accordingly, it is not normally necessary to provide a CFC with relief from double taxation of FIF income using the FIF attribution account system (the CFC attribution account system serves this purpose). Moreover, to allow a FIF attribution credit to arise for a FIF in relation to a CFC would result in double counting under the attribution account systems for the purposes of providing relief from double taxation which may, in some instances, result in more double taxation relief being provided than is appropriate.

Explanation of the amendments

2.21 The amendments will clarify that a FIF attribution credit does not arise for a FIF in relation to a CFC as a result of FIF income being included in the notional assessable income of the CFC. This will be achieved by inserting a reference to section 605 (the provision which gives rise to a FIF attribution credit) into section 389 [clause 9]. Consequently, section 605 will be disregarded for the purposes of calculating the attributable income of a CFC.

Section 5 - Controlled foreign trusts - attributable taxpayer exemption

Summary of the amendments

Purpose of the amendments

2.22 To ensure that double taxation does not arise from the interaction of the CFC, transferor trust and FIF measures where a taxpayer has an interest in a CFC which is held through a non-resident trust estate. [Clause 11]

Date of effect

2.23 The amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993. [Subclause 2(2)]

Background to the legislation

2.24 Double taxation may arise from the interaction of the controlled foreign company (CFC) and foreign investment fund (FIF) measures where a taxpayer has an interest in a CFC which is traced through a non-resident trust estate. This may occur for the following reasons.

2.25 The CFC and FIF measures both seek to ensure that Australian residents are taxed on their economic interest in the profits of certain non-resident entities as those profits are derived. It was anticipated that there would be some overlap between the measures. Accordingly, there are a number of exemptions from the FIF measures which ensure that the CFC measures take precedence over the FIF measures. In particular, section 494 ensures that the FIF measures will not apply to an interest in a FIF if a taxpayer is also an attributable taxpayer under the CFC measures in relation to that interest. In addition, section 431A ensures that FIF income is not included in a taxpayer's share of the attributable income of a CFC where that taxpayer is an attributable taxpayer under the CFC measures in relation the FIF.

2.26 However, there may still be instances where a taxpayer is effectively taxed under both the FIF and CFC measures on the profits of a FIF which is held through a non-resident trust estate. This is because FIF income may be included in the net income of a non-resident trust estate where the trust has an interest in a FIF. Thus, a taxpayer who is a resident beneficiary of the trust may be taxed on a share of the trust's FIF income under section 97 of the general provisions dealing with the taxation of trusts. In addition, a resident beneficiary may also be taxed under the CFC measures in relation to a FIF interest held by a non-resident trust where the trust's FIF interest is also treated as a CFC and the beneficiary's indirect interest in the CFC is measured by tracing through the trust.

2.27 Section 493, which provides an exemption from the FIF measures for interests in FIFs which are controlled foreign trusts, does not prevent the abovementioned double taxation from arising. This is because section 97 may apply to include a share of a non-resident trust estate's FIF income in the assessable income of a taxpayer who is a beneficiary of the trust in instances where the taxpayer's interest in the trust is exempt from the FIF measures (subsection 96A(1)). Thus, a taxpayer may be taxed on an interest in a company which is traced through a non-resident trust under the CFC measures and also under section 97 if FIF income is included in the trust's net income in relation to that company.

2.28 Further, the attributable taxpayer exemption in section 494 is of no assistance in preventing the abovementioned double taxation. This is because section 494 only operates to ensure that the operative provision for the FIF measures (i.e., section 529) does not apply where a taxpayer is an attributable taxpayer under the CFC measures in relation to a FIF. This does not prevent a taxpayer from being assessed on a share of a non-resident trust estate's FIF income under section 97.

2.29 The following is an example which illustrates how double taxation may arise under the FIF and CFC measures where a CFC is held through a non-resident trust estate.

Example

Facts

2.30 A non-resident trust estate (XYZ trust) has two beneficiaries ("A" and "B") both of whom are residents which are equally entitled to the corpus of the trust. Further, XYZ trust wholly owns a non-resident company (CFCco).

Consequences

2.31 CFCco is a CFC because "A" and "B" together control 100% of CFCco after taking into account their interest traced through XYZ trust. [Sections 340 and 349-355] Thus, "A" and "B" may be taxed under the CFC measures on a share of CFCco's attributable income.

2.32 In addition, the net income of XYZ trust may include FIF income referable to XYZ trust's interest in CFCco (CFCs are also FIFs). Thus, if beneficiary "A" or "B" are presently entitled to a share of XYZ trust's income (or are deemed to be presently entitled to a share of XYZ trust's net income under section 96B and 96C), they may be taxed under section 97 on a share of the FIF income referable to CFCco which is included in XYZ trust's net income. Accordingly, profits accumulated by CFCco may be attributed directly to "A" and "B" under the CFC measures and indirectly as FIF income included in the net income of XYZ trust.

2.33 The following diagram illustrates the above example:

2.34 Similarly, double taxation may arise where a taxpayer who has transferred property to a non-resident trust estate is attributed a share of the net income of the trust under the transferor trust measures (Division 6AAA). This is because the share of the net income of a non-resident trust estate which is included in the assessable income of an Australian transferor may include FIF income which is referable to the trust's interest in a company. Further, the transferor may also be attributed a share of the company's attributable income under the CFC measures based upon the interest which the transferor holds in the CFC through the trust.

Explanation of the amendments

2.35 New subsections 96A(3A) and 96A(3B) will ensure that taxation does not arise under both the CFC and FIF measures where a beneficiary in a non-resident trust estate has an interest in a CFC which is held through that trust [clause 12]. In this regard, double taxation may only arise in relation to non-resident trust estates where they are also controlled foreign trusts (CFTs) for the purposes of the CFC measures because a trust must be a CFT before the CFC measures may apply to an interest in a company held indirectly through that trust. Accordingly, subsections 96A(3A) and 96(3B) only apply to CFTs. A beneficiary will continue to be taxed on an indirect interest in a CFC which is held through a non-controlled foreign trust under section 97.

2.36 New subsection 96A(3A) applies where the statutory accounting period of a CFC coincides with the notional accounting period of a FIF held by a CFT. In addition, the CFC and FIF must be the same entity. In this case, no amount will be included in the beneficiary's share of the net income of the CFT under the FIF measures in relation to the FIF if section 456 (i.e., the operative provision of the CFC measures) applies to the beneficiary in relation to the FIF at the end of that period.

2.37 New subsection 96A(3B) is relevant where the statutory accounting period of a CFC does not coincide with the notional accounting period of a FIF held by a CFT. Broadly, subsection 96A(3B) operates in the same way as subsection 96A(3A) with the exception that section 456 must apply to the beneficiary in both of the statutory accounting periods of the CFC which overlap the FIF's notional accounting period.

2.38 Currently, subsection 96A(1A) ensures that an amount not included in a beneficiary's assessable income under section 97 is not included in the trustee's assessable income under section 99 or 99A, or in the attributable income of a resident taxpayer who has transferred property to the trust ("transferor") under section 102AAU. However, a similar provision is not required where a beneficiary's share of the net income of a CFT is reduced because of new subsection 96A(3A) or 96A(3B). This is because a trustee of a CFT is only assessed under sections 99 or 99A on the net income of the trust which is attributable to sources in Australia and thus, the trustee would not be assessed on the trust's FIF income.

2.39 Moreover, the amendments described below largely remove the potential for taxation of a "transferor" on an amount excluded from a beneficiary's share of the net income of a CFT under new subsections 96A(3A) or 96A(3B). This is because section 456 will normally apply to the "transferor" given that subsections 356(5) and 360(1) have the effect of deeming a "transferor" to have a direct attribution interest in a CFT, and an attribution tracing interest through a CFT, of 100%. Economic double taxation of a transferor and a CFT's beneficiaries under the CFC measures is addressed by subsection 362(5).

2.40 New subparagraph 102AAU(1)(c)(ix) will have the effect that the attributable income of a CFT (a trust to which the transferor trust measures apply will always be a CFT - paragraph 342(a)) in relation to a particular "transferor" will be reduced by excluded foreign investment fund income amounts. These amounts are defined by new subsections 102AAU(7) and (8). [Clause 13]

2.41 New subsection 102AAU(7) applies where the statutory accounting period of a CFC coincides with the notional accounting period of a FIF held by a CFT. In addition, the CFC and FIF must be the same entity and section 456 (i.e., the operative provision of the CFC measures) must apply to the "transferor" in relation to the entity at the end of those periods. Where these conditions are satisfied, the excluded foreign investment fund amount will be the amount which was included in the CFT's attributable income under the FIF measures as a result of the CFT having an interest in the FIF.

2.42 New subsection 102AAU(8) is relevant where the statutory accounting period of a CFC does not coincide with the notional accounting period of a FIF held by a CFT. Broadly, subsection 102AAU(8) operates in the same way as subsection 102AAU(7) with the exception that section 456 must apply to the "transferor" in both of the statutory accounting periods of the CFC which overlap the FIF's notional accounting period.

2.43 New subsections 96A(3A), 96A(3B), 102AAU(7) and 102AAU(8) all require that section 456 applies to either a beneficiary's or a "transferor's" interest in a CFC. As stated in TD 93/167, section 456 is considered to have applied in relation to a particular statutory accounting period of a CFC even though:

(a)

the CFC has no amounts of notional assessable income to which sections 384 or 385 apply (this would be the case if the CFC passes the active income test); or

(b)

the amount of notional assessable income of the CFC does not exceed its notional allowable deductions; or

(c)

subsection 385(4) applies to the CFC.

Section 6 - Attributable FIF income of a listed country transferor trust

Summary of the amendments

Purpose of the amendments

2.44 The amendments will ensure that FIF income derived by a non-resident trust is included in the assessable income of Australian taxpayers who have transferred property to the trust to the extent the trust does not distribute its profits. [Clause 14]

Date of effect

2.45 The amendments will apply to the calculation of attributable income for non-resident trust estates from the 1994/95 and later years of income. [Clause 16]

Background to the legislation

2.46 Normally, the transferor trust measures operate to tax Australian residents who have transferred property to a non-resident trust on the income of the trust which is not distributed to its beneficiaries. However, where a trust derives only income or profits which are subject to tax in a listed country (i.e., broadly, a country which imposes comparable rates of tax to Australia) or which are designated concession income (section 102AAE), the Australian taxpayers who have transferred property to the trust are only taxed on the eligible designated concession income of the trust which is not distributed to the trust's beneficiaries (paragraph 102AAU(1)(b)). Broadly, designated concession income comprises certain types of passive income (specified in the regulations) on which no tax is payable or a reduced amount of tax is payable in a listed country. Moreover, eligible designated concession income in relation to a particular listed country is designated concession income which is either not subject to tax or designated concession income in relation to other listed countries (section 317).

2.47 Currently, it is not clear that FIF income is to be included in the attributable income of a listed country trust where the trust has an interest in a FIF. This is because FIF income is not eligible designated concession income and therefore, arguably, should not be taken into account in determining the attributable income of a listed country trust under section 102AAU. It was, however, intended that FIF income would be included in the attributable income of these trusts.

Explanation of the amendments

2.48 The amendments will clarify that FIF income is to be included in the attributable income of a listed country trust estate. This will be achieved by amending paragraph 102AAU(1)(b) to exclude amounts of FIF income (i.e., amounts included in the trust's assessable income under section 529) from the exempt income of the trust. [Clause 15]

Section 7 - Double taxation of FIF income derived by a resident public unit trust

Summary of the amendments

Purpose of the amendments

2.49 The amendments will address the potential double taxation of profits of a resident public unit trust which may arise because of concessional treatment provided to small investors who hold units in the trust. [Clause 17]

Date of effect

2.50 The amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993 . [Subclause 2(2)]

Background to the legislation

2.51 Representations made during the consultation process on the FIF measures expressed concern that small investors who are unitholders in a resident public unit trust may effectively be taxed on the trust's FIF income. This was because the trust's net income (i.e., taxable profits) includes FIF income and beneficiaries who are entitled to a share of the trust's income are taxed on a corresponding share of the trust's net income. Accordingly, small investors who receive a share of a trust's income would, in effect, be taxed on a share of the trust's FIF income.

Example

2.52 A small investor is presently entitled to 1% of the income of XYZ trust which is a resident trust estate. XYZ trust has income for the purposes of both trust and taxation law of $100,000. In addition, XYZ trust has $10,000 FIF income for the purposes of the taxation law.

Consequences

2.53 The small investor would be assessed under section 97 on $1,100 (i.e., 1% x ($100,000 income + $10,000 FIF income)) being the investor's share of the trust's net income. Of this amount, $100 (i.e., 1% x $10,000) relates to the trust's FIF income. Thus, the small investor has effectively been taxed on $100 FIF income as a result of the FIF measures.

2.54 In response to the representations on this matter, it was decided that the net income of a resident public unit trust would not include FIF income for the purposes of determining a beneficiary's share of the trust's net income where the beneficiary is a small investor (subsection 96A(2)/paragraph 96A(2)(c)) . This made it necessary to also deny the benefit of any tax relief for FIF taxation which is normally available when determining in later years the amount to be included in the assessable income of a small investor who was not taxed on the FIF income which gave rise to that benefit (paragraph 96A(2)(d)).

2.55 Currently, however, the above treatment may technically result in double taxation of the FIF income of a resident public unit trust. This may occur because either section 99 or 99A may operate to tax the trustee of a resident public unit trust on that part of the net income of the trust which is not included in the assessable income of a small investor because of the operation of paragraph 96A(2)(c). This result was not intended.

Explanation of the amendments

2.56 New paragraph 96A(2)(e) will ensure that the trustee of a resident public unit trust will not be assessed under sections 99 or 99A on the net income of the trust which is not included in the assessable income of a beneficiary because of the operation of paragraph 96A(2)(c). This will be achieved by disregarding paragraph 96A(2)(c) for the purposes of applying sections 99 or 99A. [Clause 18]

2.57 In addition, amounts included in a beneficiary's share of the trust's net income as a result of paragraph 96A(2)(d) will be disregarded for the purposes of applying sections 99 or 99A. This will ensure that the calculation of the amount to be included in a trustee's assessable income under section 99 or 99A will not be reduced by an amount included in a beneficiary's assessable income under paragraph 96A(2)(d). Amounts included in a beneficiary's assessable income under paragraph 96A(2)(d) do not relate to net income of the trust for the current year and therefore should not affect the taxation of the trustee on that net income.

Section 8 - Reduction of FIF amount by interim dividends paid to a CFC

Summary of the amendments

Purpose of the amendments

2.58 The amendments will remove the modifications in the CFC measures which currently apply when determining a reduction of FIF income because of interim distributions made by the FIF. [Clause 19]

Date of effect

2.59 The amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993 . [Subclause 2(2)]

Background to the legislation

2.60 The methods applicable for determining the profits of a FIF, in effect, provide an approximation of a FIF's total profits for a particular period (called a notional accounting period of the FIF). The extent to which a FIF's profits are attributed to a taxpayer under the FIF measures is reduced to the extent that they have been distributed by the FIF during the notional accounting period for which the FIF's profits are being calculated (section 530). This treatment ensures that a taxpayer is not taxed on the same amount under the FIF measures and the provisions of the law which tax realised profits.

2.61 Currently, the law modifies the reduction of FIF income under section 530 for the purposes of determining the attributable income of a CFC (section 431B). The modification is that a CFC's FIF income is not reduced, as would normally be the case, to the extent that the CFC receives an assessable distribution from a FIF during the FIF's income year. Rather, a CFC's FIF income is reduced to the extent that the CFC receives an assessable distribution from a FIF after the end of the FIF's notional accounting period and before the end of the CFC's statutory accounting period.

Example

2.62 A FIF has a notional accounting period of 1 April 1993 to 31 March 1994. Normally assessable distributions (including certain distributions which are exempt because they have been paid from profits which have been comparably taxed by another country) made by the FIF during that period would reduce the FIF income which is calculated for the period (section 530). However, if the FIF is held by a CFC which has a statutory accounting period of 1 July 1993 to 30 June 1994, only assessable distributions made by the FIF after the end of the FIF's notional accounting period, i.e., 31 March 1994 and before the end of the CFC's statutory accounting period, i.e., 30 June 1994 would reduce the FIF income included in the CFC's attributable income (section 431B) . This modification is illustrated by the following diagram:

2.63 It has been found on review that the abovementioned reduction of FIF income for interim distributions by a FIF to a CFC does not give the correct result. This is because it is only necessary, in order to prevent double taxation, to reduce the profits of a FIF which are to be taxed under the FIF measures to the extent those profits have been distributed prior to the point in time when the amount of those profits is determined using one of the methods for calculating FIF income.

2.64 Double taxation of distributions from profits of a FIF which are made after the profits have been included in a CFC's attributable income under the FIF measures is avoided through the operation of the attribution account system (Division 4 of Part X). The attribution account system, in conjunction with subsection 402(3), allows for the exemption of distributions from a FIF to the extent they have been paid out of profits included in a CFC's attributable income under the FIF measures.

2.65 The correct adjustments to a CFC's FIF income for interim distributions made by a FIF can be achieved by treating a CFC in the same way as any other taxpayer. That is, by reducing the CFC's FIF income by interim distributions which are included in the CFC's notional assessable income (paragraph 530(1)(c)) or which are exempt under paragraph 402(2)(c), paragraph 403(b) or section 404 because they have been comparably taxed (paragraph 530(1)(d)).

Example

2.66 In the above example, an attribution credit would arise in relation to the FIF for an attributable taxpayer of the CFC at the end of the FIF's notional accounting period, i.e., 31 March 1994 (paragraph 371(1)(aa) and subsection 371(2A)) . Accordingly, distributions made by the FIF after 31March 1994 will not be included in the CFC's attributable income to the extent an attribution debit arises for the FIF in relation to the CFC's attributable taxpayers as a result of the FIF making that distribution (subsection 402(3)) . Broadly, such a distribution would give rise to an attribution debit of the lesser of the amount of the distribution and the undistributed amount of the FIF's profits which have been taxed under the FIF measures (section 372). There is therefore no need for section 530 to apply to reduce FIF income for the FIF's notional accounting period ending 31 March 1994 for distributions made to the CFC after that period has ended because the double taxation is prevented by the operation of subsection 402(3).

2.67 However, there is currently no provision to reduce the CFC's FIF income where the CFC receives an assessable distribution from the FIF during the period 1 April 1993 to 31 March 1994 (section 530 does not apply because of the modifications made by section 431B). This may effectively result in a distribution from the FIF during that period being included in the notional assessable income of the CFC under the FIF measures and also under another provision of the Act (e.g., section 44 where a non-portfolio dividend is paid by a company FIF to a CFC in an unlisted country). Note that relief from double taxation of these distributions would be provided if section 530 were to apply normally, i.e., without modification by section 431B.

Explanation of the amendments

2.68 The amendments will repeal section 431B thereby removing the modifications which currently apply for the purposes of determining the reduction of a CFC's FIF income for distributions received by the CFC from a FIF [clause 20]. Thus, broadly, the same rules will apply to CFCs for the purposes of preventing double taxation of distributions from FIFs as those which apply to other taxpayers.

Section 9 - Taxation of corporate limited partnerships under the CFC and FIF measures

Summary of the amendments

Purpose of the amendments

2.69 The amendments will align the treatment of corporate limited partnerships (including dividends paid by corporate limited partnerships) under the foreign tax credit, foreign loss, CFC and FIF provisions of the Act with the treatment of companies (including dividends paid by companies) under those provisions. [Clause 21]

Date of effect

2.70 The amendments will apply from the 1994-95 year of income. [Clause 24]

Background to the legislation

2.71 Changes to the law with effect from the 1992-93 year of income operate to treat certain limited partnerships ("corporate limited partnerships") as companies for taxation purposes. It follows from this treatment that an interest held by a resident corporate limited partnership in a CFC or FIF should be treated in the same way under the CFC and FIF measures as an interest held by a resident company in a CFC or FIF. However, there are currently technical problems with regard to the way provisions of the law dealing with the treatment of corporate limited partnerships interact with the CFC and FIF provisions of the Act. There are also problems with regard to the way they interact with the foreign tax credit and foreign loss provisions of the Act. These problems are discussed below.

2.72 The CFC measures do not currently apply to an interest held by a resident corporate limited partnership in a CFC because the CFC measures only operate to attribute income to Australian entities (sections 456 and 361). Moreover, a corporate limited partnership is not an Australian entity within the meaning of section 336.

2.73 Section 336 provides that each of the following is an Australian entity:

(a)

an Australian partnership;

(b)

an Australian trust;

(c)

an entity (other than a partnership or trust) that is a Part X Australian resident.

However, a corporate limited partnership does not currently fall into any of the above categories.

2.74 A resident corporate limited partnership is not an Australian partnership (paragraph (b) above) because section 94K provides that a reference in the income tax law to a partnership does not include a reference to a corporate limited partnership.

2.75 Moreover, a corporate limited partnership is not a resident of Australia "within the meaning of section 6" and therefore does not qualify as a "Part X Australian resident" (section 317, paragraph (c) above). This is the case even though a reference in the income tax law to a company is normally taken to include a corporate limited partnership because there is an exception to that rule where the term "company" is used in the section 6 definition of "resident" or "resident of Australia" (section 94J).

2.76 A similar problem arises in relation to the FIF measures because they only apply to those companies which are Part XI Australian residents as defined in section 470 (paragraph 485(3)(c)). The definition of Part XI Australian resident is essentially the same as that for a Part X Australian resident and therefore gives rise to the problems discussed above.

2.77 Moreover, a corporate limited partnership currently cannot qualify for the exemption under section 23AJ for certain dividends received from non-resident companies because a corporate limited partnership cannot satisfy the requirement in paragraph 23AJ(1)(b) that it is a resident "within the meaning of section 6".

2.78 Another problem with the treatment of corporate limited partnerships is that references to a company in the definition of a "dividend" in section 6 are not taken to be references to a corporate limited partnership (section 94J). Thus, although section 94L may apply to deem a corporate limited partnership to have paid a dividend for taxation purposes, a dividend paid by a corporate limited partnership is not a dividend "within the meaning of section 6". Therefore, a dividend paid by a corporate limited partnership will not be treated as passive income by paragraph 160AEA(1)(a) (which defines passive income for the purposes of the foreign tax credit and foreign loss provisions) or 446(1)(a) (which defines passive income for the purposes of the CFC measures). These provisions should apply to distributions which are treated as dividends paid by a corporate limited partnership.

Explanation of the amendments

2.79 The amendments will align the treatment of corporate limited partnerships (including dividends paid by corporate limited partnerships) under the foreign tax credit, foreign loss, CFC and FIF provisions of the Act with the treatment of companies (including dividends paid by companies) under those provisions. This will be achieved by substituting section 94T, which deals with residency of corporate limited partnerships, with new section 94T which will make it clear that corporate limited partnerships are to be treated as residents "within the meaning of section 6" where they are formed in Australia, carry on business in Australia or have their central management and control in Australia [clause 23]. These are the same requirements for residency as were provided by former section 94T.

2.80 In addition, section 94L which has the effect of treating distributions from corporate limited partnerships as dividends will be amended to also treat those distributions as dividends "within the meaning of section 6". [Clause 22]

Section 10 - Deduction for FIF losses

Summary of the amendments

Purpose of the amendments

2.81 The amendments will modify the calculation and availability of a deduction under section 532 or 533 where a taxpayer has incurred a FIF loss under the market value or cash surrender value methods for determining FIF income to ensure that:

(i)

FIF losses are converted to Australian currency for the purposes of calculating the deduction; and

(ii)

quarantining does not apply to a deduction from assessable income for FIF losses.

[Clauses 25 and 27]

Date of effect

2.82 The amendment described at item (i) above will apply to the calculation of FIF income for notional accounting periods of FIFs ending after the commencement of the 1994/95 year of income [clause 29] . The amendment described at item (ii) will apply from the commencement of the FIF measures, i.e., 1 January 1993 [subclause 2(2)] .

Background to the legislation

2.83 Broadly, a taxpayer may claim a deduction from assessable income for a loss arising under the market value or cash surrender value methods for determining FIF income to the extent the FIF or FLP has a FIF attribution surplus (i.e., retained profits which have been taxed previously under the FIF measures) (sections 532 and 533) . This treatment was provided on the basis that a FIF loss reflects a reduction in a FIF's profits which can be distributed to a taxpayer. Accordingly, the deduction provides relief for the FIF taxation of profits which are no longer available for distribution.

2.84 There are currently two problems with the calculation and availability of the abovementioned deduction for FIF losses. First, there are no explicit currency conversion rules in sections 532 or 533 to ensure that the amount of a deduction which may be claimed for a FIF loss is calculated with regard to amounts expressed in Australian currency. In this regard, it is considered the intention of the law is clear that the currency in which a FIF loss is expressed is to first be converted to Australian currency for the purposes of determining the deduction under sections 532 or 533. This is because the amount of a deduction under those sections is determined with regard to a FIF attribution surplus which is expressed in Australian currency. It is intended only to clarify the existing law by formally stating that a FIF loss is to be converted to Australian currency for the purposes of calculating a deduction under section 532 or 533.

2.85 Secondly, section 79D may operate to quarantine a deduction for FIF losses under section 532 or 533 because FIF income belongs to the passive class of foreign income and a deduction under those sections may be said to relate to FIF income. It was not intended, however, that the deduction be quarantined.

Explanation of the amendments

2.86 New subsection 533A will ensure that FIF losses are converted to Australian currency for the purposes of calculating the availability of a deduction under section 532 or 533 [clause 28]. This conversion is to take place using the rate of exchange applicable at the end of the notional accounting period of a FIF in which the loss arises.

2.87 The amendment of subsection 160AFD(9) to exclude deductions available under section 532 or 533 from the definition of "foreign income deduction" will ensure that quarantining does not apply to a deduction which is available under those sections [clause 26]. This is because the definition of "foreign income deduction" in section 79D uses the definition in subsection 160AFD(9) and therefore the amendment of that subsection will ensure that a deduction under section 532 or 533 is not limited by section 79D.

Section 11 - Unapplied FIF losses under the market value and cash surrender value methods for determining FIF income

Summary of the amendments

Purpose of the amendments

2.88 The amendments will provide currency conversion rules for FIF losses arising under the market value and cash surrender value methods for determining FIF income. [Clause 30]

Date of effect

2.89 The amendments will apply to the calculation of FIF income for notional accounting periods of FIFs ending after the commencement of the 1994/95 year of income. [Clause 33]

Background to the legislation

2.90 Currently, there is no provision which formally states that unapplied previous FIF losses (i.e., FIF losses reduced to the extent they have been used to enable a taxpayer to claim a deduction from assessable income under section 532/533) are to be calculated in, or converted into, the same currency as the gross FIF income from which they are to be deducted. For instance, the currency conversion rules for the purposes of the market value method currently only apply when determining the FIF amount in section 538 and not in the calculation of FIF income in section 542.

2.91 Under section 542, unapplied previous FIF losses are deducted from gross FIF income in order to determine the amount of FIF income which is to be included in the relevant taxpayer's assessable income. However, it is not formally stated that these unapplied previous FIF losses be calculated in, or converted into, the same currency as that in which a FIF's gross FIF income is expressed. A similar problem arises under the cash surrender value method for determining the FIF income of a FLP.

2.92 It is not normally the case that an unapplied previous FIF loss would be expressed in a different currency to gross FIF income. For instance, subsection 539(6) has the effect that the values of amounts used in the calculation of FIF income are to be obtained from a particular stock exchange for as long as it is practicable to do so. Accordingly, amounts used in the calculation of FIF income under the market value method would normally be expressed in the currency used by a particular stock exchange (subsection 538(3) and paragraph 538(2)(a)).

2.93 One case where an unapplied previous FIF loss might not be expressed in the currency in which gross FIF income is calculated is where a taxpayer elects under subsection 538(4) to express amounts relevant to the calculation of gross FIF income in Australian currency. In this case, an unapplied previous FIF loss would not be calculated using amounts expressed in Australian currency to the extent those amounts are referable to notional accounting periods of a FIF prior to that in which the election was made.

Explanation of proposed amendments

2.94 New subsections 542(8) will ensure that an unapplied previous FIF loss (subsections 542(5), (6) and (7)) is calculated using the same currency as the currency in which gross FIF income (paragraph 542(2)(a)) is expressed. Where an amount used in the calculation of an unapplied previous FIF loss is expressed in a different currency to that in which gross FIF income is expressed, the amount is to be converted to the currency in which the gross FIF income is expressed using the rate of exchange which applied at the end of the notional accounting period of the FIF to which the amount relates. [Clause 31]

Example

2.95 A taxpayer elects under subsection 538(4) to express amounts used in the calculation of gross FIF income in Australian currency from the notional accounting period 1 July 1995 to 30 June 1996. In addition, there is a FIF loss (section 541) of $(US)100 from the notional accounting period 1 July 1993 to 30 June 1994 and gross FIF income of $(US)30 from the notional accounting period 1 July 1994 to 30 June 1995.

2.96 In this case, new subsection 542(8) requires that in calculating the amount of an unapplied previous FIF loss for the notional accounting period 1 July 1995 to 30 June 1996:

(i)

the $(US)100 FIF loss is to be converted to Australian currency using the rate of exchange applicable at 30 June 1994; and

(ii)

the $(US)30 gross FIF income is to be converted to Australian currency using the rate of exchange applicable at 30 June 1995.

2.97 Even though there is currently no formal step stated in the law that the amount of an unapplied previous FIF loss is to be expressed in the same currency as the amount of gross FIF income against which it is to be offset, it is considered that such a step is clearly implied. The proposed amendments are intended only to clarify the existing law by stating this step in calculating FIF income.

2.98 New subsection 600(8) provides similar currency conversion rules for the purposes of the cash surrender value method for determining FIF income from a FLP. [Clause 32]

Section 12 - Reduction of attribution percentage under the calculation method

Summary of the amendments

Purpose of the amendments

2.99 The amendments will provide that the attribution percentage under the calculation method for determining FIF income is reduced in cases where the total interests held in a FIF by Australian residents exceed 100%. [Clause 34]

Date of effect

2.100 The amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993. [Subclause 2(2)]

Background to the legislation

2.101 Currently, it is possible for Australian residents to be attributed more than 100% of the calculated profit of a FIF under the calculation method for determining FIF income. This is because a taxpayer's attribution percentage is normally calculated with regard to FIF interests which the taxpayer is entitled to acquire (section 581 and subsection 582(6)). It follows that a certain amount of double counting of FIF interests will arise if an Australian resident holds an interest in a FIF and another Australian resident is entitled to acquire an interest in the FIF. Thus, it is currently possible for the total of interests held by Australian residents in a FIF to exceed 100% and therefore those taxpayers when taken as a whole may be taxed on more than 100% of the FIF's profits.

2.102 A certain amount of double counting of FIF interests arising from a taxpayer's entitlement to acquire an interest in a FIF is considered necessary in order to prevent taxpayers from disguising their rights to the accumulated profits of a FIF. Of particular concern are instances where a non-resident holds an interest in a FIF and an Australian resident is entitled to acquire an interest in the FIF. In these cases, the Australian resident may benefit from the accumulation of income in the FIF by exercising the right to acquire an interest in the FIF at some time in the future. Thus, unless the FIF measures apply to the taxpayer's entitlement to acquire an interest in the FIF, the taxpayer could benefit from the accumulation of profits by the FIF and not be taxed under the FIF measures as those profits accrue.

2.103 However, despite the abovementioned concerns, it is not considered necessary to attribute more than 100% of a FIF's calculated profit to Australian residents in order to safeguard the operation of the FIF measures.

Explanation of the amendments

2.104 New subsections 581(4) and 582(6A) will reduce a taxpayer's attribution percentage under the calculation method for determining FIF income in some instances. This reduction will apply where the total attribution percentages held by Australian residents, to whom the operative provision of the FIF measures (i.e., section 529) applies in relation to a particular FIF, exceed 100%. In these cases, the attribution percentage will be reduced by a proportion based upon the extent to which the total of the attribution percentages held by those Australian residents exceed 100%. [Clauses 35 and 36]

Section 13 - Attribution of dividends paid from profits taxed under the FIF measures

Summary of the amendments

Purpose of the amendments

2.105 The amendments will provide that the attributable portion of a dividend under the CFC measures is reduced to the extent the dividend was paid out of profits upon which a taxpayer has been taxed previously under the FIF measures. [Clause 40]

Date of effect

2.106 The amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993. [Subclause 2(2)]

Background to the legislation

2.107 An Australian controller of a CFC may be taxed under the CFC measures on a share of certain dividends received by that CFC from another CFC (section 458). The amount of the dividend so taxed is reduced to the extent the dividend was paid out of profits which have been taxed under the CFC measures. This reduction prevents double taxation of those profits.

2.108 The extent to which a dividend is treated as having been paid out of previously taxed profits is measured by the amount of an attribution debit which arises for the entity paying the dividend. Further, for this purpose, the attribution debit is grossed-up to the amount of an attribution debit which would have arisen if the attributable taxpayer wholly owned the CFC. The attribution debit is grossed-up in this way because the section 458 amount is calculated with regard to gross amounts rather than an attributable taxpayer's share of those amounts. In comparison, an attribution debit relates to the profits of a CFC upon which a particular taxpayer has been taxed under the CFC measures. Thus, if not for grossing-up of an attribution debit, a taxpayer would not receive sufficient relief from double taxation for amounts which have been taxed previously under the CFC measures when calculating the amount of a dividend which is to be attributed under section 458. The following example illustrates why this grossing-up is necessary.

Example

Facts

2.109 An Australian company (Ausco) owns 50% of a company in a listed country (CFC1) which in turn holds a company in an unlisted country (CFC2) as is illustrated by the following diagram:

2.110 In year 1, all of CFC2's profits are included in its attributable income. CFC2's attributable income is calculated to be $100,000 and Ausco is taxed on $50,000 (i.e., $100,000 attributable income x 50% attribution percentage) of CFC2's attributable income. This gives rise to an attribution credit for CFC2 of $50,000 in relation to Ausco.

2.111 In year 2, CFC2 distributes all of its profits from year 1 as a dividend to CFC1.

Consequences

2.112 Ausco has been taxed on the profits out of which CFC2 paid the dividend in year 1 and therefore should not be taxed again on the dividend. Thus, when calculating the amount of the dividend which will be attributed to Ausco under section 458, the dividend should first be reduced to the extent that Ausco has been taxed on the profits out of which the dividend was paid. In this case, the reduction should be the whole of the dividend, i.e., $100,000.

2.113 This reduction is provided for in section 458 in that the attributable dividend is reduced by the grossed-up attribution debit which arises for a company as a result of paying the dividend. Thus, the $100,000 dividend would be reduced by $100,000 (i.e., $50,000 attribution debit arising as a result of CFC2 paying the dividend divided by Ausco's attribution percentage of 50% in CFC2) when determining the extent to which Ausco will be taxed on the dividend.

2.114 It can be seen from the above example that in order to achieve the correct result under section 458, it is necessary to gross up the attribution debit which arises for CFC2 on paying the dividend. It would not be sufficient to reduce the dividend by the attribution debit which arises for CFC2 as a result of paying the dividend. This is because the attribution debit only reflects the amount of CFC2's profits upon which Ausco has been taxed whereas the calculation of the taxable portion of the dividend under section 458 is determined with regard to the whole dividend and not just Ausco's share of that dividend. Thus, Ausco would not receive sufficient relief from double taxation unless the dividend which is attributable under section 458 is reduced by the grossed-up amount of the attribution debit which arises for CFC2 as a result of paying the dividend.

2.115 Currently, however, the section 458 amount is not reduced by the "grossed-up" amount of a FIF attribution debit which arises for the paying entity. Broadly, a FIF attribution debit reflects the extent to which a dividend has been paid out of profits which have been taxed previously under the FIF measures. Accordingly, double taxation of the paying entity's profits under the FIF measures and section 458 may arise unless a dividend paid from those profits is reduced for the purposes of section 458 by the "grossed-up" amount of a FIF attribution debit which arises for the entity which pays the dividend.

2.116 It should be noted that most non-portfolio dividends paid to a CFC will not give rise to a FIF attribution debit for the paying entity. This is because the attribution account system for the purposes of the CFC measures is used to keep track of profits which have been taxed previously as a result of FIF income being included in the attributable income of a CFC. Nevertheless, it is possible in some circumstances for non-portfolio dividends paid to a CFC to give rise to a FIF attribution debit for the paying entity. This may happen, for instance, where a CFC and an attributable taxpayer both hold a direct interest in a FIF (these may be interests with different distribution profiles). In this case, the CFC may receive a distribution from the FIF which gives rise to a FIF attribution debit in relation to the taxpayer (section 606) because the CFC is a FIF attribution account entity. Accordingly, a FIF attribution debit may arise where the CFC subsequently pays a non-portfolio dividend to another CFC in relation to the taxpayer. Moreover, section 458 may apply to that dividend.

Explanation of the amendments

2.117 The amendments will ensure that the attributable portion of a dividend under the CFC measures is reduced to the extent the dividend was paid out of profits upon which a taxpayer has been taxed previously under the FIF measures. This will be achieved by modifying the definition of formula component "GD" in section 458 to take into account a FIF attribution debit which arises as a result of a dividend paid by a CFC. [Clause 41]

Section 14 - Technical amendments

Summary of the amendments

Purpose of the amendments

2.118 The amendments will correct technical problems with the drafting of sections 511 and 523. [Clauses 37 and 42]

Date of effect

2.119 The amendments to section 511 and subparagraph 523(b)(ii)(C) will apply from the commencement of the FIF measures, i.e., 1 January 1993. The amendment of subparagraph 523(b)(ii)(D) is to apply to notional accounting periods of FIFs ending after the commencement of the 1994-95 year of income. [Subclause 2(2) and clause 39]

Background to the legislation

2.120 The exemption from the FIF measures in section 523 for foreign companies principally engaged in several activities basically mirrors the exemption in section 511 for foreign companies engaged in activities connected with real property (the exemption in section 523 deals with a number of activities other than those in connection with real property). However, there are differences between sub-subparagraphs 511(b)(ii)(C) and 523(b)(ii)(C), and also between sub-subparagraphs 511(b)(ii)(D) and 523(b)(ii)(D). These differences arise because the words "or by a wholly-owned subsidiary of the company that was principally engaged in carrying on the business of providing those services through directors or employees of that subsidiary" were inserted at the end of sub-subparagraph 523(b)(ii)(D) rather than sub-subparagraph 523(b)(ii)(C) as was intended. The amendments will correct this anomaly.

2.121 Another technical problem is that the third last line of section 511 refers to subparagraph (a)(i). The reference should be to paragraph (a).

Explanation of the amendments

2.122 The amendments will remove the words "or by a wholly-owned subsidiary of the company that was principally engaged in carrying on the business of providing those services through directors or employees of that subsidiary" from sub-subparagraph 523(b)(ii)(D) and insert them at the end of subparagraph 523(b)(ii)(C) [clause 38]. The amendments will also correct the reference to subparagraph (a)(i) in section 511 so that it refers to paragraph (a) [clause 43].

GLOSSARY

Attributable taxpayer"

A person who has, in general, a 10 per cent or greater interest in a Controlled Foreign Company or in a non-resident trust for the purposes of Part X of the Principal Act.

Attribution account (including FIF attribution account)

An attribution account establishes a link between:

•

income that has been attributed to the taxpayer from an entity; and

•

income actually distributed to that taxpayer by the entity.

This makes it possible to identify when, and to what extent, it is necessary to provide relief from double taxation on the distribution of profits which have been taxed on an accruals basis.

Calculation method

An alternative method, available at the taxpayer's election, to determine the amount to be included in a taxpayer's assessable income under the FIF measures. The amount is calculated by determining a taxpayer's share of a FIF's profits. A FIF's profits are calculated using rules similar (but simpler than) those that apply for a resident taxpayer.

Cash surrender value method

Method of taxation applying to taxpayers who have an interest in a FLP. In general, the amount included in assessable income is calculated by measuring the increase, if any, in the cash surrender value of an interest in a FLP between the last day of the previous notional accounting period and the last day of the current notional accounting period, with an adjustment for acquisitions, disposals and distribution.

Controlled foreign company or CFC

A company that is not a resident of Australia and is controlled by five or fewer residents- see Part X of the Principal Act.

Deemed rate of return method

The backup method to determine the amount to be included in the taxpayer's assessable income under the FIF measures which is used where it is not possible to use the market value method and a taxpayer does not choose to use the calculation method. The amount is calculated by applying a deemed rate of return to the value of the FIF or FLP interest.

FIF

A foreign investment fund.

FIF interest

An interest in a foreign investment fund.

Foreign Life Policy (FLP)

A foreign life policy is a life assurance policy (as defined in subsection 482(2)) issued by a non-resident.

Interest in a FIF

The total of all instruments in a company held by the taxpayer (such as a share, option, convertible note etc.) or in a trust (such as a unit, option to acquire a unit, a note convertible into a unit).

Market value method

The primary method to determine the amount to be included in the taxpayer's assessable income under the FIF measures. In general, the amount is calculated by measuring the increase, if any, in the market value of a FIF interest between the last day of the previous notional accounting period and the last day of the current notional accounting period with adjustment for acquisitions, disposals and distributions.

Notional accounting period

The period by reference to which the FIF measures will apply. In general, this will be the same as the taxpayer's year of income. The taxpayer may elect that the notional accounting period coincide with the accounting period that the FIF uses for reporting to shareholders or beneficiaries. In relation to FLPs, the taxpayer may elect that the notional accounting period of the FLP coincide with the period for which cash surrender values are available.

Statutory accounting period

The statutory accounting period is used as the measurement period of the CFC measures. It is a period of 12 months, ending on 30 June, unless the foreign company has elected for a 12 month period ending on another day (section 319).

Transferor trust

A non-resident trust to which a resident taxpayer has made, or is deemed to have made, a transfer of property or services under Division 6AAA of Part III of the Act.

CHAPTER 3 - REGIONAL HEADQUARTERS - INCOME TAX CONCESSIONS

Overview

3.1 The Bill will amend the Income Tax Assessment Act 1936 in order to provide certain concessions designed to encourage multinational corporations to locate their regional headquarters (RHQs) in Australia.

Summary of the amendments

Purpose of the amendments

3.2 The Bill proposes to:

•

allow deductions for certain business relocation expenses associated with the setup of an RHQ company in Australia [ clause 110]; and

•

exempt non-residents from liability to dividend withholding tax (DWT) on dividends paid out of certain foreign source dividend income of Australian resident companies [ clause 44].

Date of effect

3.3 Deductions for setup costs will be available for expenses incurred or reimbursements made on or after 1 July 1994. [Clause 111 - new 82CA]

3.4 In the case of the DWT exemption, resident companies will be able to credit their Foreign Dividend Account (FDA) with qualifying foreign source dividend income received on or after 1 July 1994. From that date, a resident company that has a surplus in its FDA will be able to pay a dividend that consists of an FDA declaration amount. [Clause 49]

Background to the legislation

What is an RHQ?

3.5 The generally strong economic development evident in the Asia/Pacific region has prompted multinational corporations to establish a base from which to provide support services for their new or expanding operations in the region. The term RHQ broadly refers to an entity that provides support services to its associated companies located in other countries in the region and acts as an intermediary between the associated companies and the parent company located elsewhere, for example, in Europe or North America. In the Australian context an RHQ is an Australian company which is established to perform the above mentioned functions for associated companies located in our region.

The aim of the RHQ concessions

3.6 The measures were announced by the Government in its Working Nation White Paper on Employment and Growth as part of a policy to encourage multinational corporations to locate their RHQs in Australia.

The concessions

3.7 The White Paper announced the Government's decision to provide an exemption from dividend withholding tax for certain foreign source dividend income flowing through Australian resident companies and to allow certain costs associated with the setup of an RHQ company in Australia to be deductible for income tax purposes.

3.8 Although introduced as part of the RHQ policy initiatives, the DWT exemption will not be limited to shareholders of companies performing RHQ activities in Australia. It will also be available to non-resident shareholders of all Australian resident companies which derive qualifying foreign source dividend income.

Deductibility of setup costs

3.9 During the establishment period an RHQ company may not be an operating business and will therefore not be deriving assessable income. Alternatively, an RHQ may establish its operations but may not derive assessable income for some time. Under the law as it now stands setup costs incurred prior to the operations commencing in Australia or prior to the RHQ company deriving assessable income would normally be treated as outgoings of a capital nature. In certain circumstance these costs would be depreciable and in others may not be deductible at all.

3.10 To be eligible for the proposed deduction a company will need to be an RHQ and incur the setup costs or reimburse an associated company within a designated period.

Dividend withholding tax exemption

3.11 Currently, a non-resident shareholder's liability to DWT on a dividend paid by an Australian resident company depends on the extent to which the dividend is franked (that is, the extent to which Australian company income tax has been paid) (paragraph 128B(3)(ga)) and whether Australia has concluded a Double Tax Agreement with the shareholder's country of residence. Under these agreements, DWT is generally imposed at the rate of 15 per cent, reduced from the 30% rate imposed (other than for residents of Papua New Guinea) by the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974.

3.12 Under the new arrangements a non-resident will be exempt from DWT to the extent that the dividend consists of an FDA declaration amount. A dividend will consist of an FDA declaration amount if the company has declared a percentage that allocates the surplus in its FDA to its shareholders.

Explanation of the amendments

Deductibility of RHQ setup costs

Object of the concession

3.13 To assist readers in using the legislation, a proposed new Subdivision - Subdivision CB of Division 3 of Part III - is to be inserted in the Income Tax Assessment Act 1936 [clause 111] . The object of the Subdivision, which is set out in simple terms, is to provide an income tax deduction for certain expenditure incurred by companies which are authorised by the Treasurer to establish a regional headquarters in Australia [new section 82C] .

Commencement date

3.14 The tax concession for setup costs of an RHQ company will apply to eligible expenditure incurred by an RHQ company on or after 1 July 1994. [New section 82CA]

Only eligible companies can become RHQs

3.15 Foreign corporations will have a choice whether to relocate to Australia or establish a new company in Australia. The company, however, must be in existence at the time it makes an application to become an RHQ company. It should apply to the Treasurer in writing to become an RHQ company and should provide enough information to show that it intends to establish facilities in Australia for the main purpose of providing regional headquarters support. [New section 82CD]

Becoming an RHQ company

3.16 An RHQ company is defined as a company which has been determined by the Treasurer under new section 82CE to be an RHQ company [new section 82CB] . Based on a company's application the Treasurer may make a written determination that the company is an RHQ company [new subsection 82CE(1)] . The determination under new subsection 82CE(3) must be made in accordance with written guidelines made by the Treasurer [new paragraph 82CE(4)] .

3.17 Both the determination made by the Treasurer and the guidelines are disallowable instruments for the purposes of section 46A of the Acts Interpretation Act 1901. Broadly speaking, this means that the disallowable instruments must be laid before both Houses of Parliament and that either House may pass a resolution disallowing any of the instruments. [New subsection 82CE(5)]

RHQ setup costs

What type of RHQ setup costs are to be deductible?

•

expenditure in setting up facilities in Australia, the main purpose of which is to provide " regional headquarters support" (see paragraph 3.22); and

•

reimbursement of the above type of setup costs of the RHQ company that were previously incurred by an associated offshore company (see paragraph 3.20).

3.18 In either case the expenditure may be of a revenue or capital nature. Certain costs, however, are expressly excluded . They are:

•

costs associated with undertaking a feasibility study;

•

the cost of purchasing tangible assets such as plant, equipment, land and buildings; and

•

the cost of moving an RHQ from one location in Australia to another location in Australia. [New paragraphs 82CB(1) (c) (d) and (e)]

Time requirements

3.19 RHQ setup costs will be allowable deductions if they are incurred no earlier than 12 months before and no later than 12 months after the date the RHQ company first derives assessable income from the provision of regional headquarters support [new subparagraph 82CB(1)(a)(ii)] . This will, in effect, give RHQs a 24 month time period in which to incur the costs. However, in the case of RHQ setup costs that are actually incurred by the RHQ company, (as distinct from any costs that are reimbursed to an associated offshore company) the 12 month period cannot extend back before 1 July 1994 [new section 82CA] .

Reimbursements to associated companies

3.20 A reimbursement to an associated offshore company will be allowed as an income tax deduction if the expenditure incurred by the associated offshore company would have qualified as setup costs if the RHQ company had actually incurred the expenditure itself.

3.21 Although reimbursement costs are also covered by the "12 months before and 12 months after" rule, they are not restricted to expenditure incurred on or after 1 July 1994 as is the case with setup costs incurred directly by an RHQ company. [New paragraph 82CB(1)(b)]

Examples

The Treasurer has determined that a company is an RHQ company from 15 July 1994. Assume the RHQ company first derives assessable income specifically from the provision of regional headquarters support on 29July 1994. The RHQ company can claim any setup costs as allowable deductions which are incurred on and after 1 July 1994 till 29 July 1995.

Given the above facts if an associated offshore company incurred setup costs on behalf of an RHQ company on 1 April 1994 and the RHQ company reimburses the associated offshore company on 31 July 1994, the reimbursement would be an allowable deduction to the RHQ company as the expense was incurred by the RHQ company after 1 July 1994 even though it was incurred by the associated offshore company before 1July1994. The important fact is that reimbursement was made in respect of expenditure incurred within the first 12 month period.

However, if the associated company incurred setup costs on behalf of the RHQ company on 30 June 1993 the costs would not be deductible as they were first incurred outside the first 12 month period.

Regional headquarters support

3.22 In order for a company to become an RHQ company the Treasurer needs to be satisfied that a company intends to establish facilities with the main purpose of providing "regional headquarters support".

3.23 'Regional headquarters support' is defined to mean the provision of 'management related services' , 'data services' or 'software support services' to its 'associated companies' or parts of itself ( e.g. a branch) which are located in countries other than Australia. These terms are discussed below. [New subsection 82CB(2)]

3.24 The following services are all included in the definition of 'management related services':

•

finance and treasury services;

•

business planning services;

•

marketing services;

•

accounting services; and

•

research and development services.

3.25 Examples of services which are considered to fall within this definition are managing the finances of the associated offshore companies, e.g. the management of cash balances, borrowings and lending, new business development and logistical support services. [New82CB(1)]

3.26 The definition of the term "data services" makes it clear that the provision of data services must involve a substantial input, transmission or manipulation of data or the production of information from data. Examples of data services will be providing telecommunication functions for the transmission of data to and from the RHQ company and its associated offshore companies and providing a central booking system, e.g. an airline booking system for use by the associated offshore companies. [New subsection 82CB(3)]

3.27 The term 'software support services' is given the broad meaning of providing software support to clients which consists of advice and assistance in relation to computer software sold by the company. Examples of software support services would be the provision of a 'help desk' facility to provide advice and assistance to computer users working for the associated offshore companies and/or providing computer programming assistance to those users. [New subsection 82CB(4)]

3.28 In basic terms two companies are an 'associated company' if one controls directly or indirectly more than 10% of the voting power in the other company, or a third company controls more than 10% of the voting power in both of them. [New section 82CC]

Dividend withholding tax exemption

Object of the concession

3.29 The object of the new exemption is to alleviate an impediment to the investment by non-residents in Australian resident companies that derive foreign source dividend income which otherwise does not attract Australian income tax.

3.30 A proposed new subdivision - Subdivision B of Division 11A of Part III - is to be inserted in the Income Tax Assessment Act 1936 [clause 48] . The object of the Subdivision is to make provision for the operation of foreign dividend accounts (FDAs) for the purpose of the exemption from withholding tax provided by paragraph 128B(3)(gaa) [new section 128S] .

The exemption

3.31 A non-resident who derives dividend income will be exempt from DWT to the extent that the dividend consists of a 'foreign dividend account declaration amount' (FDA amount). [New paragraph 128B(3)(gaa)]

3.32 The exemption will apply to the part of a dividend that is not already exempt under paragraph 128B(3)(ga). That is, where the dividend has been franked, the new exemption will apply to the unfranked part of the dividend. Under the imputation system, a DWT exemption already applies to the franked amount of the dividend. The franked amount represents profits that have been taxed in Australia at the company level.

Certain income not included in assessable income

3.33 The Bill will also amend section 128D of the Income Tax Assessment Act 1936. Without this amendment the dividends which are to be exempt from withholding tax would technically be subject to tax under the normal assessment process. [Clause 47]

3.34 An FDA amount results from the declaration, in accordance with new section 128TC , of a 'foreign dividend account declaration percentage' (FDA declaration percentage) by the company paying the dividend.

3.35 A resident company will be able to specify an FDA declaration percentage if qualifying dividends are paid to the company on or after 1July 1994. The qualifying categories of dividend that are to be credited to the FDA are defined in new subsection 128TA(1) . These are:

'non-portfolio dividends' as currently defined by section 317 that are:

(a)

exempt from income tax by section 23AJ;

(b)

non-exempt dividends for which an entitlement to a foreign tax credit under sections 160AF or 160AFC may arise; and

•

dividends that consist of an FDA amount and are paid by a related company as defined by subsection 51AE(16).

3.36 Dividends other than non-portfolio dividends and dividend income exempt from income tax under sections 23AI or 23AK are excluded from the new arrangements.

3.37 Section 23AI and 23AK exempt dividends are paid out of attributed income (under the controlled foreign companies or the foreign investment fund provisions) which has been subject to Australian tax. Dividends paid out of this income are catered for under existing law as companies can frank the dividends thereby exempting them from DWT.

Amount of a dividend

3.38 Because of the way the foreign tax credit system operates, any dividend income received by an Australian multinational would be grossed up by any foreign tax paid (including any underlying tax on the profits from which the dividends are paid), thus artificially inflating the amount of a dividend which is to be subject to the withholding tax exemption. New 128SA will ensure that only the net dividend received is taken into account. The net dividend properly reflects the profit amount capable of being distributed by a resident company to its own shareholders. [Clause48]

The foreign dividend account (FDA)

3.39 The FDA will be a notional account which will quantify on any given day the amount of distributable profits that can be paid as DWT-free dividends. Basically, the FDA will be credited with amounts of qualifying dividends paid on or after 1 July 1994 and debited for expenditure relating to the qualifying dividends and for the part of the dividends, if any, on which Australian tax is payable.

3.40 The FDA will also be debited when a dividend to which the new exemption applies is paid. This will occur when an FDA surplus exists, that is, where the FDA credits exceed the FDA debits [new subsection 128T(1)] and the company makes an FDA declaration in relation to the dividend.

Section 23AJ exempt dividend income

3.41 Dividend income is exempt under section 23AJ where 'non-portfolio' dividends are received by a resident company from a company resident in either a listed or unlisted country and to the extent that the dividend is an 'exempting receipt' as defined by section 380.

3.42 'Non-portfolio dividend' is defined by section 317. Broadly speaking, a non-portfolio dividend is a dividend where the recipient company has a voting interest of at least 10% of the voting power in the company paying the dividend.

FDA credit

3.43 The recipient company will, at the time the dividend is paid, be able to credit the FDA with the amount of the dividend that is exempt under section 23AJ. [New section 128TA]

FDA debit

3.44 If a company incurs expenditure, on or after 1 July 1994, that is attributable to the section 23AJ exempt dividend income it derives, its distributable profits will reflect the corresponding reduction in the company's ability to pay dividends from this class of income. That reduction will also be reflected in the FDA. An FDA debit, equal to the amount of the expenditure, will arise at the time such expenditure is incurred. [New section 128TB]

Qualifying non-exempt dividend income

3.45 The second category of qualifying dividends are those that are both non-portfolio and non-exempt dividends where the recipient company is taken, under Division 18 of Part III of the Income Tax Assessment Act 1936, to have paid and to have been personally liable for foreign tax in respect of the dividends.

FDA credit

3.46 The recipient company will, at the time the dividend is paid, be able to credit the FDA with the amount of the dividend. [New128TA]

FDA debit

3.47 If a company incurs expenditure, on or after 1 July 1994, that is attributable to qualifying non-exempt dividend income it derives, its distributable profits will reflect the corresponding reduction in the company's ability to pay dividends from this class of income. That reduction will also be reflected in the FDA. An FDA debit, equal to the amount of the expenditure, will arise at the time such expenditure is incurred. [New section 128TB]

3.48 Because qualifying non-exempt dividends are subject to Australian income tax, a portion of the income of that class will be capable of being distributed as a franked dividend. As a non-resident is exempt from DWT on the franked amount of the dividend, the FDA mechanism would confer a double exemption from DWT if the taxed component of qualifying non-exempt dividends were not excluded. An FDA debit for the "Australian-taxable dividend amount" will therefore prevent the double counting of the DWT-exempt component.

Australian-taxable dividend amount

3.49 The "Australian-taxable dividend amount" is an approximation of the part of a company's qualifying non-exempt dividend income that is not relieved from income tax by foreign tax credits under Division 18 of Part III of the Income Tax Assessment Act 1936.

3.50 It is calculated using the following formula [new subsection 128TB(2)] :

(COMPANY TAX RATE [GROSSED-UP DIVIDEND AMOUNT - DIVIDEND DEDUCTIONS] - FOREIGN TAX ON DIVIDENDS) / COMPANY TAX RATE


3.51 This formula simplifies the calculation that would otherwise need to be made to exclude the part of the dividend on which Australian tax is payable.

3.52 The components of the formula are as follows:

3.53 The following example illustrates the calculation of the Australian-taxable dividend amount.

Example

Given the following:

Qualifying non-exempt dividends 19 000

Foreign withholding tax 3 000

Foreign underlying tax 2 000

Allowable deductions 4 000

Company tax rate = 33%

Then:

Foreign tax on dividends = $5 000

Grossed-up dividends = $24 000

Therefore, FDA debit for the Australian-taxable dividend amount

= [ .33 ( 24000 - 4000 ) - 5000 ] .33


= $4 848

3.54 An FDA debit equal to the Australian-taxable dividend amount will arise at the end of each year of income ending on or after 1 July 1994. [New subsection 128TB(4)]

Dividends paid to related companies

3.55 An Australian company will be able to pay a dividend, to the extent that it is matched by an FDA amount, to a 'related' company as defined by subsection 51AE(16) [new section 128TA] . The payment of the dividend will give rise to a credit in the related company's FDA. This will allow companies with group structures to pass on qualifying dividend income to other members of the group without the income losing its DWT-exempt character. This could occur for example where qualifying foreign dividend income is received by one member of the group that pays dividends to another Australian resident member which in turn pays dividends to non-resident shareholders.

Related companies

3.56 In basic terms two companies are related if one company has 100% ownership in the other or they both share 100% common ownership.

FDA credit

3.57 The recipient company will, at the time the dividend is paid, be able to credit the FDA with the FDA amount. [New section 128TA]

FDA debit

3.58 If a company incurs expenditure, on or after 1 July 1994, that is attributable to dividends that consist of FDA amounts paid to it by a related company, its distributable profits will reflect the corresponding reduction in the company's ability to pay dividends from this class of income. That reduction will also be reflected in the FDA. An FDA debit, equal to the same portion of the expenditure as the dividends consist of FDA amounts, will arise at the time such expenditure is incurred [new 128TB] . The apportioning of expenditure between that incurred in relation to the part that consists of an FDA amount and that incurred in relation to any other dividend income is provided for by a formula in new subparagraph 128TB(3)(c)(ii) .

3.59 The following flowcharts illustrate the effect on the FDA of:

(A)

a foreign source dividend paid to a resident company; and

(B)

a dividend (that consists of an FDA amount) paid to a resident company by a related company.

Foreign dividend account declaration

3.60 A resident company that has an FDA surplus will be able to pay a dividend that consists of an FDA amount. A dividend that is franked can only consist of an FDA amount to the extent of the unfranked amount. A fully franked dividend cannot, therefore, consist of an FDA amount but it will be possible for an unfranked dividend to consist entirely of an FDA amount.

3.61 The extent to which a dividend consists of an FDA amount is to be determined by a declaration made by the company before the dividend is paid. That declaration must be in writing and specify a percentage, the 'FDA declaration percentage', by which the dividends to be paid on a particular day will consist of FDA amounts. [New subsection 128TC(1)]

3.62 The FDA amount for a dividend will be calculated by multiplying the amount of the dividend by the FDA declaration percentage. [New subsection 128TC(4)]

3.63 The FDA declaration percentage will have an upper limit that is determined by the formula in new subsection 128TC(2) . The object of the formula is to encourage the equitable distribution of a company's FDA surplus among all shareholders. At the same time it is designed to discourage companies from paying dividends that consist of FDA amounts to particular non-resident shareholders to the exclusion of resident shareholders. The formula requires the FDA surplus at the beginning of the day to be greater than or equal to the amount calculated as follows:

FDA DECLARATION PERCENTAGE[ TOTAL NON-RESIDENT DIVIDENDS + [MAXIMUM NON_RESIDENT DIVIDEND PERCENTAGE * TOTAL CALCULATION VALUE FOR DIVIDEND PURPOSES OF OTHER SHARES ]]


The components of the formula are as follows:

3.64 The formula requires the FDA declaration percentage to be applied against the sum of:

•

the total dividends to be paid to non-resident shareholders or related companies; and

•

the amount calculated by multiplying the 'maximum non-resident dividend percentage' with the 'total calculation value for dividend purposes of other shares'.

3.65 The 'maximum non-resident dividend percentage' component accommodates the possibility of dividends being paid to non-residents or related companies at different rates on different classes of share. However, it would ordinarily be expected that only one percentage figure would exist. That percentage is then multiplied by the total 'calculation value for dividend purposes' of all shares other than those on which dividends have already been taken into account in the 'total non-resident dividends' component.

3.66 The 'total calculation value for dividend purposes of other shares' component covers shares on which no dividends are paid on the relevant day as well as shares on which dividends are paid (other than to non-resident or related company shareholders).

Example

Given, on the day dividends are to be paid by a resident company:

•

The following extract from a company's shareholders' equity account:

$

Paid-up ordinary share capital 100 000

Preference share capital 1 000

Share premium reserve 99 000

Where:

•

The amount credited to the share premium reserve was subscribed entirely by preference shareholders. A dividend of 5% per annum payable on preference shares is calculated by reference to the sum of the nominal capital of $1 per share and share premium of $99 per share.

•

The company makes a written FDA declaration specifying an FDA declaration percentage of 50% in relation to dividends to be paid to ordinary shareholders on that day.

•

The dividend to be paid on ordinary shares is 10c per share. The nominal, or par, value of ordinary shares is $1 The dividend rate is therefore 10%.

•

No dividend is to be paid to preference shareholders on the day.

•

The shareholder structure of the company consists of resident shareholders holding 40% of the issued ordinary shares and non-resident shareholders holding 60% of the issued ordinary shares.

•

The surplus in the company's FDA at the beginning of the day is $12 000.

Then, the components of the formula for the FDA percentage limit are:

3.67 The formula with each of its components is as follows:

12,000 > or = than [6000 + [10% of $140000]]
that is, $12,000 > or = than 10,000


3.68 It shows that the FDA declaration percentage specified by the company does not exceed the limit in the formula.

Foreign dividend account declaration amount (FDA amount)

3.69 The percentage a company specifies in an FDA declaration will be used to calculate the FDA amount for all of the dividends paid on the day to which the declaration relates. An FDA debit equal to the sum of the FDA amounts on those dividends will arise immediately after the beginning of the day on which the dividends are paid [new section 128TB] . This debit adjusts the FDA surplus to reflect the reduced amount of profits sourced from qualifying foreign dividends that remain available for distribution to shareholders.

3.70 In the example above, the FDA debit that arises, under new paragraph 128TB(1)(a) , in relation to the FDA amounts of the dividends paid would total $5 000. This is calculated by applying the 50% FDA declaration percentage to the total amount of dividends paid.

Excessive 'FDA declaration percentage'

3.71 If a company declares a percentage that results in the formula calculation exceeding the company's FDA surplus at the beginning of the day, the declaration is to be treated as having effect as if the percentage declared had been such that the formula calculation would equate with the FDA surplus [new subsection 128TC(5)] . The effects of this will be:

•

a failure by the company to deduct sufficient withholding tax on dividends paid to non-residents. There would be a deficiency in DWT of the difference between the amount deducted and the amount that should have been deducted if the appropriate declaration percentage had been specified. A consequence of this is that the company will become liable, under section 221YQ, for the unpaid withholding tax and for any additional tax, under subsection 128C(3), for its late payment.

•

an incorrect recording of the FDA amount on dividend statements issued by the company to its shareholders. If that misstatement results in the incorrect deduction of withholding tax by another person, the company will become liable for the shortfall under new section 128TE .

Dividend statements

3.72 A shareholder will be notified of the extent to which a dividend consists of an FDA amount by a statement the company is required to provide either before or at the time the dividend is paid.

3.73 Dividend statements will be required by new subsection 128TD(1) to contain the following information:

(a)

if the dividend consists entirely of an FDA amount, a statement to the effect that a non-resident who derives the dividend is not liable to pay withholding tax on the dividend; or

(b)

if the dividend consists, in part, of an FDA amount:

the FDA amount;

the amount of the dividend that remains after deducting the sum of the FDA amount and any franked amount;

the amount of withholding tax, if any, deducted from the dividend.

3.74 A company may include this information in the statement it is already required, by section 160AQH, to provide to shareholders when it pays a frankable dividend [new subsection 128TD(2)] . Whether the information is included in that statement or in a separate statement, the statement will need to be in a form approved by the Commissioner of Taxation [new subsection 128TD(3)] .

3.75 The Commissioner intends to provide guidelines on the approved form of dividend statement required by new section 128TD by way of public ruling. The ruling may also prescribe any other information that new subsection 128TD(4) will require to be included in a dividend statement.

Penalty for incorrect dividend statement

3.76 A company that provides a shareholder with a dividend statement that overstates the FDA amount will become liable for an additional tax penalty. [New subsection 128TE(1)]

3.77 The amount of the additional tax penalty will be an amount equal to the withholding tax shortfall in relation to the dividend, reduced by any withholding tax shortfall:

for which the company would become liable as a result of an excessive FDA declaration percentage, as provided for by new 128TC(5) (see paragraph 3.69 above); or

that would result from an overstatement of the franked amount of the dividend [new subsection 128TE(2)] . Under section 160ARY, a company would be liable for franking additional tax if the franked amount of the dividend had been overstated. The franking additional tax would be of an amount equal to the overstatement of the franking rebate that a shareholder would have become entitled to if the shareholder were a resident of Australia

3.78 The amount of additional tax payable is to be determined by an assessment made by the Commissioner [new subsection 128TE(3)] . Notice of that assessment may be incorporated in a notice of assessment made under any other provision of the Income Tax Assessment Act 1936 [new subsection 128TE(4)] .

3.79 The operation of other provisions of the Income Tax Assessment Act 1936 dealing with assessments and the collection and recovery of tax will be extended to the additional tax penalty for incorrect dividend statements [new subsection 128TE(5)] . These provisions are as follows:

Record keeping

3.80 Section 262A will apply in relation to the proposed exemption and companies will be required to keep records for the purpose of ascertaining whether there is an FDA surplus and in relation to the FDA declaration. [New section 128TF]

Transitional

3.81 Resident companies will be able to declare an FDA percentage if qualifying dividends are paid to the company on or after 1 July 1994. However, a FDA declaration in relation to those dividends cannot be made until commencement of the legislation.

3.82 Companies will be able to make a declaration in relation to dividends paid in the transitional period within 90 days of commencement. The declarations will be effective on the date the dividends were paid and will remove the liability, that arose under the existing law at the time of making the payment, to deduct DWT. [Clause50]

CHAPTER 4 - SOCIAL SECURITY PAYMENTS

4.1 This Chapter explains the consequential amendments to the Income Tax Assessment Act 1936 (the Act) required as a result of the Social Security (Home Child Care and Partner Allowances) Legislation Amendment Act 1993. Section 1 deals with the home child care allowance and section 2 covers the partner allowance.

Section 1 - Home child care allowance and dependant rebate

Overview

4.2 The Bill contains the amendments to the Act which are necessary to complement the payment of the new 'home child care allowance' for couples with dependent children. The new allowance will be paid by the Department of Social Security to the dependent spouse from 29September 1994.

Summary of the amendments

Purpose of the amendments

4.3 The amendments will:

•

exempt home child care allowance payments from income tax;

•

remove a taxpayer's entitlement to the dependent spouse rebate where the taxpayer's spouse qualifies for the home child care allowance;

•

exclude the home child care allowance from separate net income and alter the separate net income test for partial rebate entitlements;

•

make necessary consequential amendments to the current zone rebates and rebates for members of the defence forces serving overseas and United Nations armed forces. These amendments are necessary to ensure that these taxpayers are not disadvantaged by the abolition of the with child dependent spouse rebate; and

•

make consequential amendments to the provisional tax provisions. [Clause 51]

Date of effect

4.4 The amendments will apply as follows:

•

the amendments to exempt the home child care allowance from income tax will apply to payments made on or after 29September 1994 [subclause 58(1)] ;

•

the amendments to the rebate entitlements, including the separate net income test amendments, will apply to assessments for the 1994-95 and later years of income [subclause58(2)] ;

•

the transitional amendments to the rebate entitlements will apply to assessments for the 1994-95 year of income [clause60] ;

•

the consequential amendments to the provisional tax provisions will apply to the calculation of provisional tax (including instalments) for the 1994-95 and later years of income [clause58] .

Background to the legislation

4.5 The Government announced in the 1993-94 Budget that the "with child" dependent spouse rebate would be abolished and replaced with the home child care allowance. The new allowance will be paid through the social security system commencing from 29 September 1994. As a result, the Act requires complementary amendment to accommodate the introduction of the home child care allowance.

Explanation of the amendments

4.6 As some terms are used frequently throughout this chapter, the following abbreviations are made. The relevant income tax provision is also shown:

HCCA Home child care allowance [Social Security legislation]

DSRD With child/student dependent spouse rebate [subsection159J(1B)]

DSR Without child dependent spouse rebate [subsection 159J(1)]

SNI Separate net income [subsection 159J(6)]

Exemption of HCCA payments from income tax

4.7 The amendments will exempt HCCA payments from income tax by introducing new section 24ABXA into the exemption provisions in Division1AA of Part III of the Income Tax Assessment Act 1936. Those provisions detail which Social Security allowances and pensions are exempt from tax. [Clauses 53 and 54]

Rebates for dependants

4.8 A taxpayer's entitlement to the DSRD is currently obtained through subsection 159J(1B). This is achieved by increasing the DSR entitlement under subsection 159J(1) by an additional amount when the taxpayer has a dependent child or student. The respective DSR and DSRD amounts for the 1993-94 year are $1188 and $1425. The amendments remove a taxpayer's entitlement to the DSRD by ceasing the operation of subsection 159J(1B) in respect of a dependent spouse [paragraph (a) of clause 57] . The amendments also remove a taxpayer's entitlement to the DSR if the taxpayer's dependent spouse qualifies for the HCCA. This is achieved by introducing a new definition of a "non-HCCA spouse" for rebate purposes [paragraphs (b) and (h) of clause 57] . This will be the case even where a spouse qualifies for the HCCA but is not entitled to payment. For example, under the HCCA legislation, a dependent spouse may not be entitled to HCCA payments because of:

•

income received; or

•

someone else receiving HCCA payments for the same child; or

•

the dependent spouse's partner is already receiving HCCA payments.

The income test is similar to the current legislation where the taxpayer would also be denied a DSRD because of the SNI test applied to the spouse's income.

4.9 Apart from the transitional 1994-95 year, there will be situations where there is a mix of DSR entitlement and HCCA qualification in a year of income because the dependent spouse does not qualify for the HCCA for the entire year. For example, HCCA will cease when a child completes secondary school during the year of income or HCCA will commence when a child is born during the year of income. The practical application of this will be an extension of the present arrangements [subsection 159J(3)] which will enable the Commissioner to pro-rata the full year amount of rebate to a partial rebate for the part of the year in which the taxpayer's dependent spouse does not qualify for the HCCA. [Paragraph (c) of clause 57]

4.10 Where the taxpayer has more than one dependent spouse the current legislation [subsection 159J(5A)] provides for the taxpayer to be entitled to the lesser of the rebate entitlements. Consistent with this approach, new subsection 159J(3B) will prevent any DSR entitlement if any of the dependent spouses qualify for the HCCA during the whole or part of the year of income. [Paragraph (d) of clause 57]

Separate net income - Partial rebates

4.11 The income test applied to HCCA recipients will incorporate a $282 annual income threshold as contained in subsection 159J(4) for the purposes of reducing DSR or DSRD entitlements where the taxpayer's spouse has SNI. Partial rebates under the new arrangements, where there is only DSR or a mix of DSR and HCCA entitlements, will therefore require the $282 threshold to be available on a pro-rata basis.

4.12 The existing arrangements consider the dependent spouse's SNI in respect of the part of the year in which the taxpayer is entitled to receive the DSR. With the introduction of HCCA, it will be necessary to reduce the $282 threshold to the amount which bears the same proportion to that threshold as the part of the year in which there is entitlement to the DSR bears to the full year [paragraphs (e) and (f) of clause 57 and new subsection 156J(4A)]. For example, without this restriction, a couple whose first child was born on 1/1/95 would receive the full $282 threshold for the taxpayer's entitlement to the DSR for the first six months. At the same time, the spouse's entitlement to HCCA for the remaining six months would be subject to a pro-rated test free area of $141.

HCCA excluded from SNI

4.13 Home child care allowance payments will be excluded from SNI by the amendments as it would be inappropriate to reduce the amount of a partial DSR by any HCCA payments received in the same year [paragraph (g) of clause 57] . Because the HCCA replaces the DSR, such a reduction would be akin to reducing part of the DSR because of the receipt of the remaining part of the DSR before the amendments.

Income of certain persons serving with an armed force under the control of the United Nations, rebates for residents of isolated areas and rebates for members of Defence Force serving overseas

4.14 The amendments made by this Bill will not affect the amounts allowed by the additional rebates that are currently available for taxpayers:

•

living in an isolated areas of Australia (zone rebates) [section 79A];

•

serving overseas in the defence forces [section 79B]; or

•

serving with a United Nations armed force [section 23AB];

who would have been entitled to the DSRD but for its removal. [Clauses 52, 55 and 56]

4.15 These rebate calculations include a fixed dollar amount plus a percentage of the taxpayer's dependent rebate entitlements. Taxpayers who would have been entitled to the DSRD, but for these amendments, will now use a notional DSRD in the calculation of the dependent rebate entitlements for 1994-95 and subsequent years of income. [Subclause 59(2)]

4.16 This approach is consistent with that currently adopted for allowing notional rebates for children in the calculation of the dependent rebate entitlements. The calculation of these zone and related rebates will also ensure that taxpayers who are currently entitled to the DSRD and do not qualify for the HCCA, are not disadvantaged. For example, a taxpayer with a dependent spouse and dependent student (aged 20 years) will now be entitled to the DSR rather than the DSRD under the existing arrangements. This taxpayer will use a notional DSRD entitlement rather than the actual DSR entitlement in the calculation of dependent rebate entitlements for zone, and the other rebates referred to in paragraph 14.

4.17 The provisions where the notional DSRD rebate entitlement is used in the calculation of these rebates are as follows:

•

the "relevant rebate amount" in subsection 79A(4) [clause55] ;and

•

subparagraphs 23AB(7)(a)(ii) [clause 52] and 79B(2)(a)(ii), paragraph 79B(4)(b) and subparagraph 79B(4A)(b)(ii) [clause56] .

Uplifted provisional tax amount

4.18 Provisional tax is calculated for a year of income by deducting "qualifying reductions" from the tax estimated on the uplifted preceding year's income [Subsection 221YCAA(1)]. The "qualifying reductions" include an allowance for "location rebates" [paragraph 221YCAA(2)(n)] that the taxpayer was entitled to in his or her assessment for the preceding year of income. The location rebates include rebates for:

•

persons serving with an armed force under the control of the United Nations; or

•

residents of isolated areas; or

•

members of the defence forces serving overseas.

4.19 If the preceding year's location rebate included a component representing dependent rebate entitlements (see paragraphs 14 to 17 above), the provisional tax provisions cause the qualifying reduction in respect of the location rebate to be increased. The qualifying reduction is increased by 20% of the indexation increase (under section 159HA) in the amount of the concessional rebates for the current year [subparagraph 221YCAA(2)(n)(i)].

4.20 The amendments ensure that a taxpayer who would have been entitled to the DSRD has the qualifying reduction in respect of their location rebate calculated with reference to the appropriate notional DSRD or actual DSR as discussed above. [Paragraph(a) of clause 58]

4.21 The provisional tax arrangements for a taxpayer who claimed a DSR or DSRD currently have regard to the appropriate indexation (under section 159HA) of that rebate amount for the provisional income year. Because of the abolition of the DSRD, the provisional tax amendments in the Bill, which need to reflect how provisional tax will be calculated for 1994-95 and later years of income, alter the current arrangement specifically in respect of a taxpayer who is entitled to the DSRD in their 1993-94 assessment. [Paragraphs (b) and (c) of clause 58 and new paragraph 221YCAA(2)(pa)]

4.22 New paragraph 221YCAA(2)(pa) will provide that a taxpayer who is entitled to a DSRD in their 1993-94 assessment will be allowed a qualifying reduction of one quarter of the DSRD amount (as indexed by section 159HA) for the purposes of their 1994-95 provisional tax calculation.

4.23 This approach may not reflect the appropriate qualifying reduction for all taxpayers. For example, where a taxpayer would have previously qualified for the DSRD because the youngest dependant was a 20 year old student, the taxpayer's spouse will not qualify for the HCCA from 29 September 1994. In this case, the taxpayer's spouse rebate claim for 1994-95 (approximately 1/4 DSRD plus 3/4 DSR) will potentially be higher than the 1/4 DSRD allowed for in the 1994-95 provisional tax calculation. The same applies in any other case of HCCA disqualification for a taxpayer who is entitled to the DSRD in their 1993-94 tax return. These taxpayers will be able to lodge a provisional tax variation [section 221YDA] to reduce the provisional tax calculated if necessary.

Transitional 1994-95 year

4.24 Because payments of HCCA commence from 29 September 1994, the amendments need to reflect the arrangements to apply for assessments for the 1994-95 transitional year. In the transitional year, a taxpayer, who would have been entitled to the DSRD but for its abolition, will be entitled to a:

(i)

DSRD (for the period to 28 September 1994); plus

(ii)

DSR for the period from 29 September 1994 when the taxpayer's spouse does not qualify for the HCCA. [Subclause 60(1)]

The application of the transitional year formula to a taxpayer entitled to the DSR (being a taxpayer with a dependent spouse and no dependent children or students) will result in the same entitlement as before the amendments.

4.25 The amendments also expressly prevent a taxpayer, who would not have been entitled to a DSRD or DSR in their 1994-95 assessment, from being entitled to a rebate in the transitional year. [Sub clause 60(4)]

4.26 The DSR and notional DSRD entitlements for the 1994-95 will be $1211 and $1452 respectively. These amounts represent the 1993-94 amounts of $1188 and $1425 referred to in paragraph 8 above as indexed by the application of section 159HA. Under the amendments proposed, the maximum dependent spouse rebate entitlement (for a taxpayer with a dependent student whose age does not entitle the taxpayer's spouse to receive the HCCA) for the 1994-95 transitional year will be:

(i)

for the period from 1 July 1994 to 28 September 1994, a maximum DSRD of $358 (90/365 * $1452) reduced by $1 for every $4 by which the spouse's SNI derived in that period exceeds $70 (90/365 * 282) ["Pre-29 Sep component (old law)" in clause 60] plus;

(ii)

for the period from 29 September 1994 to 30 June 1995, a maximum DSR of $912 (275/365 * 1211) reduced accordingly for the spouse's SNI derived in that period which exceeds $212 (275/365 * 282) ["Post-28 Sep component (new law)" in clause60]

The maximum entitlement for taxpayer, who is entitled to the DSRD and whose dependent spouse qualifies for HCCA from 29 September 1994, will be the DSRD shown in (i) above.

4.27 The following examples illustrate in more detail the application of the amendments in clause 60 of the Bill for the transitional year:

Examples of calculation of rebate entitlements where there is a mix of DSR/HCCA during the year of income (rebate and HCCA amounts to nearest $).

Example 1

A taxpayer has a dependent spouse and child during 1994-95. HCCA payments are made from 29September 1994. The spouse's SNI, and income for HCCA purposes, is $3120 ($60/wk) earned evenly throughout the year.

Present arrangements

The taxpayer would be entitled to a DSRD of $743. This amount is obtained by reducing the 1994-95 notional DSRD of $1452 by $709. The reduction of $709 is obtained by applying the $1 for $4 SNI test [(3120-282)/4=709].

Proposed arrangements

For the period to 28 September 1994 the DSRD to be claimed is equal to $181. This amount is obtained by reducing the DSRD of $358 [see paragraph 26(i) above) by $177. The reduction of $177 is obtained by applying the $1 for $4 SNI test [(780-70)/4 = 177]. The $780 SNI represents the $60 per week for 13 weeks to 28 September 1994. In addition to the part year DSRD claim, the taxpayer's spouse will receive $654 in 20 fortnightly HCCA payments of $32.70.

The total of DSRD and HCCA under the proposed arrangements would be $835 ($181 + $654). This is compared to the DSRD of $743 that would have been the rebate entitlement under the present arrangements.

Example 2

The same taxpayer as in Example 1 with the taxpayer's spouse's SNI, and income for HCCA purposes, being $3120 ($120/wk) earned evenly for 26 weeks from 1 January 1995.

Present arrangements

The taxpayer would be entitled to a DSRD of $743 as in example 1 above. As the taxpayer is married for the full year, the taxpayer is regarded as maintaining a spouse for the whole year.

Proposed arrangements

For the period to 28 September 1994 the DSRD to be claimed would be $358. This amount represents the pro-rated 1994-95 DSRD referred to above. This rebate will not be reduced, as in example 1, because the spouse's SNI to 28 September 1994 is nil. In addition, the taxpayer's spouse will receive $420 in 7 fortnightly HCCA payments of $60 (from 29 September 94 to 31 December 94) plus $35 in 13 fortnightly HCCA payments of $2.70 (from 1 January to 30 June 95). The reduced HCCA payments for the 13 fortnights from 1 January 1995 reflect the spouse's income of $120/wk during the period.

The total of DSRD and HCCA under the proposed arrangements would be $813 ($358 + $455). This is compared to the DSRD of $743 under the present arrangements.

Example 3

A taxpayer with a dependent spouse and child for 1994-95. HCCA payments commence from 29September 1994. Spouse's SNI, and income for HCCA purposes, is $6240 (120/wk) earned evenly throughout the year.

Present arrangements

DSRD entitlement is nil because the spouse's SNI exceeds the limit of $6090 at which the DSRD of $1452 is reduced to nil by application of the $1 for $4 SNI test for SNI in excess of $282.

Proposed arrangements

No DSRD since the taxpayer would not have been eligible for DSRD before the amendments [subclause 60(4)] . The taxpayer's spouse will receive $54 in 20 fortnightly HCCA payments of $2.70 (from 29September 94 to 30 June 95).

Example 4

A taxpayer with a dependent spouse and child for 1994-95. HCCA payments commence from 29September 1994. Spouse's SNI, and income for HCCA purposes, is $6240 (240/wk) earned evenly for 26 weeks from 1 January 1995.

Present arrangements

No DSRD to be claimed as explained in example 3.

Proposed arrangements

No DSRD as in example 3 by the application of subclause 60(4) . The taxpayer's spouse will receive $420 in 7 fortnightly HCCA payments of $60 from 29 September 94 to 31 December 94.

Section 2 - Partner allowance

Overview

4.28 The Bill will provide for the same tax treatment to be given to the partner allowance paid under the Social Security Act 1991 as exists for other comparable social security allowances.

Summary of the amendments

Purpose of the amendments

4.29 The amendments will provide for:

•

payments of the partner allowance to be given the same tax treatment as for other comparable social security allowances; and

•

an exemption from income tax for partner allowance bereavement payments in the same way as for other social security allowances.

Date of effect

4.30 The amendments apply to payments received on or after 29 September 1994. [Clause94]

Background to the legislation

Tax treatment of basic social security pensions, allowances and benefits

4.31 As a complementary measure to the introduction of the home child care allowance (HCCA) and the removal of the dependent spouse rebate, the Government has decided that a recipient of a job search, newstart and sickness allowance or special benefit will no longer have their allowance or benefit increased because of having a dependent partner.

4.32 Instead, as from 29 September 1994, these recipients will be paid at about half the married-rate and the partner will be eligible for an allowance at the same rate. The new allowance is to be known as the partner allowance.

4.33 The partner allowance will receive similar tax treatment to the comparable allowances and benefits received by the other partner.

4.34 Division 1AA of Part III of the Income Tax Assessment Act 1936 (the Act) provides for the tax treatment of social security pensions, allowances and benefits. In particular circumstances, the Division exempts some basic pensions and allowances from income tax.

4.35 In other circumstances the Division provides for certain of these basic payments to be taxable, in particular the basic payments of the job search, newstart and sickness allowances and special benefit. Where they are taxable, section 160AAA of the Act provides for pensioner and beneficiary rebates. These rebates extinguish the tax on:

(a)

pensions plus non-pension income up to the income test free area; and

(b)

allowances and benefits.

The rebates are reduced where there is further taxable income.

Tax treatment of supplementary amounts

4.36 Under Division 1AA, supplementary amounts such as rent assistance are exempt from income tax. Supplementary amounts are set out in subsection 24ABA(1) of the Act.

Tax treatment of bereavement payments

4.37 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" .

4.38 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 the Social Security Act 1991.

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

bereavement rate continuation period (BRCP) to which continued payments relate; it ends before the first 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.

4.40 In broad terms, the two modes of payment that the existing tax treatment of bereavement payments encompasses and which should be applicable to the new partner allowance are:

continued payment where, following the date of death, the surviving partner is entitled to a payment 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 a proportion of a bereavement lump sum may be exempt from tax. The Exempt Bereavement Calculator AB (as set out in section 24ABZD of the Act) provides the steps to determine the "tax-free amount". Where the tax-free amount is less than the lump sum payment the difference is taxable. Where the tax-free amount is equal to or greater than the lump sum payment the latter is exempt from income tax. 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.

Explanation of the amendments

Basic payments

4.41 Partner allowance basic payments, which are all payments other than supplementary payments, will be taxable under new paragraph 24ABPA(1)(b) of the Act [clause93] . However, the proposed amendment of section 160AAA of the Act will extend the beneficiary rebate to recipients of the partner allowance [clause 90] . The Income Tax Regulations will ensure that the rebate will be sufficient to extinguish the tax on the partner allowance paid at the full rate for a full income year.

Supplementary amounts

4.42 Supplementary amounts, such as rent assistance, to which recipients of the partner allowance are entitled, will be exempt from income tax under new paragraph 24ABPA(1)(a) of the Act. [Clause 93]

Bereavement payments

4.43 The Bill proposes to extend the existing tax treatment of bereavement payments to recipients of the partner allowance.

Continued payment

4.44 During the BRCP (see above diagram), the surviving partner is entitled to a continued payment equal to that which the deceased partner would have received on each payday before the next available adjustment payday. The amendments will make these payments exempt from income tax under new subsection 24ABPA(2) of the Act. [Clause93]

Example

4.45 A, a long term newstart allowee, receives a fortnightly payment of $260. His wife, B, receives partner allowance payments of $260 fortnightly. B dies. A notifies the Department of Social Security of the death two weeks after the date of death. There is one payday in the BRCP and the second payday in the bereavement period will be the first available bereavement adjustment payday. A will be entitled to $260 continued payment in relation to the BRCP. This amount is exempt from income tax. At the same time, in addition, the surviving partner, A, will continue to be entitled to the allowance at his or her pre-bereavement rate. This is not a bereavement payment. It will be assessable but subject to the beneficiary rebate under section 160AAA of the Act.

Bereavement lump sum payment

4.46 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 under new paragraph 24ABPA(3)(a) of the Act. The Exempt Bereavement Payment Calculator AB (Calculator AB) in section 24ABZD of the Act will determine the tax-free amount relating to any bereavement lump sum payment. [Clause 93]

4.47 In Step 1 of Calculator AB, the only exempt payments will be supplementary amounts such as rent assistance.

4.48 In Step 2, where the recipient of the partner allowance dies, the notional amount for the partner will be that which the deceased would have received if the deceased had not died.

4.49 In Step 3, add the amounts determined by steps 1 and 2 to arrive at the tax-free amount.

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

Example

4.51 From the previous example, A is a newstart allowee whose partner, B, is a partner allowee. B dies. There are six paydays in the bereavement lump sum period. During the bereavement lump sum period the allowance is payable to the surviving partner at the single rate of $281 per fortnight. This amount will be assessable but subject to the beneficiary rebate under section 160AAA of the Act. A receives a lump sum payment of $1,434 [($520 - $281) x 6].

4.52 Calculator AB applies as follows:

Step 1: The amount that would have been derived by B during the bereavement lump sum period was not exempt. The notional amount for the partner is nil.

Step 2: If she had not died, B would have derived $1,560 ($260 x 6) during the bereavement lump sum period. This is the notional amount for the partner.

Step 3: The tax-free amount is $1,560.

4.53 The lump sum payment of $1,434 is exempt and there is a further $126 ($1,560 - $1,434) to set off against any income A receives during the bereavement lump sum period.

4.54 However, any excess of such taxable social security income received during the bereavement period over the "tax free amount" will not be exempt from income tax - new paragraph 24ABPA(3)(b) . [Clause93]

Summary of the tax treatment of the partner allowance

4.55 The following table summarises the tax treatment of the new partner allowance:

4.56 The treatment of bereavement payments in relation to the partner allowance will be exactly the same as for the job search, newstart and sickness allowance and special benefit where both partners are recipients of the allowance or benefit.

CHAPTER 5 - ELIGIBLE INVESTMENT INCOME OF REGISTERED ORGANISATIONS

Overview

5.1 The amendment will include in the assessable income of registered organisations income derived from certain assets.

Summary of the amendments

Purpose of the amendment

5.2 The proposed amendment will include in the assessable income of a registered organisation income derived from certain assets. The purpose of the amendment is to ensure that the provisions of Division 8A of the Income Tax Assessment Act 1936 (the Act) are not circumvented by the holding of assets separate from the eligible insurance business of the organisation (for instance by the establishment of a separate fund) as a result of the High Court decision in Independent Order of Odd Fellows of Victoria v FC of T (91 ATC 5032; (1991) 22 ATR 783) (the IOOF case). [Clause 61]

Date of effect

5.3 The amendment will apply to income derived on or after 1July1994 by a registered organisation from eligible investment assets. [Clause64]

Background to the legislation

5.4 'Registered organisation' is defined in subsection 116E(1) to mean a trade union, a friendly society or an employees' association, which is exempt from tax under either paragraph 23(f) (as a trade union or employees' association) or subparagraph 23(g)(i) (as a friendly society).

5.5 Section 116F states that Division 8A overrides all other provisions of the Act in determining the assessable income of a registered organisation. Accordingly, section 116G sets out classes of assessable income of registered organisations; assessable income of registered organisations is limited to income falling within these classes. The classes of assessable income are non-complying superannuation, complying superannuation/roll-over annuity and eligible insurance business.

5.6 The amount of assessable income of a registered organisation to be included in each class is determined by section 116GD. The amount of assessable income in the eligible insurance business (EIB) class comprises assessable income allocated under certain sections relating to the disposal of relevant assets and any other EIB assessable income (subsection 116GD(2)).

5.7 The terms 'eligible insurance business', 'EIB assessable income' and 'EIB asset' are defined in subsection 116E(1). 'Eligible insurance business' means the business of, or relating to, the issuing of, or the undertaking of liability under, eligible insurance policies. 'EIB assessable income' means so much of the total income (other than premiums) of the organisation as is derived from eligible insurance business of the organisation. 'EIB asset' means an asset that relates to the eligible insurance business.

5.8 In the IOOF case, the High Court examined the definition of 'eligible insurance business' in subsection 116E(1). In that case, the taxpayer, a friendly society, had transferred monies from the 'benefits fund' into which premiums were paid, into a 'tax provision repository fund' to cover any tax liability arising from its eligible insurance business. The High Court held that investment income derived from the fund which was specifically established to meet income tax obligations was not income derived from eligible insurance business and, therefore, was exempt. This was because the investment of monies in the 'tax provision repository fund' was not relevantly related to the issuing of or the undertaking of liability under eligible insurance policies.

5.9 The Court said that although the eligible insurance business of the friendly society included all the activities relating to the issuing of and undertaking of liabilities under eligible insurance policies, including making provisions for tax liabilities and making investments in the course of carrying on eligible insurance business, it did not include the investment of moneys held in a separate fund and which could be applied for purposes other than eligible insurance business purposes. It followed that the investment income derived from the 'tax provision repository fund' was not income from eligible insurance business.

5.10 As a result of the IOOF case, the provisions of Division 8A could be circumvented by holding assets separate from the eligible insurance business of the organisation, for instance by establishing a separate investment fund the income from which, on the basis of that case, may not be derived from the business of or in relation to the issuing of or undertaking of liability under eligible insurance policies.

5.11 To overcome that result, it is necessary to broaden the definition of EIB assessable income to include all income derived from certain specified assets.

Explanation of the amendments

5.12 These amendments are necessary to ensure that all income derived by a registered organisation relating to eligible insurance business, such as income derived by a friendly society from the investment of premiums held separately from its benefits fund, is subject to income tax.

5.13 A new definition of 'EIB assessable income' is inserted to replace the existing one in subsection 116E(1). The new definition includes income derived from eligible insurance business (ie income that was previously included in EIB assessable income) as well as income derived from 'eligible investment assets'. Such assets would include money, equities, real estate, or any other assets. [Clause 62]

5.14 A definition of 'eligible investment asset' is inserted in subsection 116E(1). It means:

(a)

premiums derived in carrying on eligible insurance business or other amounts derived in carrying on eligible insurance business (regardless of whether such premiums or other amounts are transferred from one fund into another). This would include the earnings or surplus of a friendly society's benefits fund, whether held in that fund or not.

(b)

income or profits derived from eligible investment assets, for instance, interest derived on premiums or on the surplus of a friendly society's benefits fund, whether held in such fund or not .

(c)

assets purchased with amounts included in (a), (b) above or in (c). This paragraph would cover the situation of assets such as equities or real estate purchased with premiums or interest derived on premiums and whether held in a friendly society's benefits fund or transferred from the benefits fund into another fund.

[Clause 62]

5.15 The definition applies to eligible investment assets whether held in the original fund into which they were paid or credited, or whether they were transferred out of that fund, including if they were transferred into another fund or into a series of funds. For example, it would include assets (such as premiums or assets acquired with those premiums, or income derived thereon) transferred by a friendly society from its benefits fund, whether transferred into another fund or through a series of funds.

5.16 The effect of the amendment is that income derived from eligible investment assets is included in EIB assessable income regardless of how such income is used (eg whether the income is capitalised or reinvested, used to pay expenses relating to insurance business, used to pay bonuses to policyholders or members, etc). Thus investment income derived from a fund specifically established to meet tax obligations in circumstances similar to those examined by the High Court in the IOOF case will come within the new definition of 'EIB assessable income'.

5.17 That effect is achieved by the amendment regardless of the number of funds which may be interposed between the fund in which the premiums or other amount derived in carrying on the eligible insurance business are initially placed and the fund in which the EIB assessable income is derived.

5.18 A new definition of 'EIB asset' has been substituted. The new definition covers not only an asset relating to eligible insurance business but also an eligible investment asset. [Clause 62]

5.19 As a result of these changes, an amendment is needed to subsection 116GA(4). The provision currently refers to the business of the classes of income. The reference to 'the business of' is being deleted because of the inclusion of eligible investment assets in the definitions. [Clause 63]

CHAPTER 6 - PROVISIONAL TAX

Overview

6.1 This chapter explains provisions in the Bill proposing to amend the definition of 'provisional tax uplift factor' in the Income Tax Assessment Act 1936 (the Act) so that the factor will be maintained at 8% for the 1994-95 year of income and will revert to 10% for later income years unless the Parliament otherwise provides.

Summary of the amendments

Purpose of the amendments

6.2 The amendments will amend the Act so that the provisional tax uplift factor is 8% for the 1994-95 year of income and 10% for later income years. [Clause 65]

Date of effect

6.3 The amendments will apply in relation to the calculation of provisional tax (including instalments) payable for the 1994-95 year of income and later years of income. [Clause 67]

Background to the legislation

6.4 Income subject to provisional tax for a year of income is obtained by uplifting the preceding year's taxable income by the provisional tax uplift factor. Provisional tax is then calculated by applying the tax rates and Medicare levy to the uplifted income and allowing for rebate and credit entitlements (such as tax instalments deducted) which are expected to be claimed or allowed in the provisional year of income [section 221YCAA].

6.5 The provisional tax uplift factor reflects the effects of inflation and other relevant factors in ascertaining the amount of income subject to provisional tax. The uplift factor for the calculation of 1994-95 provisional tax currently stands at 10% [subsection 221YA(1)].

6.6 In the 1994-95 Budget statement, the Treasurer announced that the uplift factor of 8% used to calculate 1993-94 provisional tax would be retained for the purpose of calculating 1994-95 provisional tax.

Explanation of the amendments

6.7 The Bill proposes to amend subsection 221YA(1) of the Act so that a provisional tax uplift factor of 8% will be used in ascertaining provisional tax payable (including instalments) for the 1994-95 year of income and, unless the Parliament otherwise provides, 10% for later years of income. [Clause 66]

CHAPTER 7 - REPEALED PROVISIONS - SHORT_TERM ASSET SALES AND HOME LOAN INTEREST REBATE

Overview

7.1 This Bill will repeal section 26AAA and subdivision 17AA of Part III of the Income Tax Assessment Act 1936 (the Act).

Summary of the amendments

Purpose of the amendments

7.2 This Bill will:

•

repeal section 26AAA of the Act which taxed gains made from the sale of assets, where the sale occurred within twelve months of the purchase of the asset. Section 26AAA is now redundant;

•

repeal subdivision 17AA of Part III of the Act which provided a rebate of tax for home loan interest paid between the period 1July 1982 and 30 June 1990.

Date of effect

7.3 The amendments will apply from the day the Bill receives Royal Assent.

Background to the legislation

Short-term asset sales

7.4 Section 26AAA was introduced in 1973 to tax gains made from the sale of assets, where the purchase and sale of an asset occurred within twelve months.

7.5 When the capital gains and losses provisions were introduced in 1985, section 26AAA was retained as a transitional measure and overrode the capital gains and losses provisions for short-term asset sales.

7.6 Following an announcement in the May 1988 Economic Statement, the operation of section 26AAA was terminated in respect of sales of assets made after 25 May 1988.

Home loan interest rebate

7.7 Subdivision 17AA of Part III of the Act (sections 159ZA to 159ZQ) contains two different rebate schemes which provided a rebate of tax for home loan interest payments. Both of the schemes have ceased to have any application.

7.8 The first scheme applied to interest paid between 1 July 1982 and 30 June 1983.

7.9 The second scheme applied to interest paid during the first five years of home occupation, but ceased to apply to interest paid after 30June 1990.

Explanation of the amendments

7.10 Subdivision 17AA has been inoperative for over three years. Section 26AAA has been inoperative for over six years. Their repeal will remove 21 sections and 30 pages from the Act. [Clauses 69 and 78]

7.11 The Bill will contain a small 'saving' provision to ensure that the repealed sections will still be available for application in any assessments or amended assessments made in relation to the relevant income periods. [Clauses 76 and 81]

7.12 The Bill also makes consequential amendments to other provisions of the Act by omitting references to section 26AAA and references to subdivision AA of Division 17 of Part III.

7.13 Section 26 AAA contained definitions which were used in other provisions of the Act. The Bill includes some provisions that restate those definitions in the relevant provisions of the Act without changing the meaning of the definitions or the effect of the relevant provisions.

CHAPTER 8 - DEDUCTIONS FOR BEQUESTS OF SIGNIFICANT CULTURAL VALUE MADE TO CERTAIN INSTITUTIONS

Overview

8.1 The Bill will allow an income tax deduction for a testamentary gift of property to specified funds, authorities or institutions under the Cultural Bequests Program. The Bill will also exempt those gifts from the application of the capital gains tax provisions.

Summary of the amendments

Purpose of the amendments

8.2 The proposed amendments will:

•

allow an income tax deduction for a testamentary gift of selected items of cultural significance to the nation, and

•

exempt the disposal of the gifted property from the application of the capital gains tax provisions of the Income Tax Assessment Act 1936 (the Act). [Clause 82]

Date of effect

8.3 The selection process for the bequests program will commence in the 1994/95 financial year. The income tax deductions and capital gains tax exemptions will be available to people who have received a certificate from the Minister in relation to the gift and have died on or after 1 July 1994. [Clause 83]

Background to the legislation

8.4 The Cultural Bequests Program was announced in the 1993-94 Budget. The Program is intended to encourage people to donate, by bequest, items of cultural significance to public funds, galleries, libraries or museums by providing tax deductibility for the gift and exemption from capital gains tax on the disposal of the gifted property.

8.5 The Program will operate as a supplement to the Taxation Incentives for the Arts (TIA) scheme. The TIA scheme provides a tax deduction for gifts of works of cultural items where the gifts are for inclusion in the collections maintained by the Australiana Fund, public art galleries, libraries or museums. The TIA scheme is administered by the Department of Communications and the Arts through a committee established specifically for that purpose.

Explanation of the amendments

8.6 The amendments will provide a tax deduction and capital gains tax exemption to taxpayers who have been issued with a certificate by the Minister for Communications and the Arts (The Minister). This certificate will certify the taxpayer's agreement to bequeath items of property to the relevant institution and will certify the value of the gift and the Minister's approval. The gift deduction will be available after the death of the taxpayer and will be deductible in the year the taxpayer dies.

Testamentary gifts to be deductible

8.7 A testamentary gift to a fund, gallery or museum will be an allowable deduction if it satisfies conditions for deductibility listed in new subsection 78(6A). The donor will retain legal ownership of the gift during their lifetime and be able to opt for possession of the cultural item or collection to be transferred to the recipient institution either during their lifetime or after death. [Paragraph (d) of clause 83, new subsection 78(6A)]

Administration of the Program

8.8 The Program will be administered by the Department of Communications and the Arts. Concepts central to the administration of the scheme are:

•

the certificate;

•

approval guidelines;

•

maximum approval limit;

•

section 79C amount.

The certificate

8.9 The certificate issued by the Minister will:

•

notify approval of the gift,

•

specify the value of the gift,

•

contain other information that the Commissioner of Taxation may require.

An example of other information that the Commissioner of Taxation may require is the name of the recipient institution. The certificate will be the formal approval of the agreement to the bequest by the Minister. It will also be evidence of the value of the gift deduction and should be retained by the taxpayer or the taxpayer's representatives to be produced on request of the Commissioner. [Paragraph (d) of clause 83, new subsection 78(6B)]

Approval guidelines

8.10 The Minister must have regard to written guidelines in deciding whether to approve a particular gift and determining the value of that gift. Those guidelines may require the Minister to take into account:

•

specified criteria; or

•

recommendations of particular bodies; or

•

any other factors.

8.11 It is expected that these guidelines will also include application, valuation and selection procedures for the gifts.

8.12 The guidelines must be published by the Minister in a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901. [Paragraph (g) of clause 83, new paragraph 78(25A)(a)]

Maximum approval limit

8.13 There will be a limit to the total dollar amount for which certificates may be issued in any financial year. The Minister must specify in writing the amount of this maximum approval limit for each financial year. [Paragraph (d) of clause 83, new paragraph 78(6E)(a)]

8.14 The Minister is prohibited from issuing any certificates in any year of income until the maximum approval limit for the particular year has been specified. Paragraph (d) of clause 83, new paragraph 78(6E)(b)]

8.15 Additionally, the Minister must not issue any certificate if the value of that certificate, when added to the value of those already issued, will exceed the maximum approval limit in a financial year. [Paragraph (d) of clause 83, new paragraph 78(6E)(c)]

8.16 The maximum approval limit must be published by the Minister in a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901. [Paragraph (g) of clause 83, new paragraph 78(25A)(b)]

Section 79C amount

8.17 Where the deductible amount of a gift under section 78 of the Act exceeds the taxable income in a year, the excess may not create or increase a carried forward loss [section 79C].

8.18 Unlike deductions for all other gifts allowable under section 78, a deduction allowable under the Cultural Bequests Program may be spread between two tax returns. The gift deduction will be available in the return to the date of death of the donor. If there is any undeducted amount remaining (the section 79C amount), the undeducted amount will be deductible in the donor's estate return from the date of death to the end of that financial year. [Paragraph (d) of clause 83, new subsection 78(6G)]

8.19 It should be noted that this spreading of the deduction only applies to the single year of income in which the taxpayer dies. [Paragraph (d) of clause 83, new subsections 78(6F and 6G)]

Example

8.20 A taxpayer has agreed to bequeath an artwork on 2February1995 and has a certificate from the Minister approving the bequest and stating the value of the gift to be $500,000 . The taxpayer dies on 10January 1996. The taxpayer's income tax return to 10January1996 has net income of $200,000 - $200,000 of the gift deduction is offset against that income, reducing the taxable income to nil. The balance of the gift deduction ($300,000) is the section 79C amount. The donor's first estate return for the period 11 January 1996 to 30June1996 has net income of $100,000. The section 79C amount, may be offset against that income to reduce the taxable income to nil. The undeducted balance of $200,000 is lost as section 79C precludes the carry forward of the gift deduction to another year of income.

Value of the gift

8.21 The value of the gifted property is the value shown in the certificate at the time of the agreement to bequest and not at the time of death of the taxpayer, which may occur many years later [paragraph (e) of clause 83, new 78(15A)] . It is expected that the guidelines to be published by the Minister [refer to paragraphs 8.10-12] will provide more detail on valuation procedures.

Gift an allowable deduction after death of taxpayer

8.22 The gift deduction under the Bequest Program is allowable when it is made. To avoid uncertainty this is taken to be at the time of death of the taxpayer. To be entitled to the deduction, the property must have been actually given to and accepted by the recipient institution. [Paragraph (f) of clause 83, new subsection 78(16A) and paragraph 78(6A)(g)]

Capital gains and losses

8.23 The proposed amendments will exempt gifted property under the Cultural Bequests Program from the application of the capital gains and losses provisions of the Act. This is achieved by specifying that the capital gains and losses provisions do not apply to the disposal of an asset under the Cultural Bequests Program. [Clause 84, subsection 160L(9)]

CHAPTER 9 - GIFTS - TECHNICAL AMENDMENTS

Overview

9.1 The Bill will correct two typographical errors that occurred during the recent restructuring of the gift provisions. [Clause 86]

Summary of the amendments

Purpose of the amendments

9.2 To restore tax deductions for donations of $2 or more to public funds established and maintained for the comfort, recreation or welfare of members of the armed forces.

9.3 To correct a typographical error which occurred during the recent restructuring of the gift provisions.

Date of effect

9.4 1 July 1993 (to coincide with the date of effect of the gift provisions restructure). [Clause 88]

Background to the legislation

9.5 Broadly, section 78 of the Income Tax Assessment Act 1936 (the Act) provides deductions for gifts of $2 or more to various funds and organisations. A deduction is allowable in the year of income in which the gift is made.

9.6 As part of Taxation Laws Amendment Act (No.2) 1993 (Act No.18 of 1993), section 78 of the Act was restructured to improve the readability of the gift provisions.

9.7 During the restructure, two minor typographical errors were made in respect of two of the items listed in the tables in subsection 78(4).

Explanation of the amendments

9.8 The amendments are designed to return the legislation to a technically correct state and to ensure that any donations that have been made to the respective funds since the date of the section 78 restructure (1July1993) will not be denied deductibility due to these technical errors. [Clause 87]

CHAPTER 10 - SUPERANNUATION - REASONABLE BENEFITS LIMITS

Overview

10.1 The Bill will amend Division 14 of Part III of the Income Tax Assessment Act 1936 (the Act), which deals with reasonable benefit limits that apply to concessionally taxed superannuation benefits, to overcome a number of technical deficiencies with the new provisions and to ensure that the provisions operate as intended.

Summary of the amendments

10.2 The proposed amendments will:

•

ensure that the non-rebatable proportion of a pension or annuity is taxed as an excessive component on the commutation or roll-over of the whole or part of the pension or annuity entitlement [clause 95] ;

•

allow information held by the Commissioner of Taxation to be used to identify the tax file number of a deceased person and enable a final reasonable benefit limit (RBL) determination to be made in relation to the assessment for RBL purposes of a death benefit eligible termination payment (ETP) [clause 100] ;

•

require superannuation funds to report payments of less than $5000 [clause 103] ;

•

ensure that the Insurance and Superannuation Commissioner does not have to report payments of less than $5000 [clause 103] ;

•

ensure that the qualifying portions of ETPs previously received by a person are counted in determining whether a superannuation pension or annuity that does not meet the pension and annuity standards is to be assessed against the person's lump sum RBL [clause 106] .

Date of effect

10.3 The amendments will apply to ETPs paid on or after 1July 1994 and to pensions or annuities where the first day of the period to which the pension or annuity relates is on or after 1July1994.

Background to the legislation

10.4 Taxation Laws Amendment (Superannuation) Act 1992 inserted Division14 of Part III of the Act to transfer the administration of the reasonable benefit limits (RBLs) from the Insurance and Superannuation Commissioner to the Commissioner of Taxation. At the same time changes were made to introduce flat dollar RBLs (rather than RBLs based on a multiple of salary) and to simplify the treatment of the excessive amount of pensions and annuities. The new provisions come into effect on 1July1994.

10.5 The purpose of RBLs is to limit the amount of concessionally taxed superannuation benefits received by a person.

10.6 Since the insertion of Division 14, some technical and administrative problems with the operation of the provisions have emerged.

Explanation of the amendments

Commutation or roll-over of a pension or annuity with an excessive component

10.7 The amendments will ensure that a taxpayer who receives an eligible termination payment (ETP) representing the commutation or partial commutation of, or residual capital value of, a pension or an annuity which contains an excessive component is taxed appropriately. The excessive component of an ETP is taxed at the highest marginal rate of tax (currently 47% plus medicare levy). Similarly, if that ETP is rolled-over to purchase another superannuation pension or annuity, the rebatable proportion of the original pension or annuity will be transferred to the new pension or annuity. [Clause 95]

10.8 The effect of the proposed amendments is to take the RBL determination made at the time of commencement of the pension or annuity and apply that RBL determination to subsequent dealings with that pension or annuity.

10.9 Therefore, new subsection 140R(1A) provides that the Commissioner must make a RBL determination to the effect that an ETP is in excess of the person's RBL if the ETP is made to a person as a result of:

•

the commutation or partial commutation of, or residual capital value of, a superannuation pension or annuity; or

•

the commutation or partial commutation of a reversionary pension or annuity payable as the result of the death of another person.

10.10 The extent of the excess is worked out using the formula:

Amount of ETP * (1 - Rebatable proportion of the superannuation pension or annuity).


[Clause 96]

10.11 Similarly, new subsection 140R(1B) provides that if a residual pension or residual annuity is payable on the commutation, or partial commutation, of another superannuation pension or annuity, then the Commissioner must make a RBL determination to the effect that the pension or annuity is in excess of the person's RBL and the rebatable proportion of the pension or annuity is the same as the rebatable proportion of the original pension or annuity. [Clause96]

10.12 The rebatable proportion of a superannuation pension or annuity is determined by section 140ZQ. Essentially the rebatable proportion of the pension or annuity reflects that part of the capital value or purchase price of the pension or annuity which is within the recipient's RBLs and therefore qualifies for the new 15% rebate.

10.13 A residual pension or residual annuity referred to in new140R(1B) and paragraph140ZC(2)(c) includes a pension or annuity that is purchased with the roll-over of an ETP representing the commutation or partial commutation of, or residual capital value of, another superannuation pension or annuity.

Example

Oscar purchases an allocated pension on 1 October 1994. The purchase price of the allocated pension is $500000. Oscar has no other superannuation benefits. As an allocated pension does not meet the pension and annuity standards, the purchase price of the pension is measured against the lump sum RBL of $400000. Therefore, Oscar receives an RBL determination advising that his pension contains an excessive amount and that the rebatable proportion of the pension is 80%. On 1May1999 Oscar decides to commute his allocated pension and receives an ETP of $380000. Oscar's ETP will contain an excessive component of:

$380000 * (1 - 0.80) = $76000.


If Oscar rolled-over his ETP to purchase another pension or annuity, the rebatable proportion of his new pension or annuity would be 80%. Similarly, if Oscar elected to keep part of his ETP (say, $100000) and rolled-over the balance to purchase a new pension or annuity, the rebatable proportion of his new pension or annuity would be 80%. The ETP of $100000 he retained would have an excessive component of:

$100000 x (1 - 0.80) = $20000.


10.14 New subsection 140T(2B) and subsection 140T(2C) insert identical provisions to allow the Commissioner to make an interim RBL determination to the same effect if, for example, the Commissioner has insufficient information to make a final RBL determination. [Clause 97]

10.15 Clause 98 effectively removes subparagraph 140ZC(2)(b)(ii), subparagraph 140ZC(2)(c)(ii) and paragraph 140ZC(2)(e) so that a benefit must be reported for RBL purposes in accordance with section 140M if it is:

•

an ETP representing the commutation or partial commutation of, or residual capital value of, a superannuation pension or annuity provided that the commencement day for the pension or annuity was on or after 1July1990; or

•

a residual pension or residual annuity provided that the commencement day for the original pension or annuity was on or after 1July1990.

10.16 The proposed amendments will apply to ETPs arising from the commutation or partial commutation of, or residual capital value of, a superannuation pension or annuity paid on or after 1 July 1994 and to pensions or annuities purchased with the roll-over of an ETP representing the commutation of, or residual capital value of, another superannuation pension or annuity where the first day of the period to which the first payment of the original pension or annuity related was on or after 1 July 1994. [Clause 99]

Tax file number where interim determinations - death benefits

10.17 Division 14 will be amended to allow information held by the Commissioner of Taxation to be used to identify the tax file number (TFN) of a deceased person and enable a final RBL determination to be made in relation to the assessment for RBL purposes of a death benefit ETP. [Clause 100]

10.18 Generally speaking, if the payer of a benefit that has to be reported for RBL purposes does not provide details of the recipient's TFN, an interim RBL determination is made to the effect that the whole of the benefit is an excessive benefit (subsection 140T(2)). The recipient is then able to notify the Commissioner of his or her TFN and enable the Commissioner to revise the determination and issue a final RBL determination identifying the appropriate amount of excessive component, if any.

10.19 A death benefit ETP (which is defined in section 27AAA of the Act), is measured against the deceased's RBL to determine the excessive component. In the absence of the deceased's TFN, the Commissioner is obliged to issue an interim RBL determination to the effect that the whole of the benefit is excessive. However, the beneficiary may not know the deceased's TFN and therefore may be unable to supply appropriate information to allow the Commissioner to revise his determination.

10.20 New subsection 140T(2A) will allow the Commissioner to overlook the requirement to issue a determination to the effect that the whole of the benefit is excessive if, in relation to a death benefit ETP, the Commissioner is satisfied that the deceased has a TFN. This will allow the Commissioner to use other information held to identify the deceased's TFN for RBL purposes. [Clause 101]

10.21 The amendment will apply to death benefit ETPs made on or after 1July1994. [Clause 102]

Payer notification obligations

10.22 Division 14 will be amended to:

•

require superannuation funds to report payments of less than $5000; and

•

ensure that the Insurance and Superannuation Commissioner does not have to report payments of less than $5000.

[Clause 103]

10.23 If a superannuation fund pays a benefit to a member of less than $5000, there is currently no requirement for the superannuation fund to notify the Commissioner for RBL purposes. However, since Division 14 was inserted in the Act, the Superannuation Industry (Supervision) Act (SIS Act) has been introduced. Under the SIS Act superannuation funds will not have to pay benefits in a single lump sum or on a set day. This effectively allows people to make multiple withdrawals from superannuation funds and leaves the $5000 minimum reporting requirements open to manipulation and abuse.

10.24 An associated concern is that from 1 July 1994 the Insurance and Superannuation Commission (ISC) will supervise the administration of unclaimed moneys within the superannuation industry. Under those arrangements the ISC will accept unclaimed superannuation moneys and pay them into consolidated revenue. If the moneys are subsequently claimed, the ISC will make payments from the consolidated revenue to the superannuation fund member. Such payments will be ETPs. It is expected that the majority of payments from the ISC under these arrangements will be small amounts. Therefore, to ease the ISC's administrative burden, an amendment to the Act will exclude the ISC from reporting payments to the Commissioner of Taxation of less than $5000.

10.25 Amended sub-subparagraph 140M(1)(a)(i)(B) will ensure that the trustees of superannuation funds do have to report payments of less than $5000 and that the Insurance and Superannuation Commissioner does not have to report payments of less than $5000. [Clause 104]

10.26 The amendment will apply to payments made on or after 1July1994. [Clause105]

Superannuation pensions and annuities not meeting standards

10.27 Amendments to Division 14 will ensure that the qualifying portions of ETPs previously received by a person are counted in determining whether a superannuation pension or annuity that does not meet the pension and annuity standards is to be assessed against the person's lump sum RBL. [Clause 106]

10.28 When the Occupational Superannuation Standards Regulations (OSS Regulations) relating to the assessment of benefits against the lump sum RBL were transferred to the Act, the paragraph relating to the qualifying portions of any ETPs previously made to a person was inadvertently omitted.

10.29 New paragraph 140ZF(3)(ba) will ensure that the qualifying portions of ETPs previously received by a person are counted in determining whether a superannuation pension or annuity that does not meet the pension and annuity standards is to be assessed against the person's lump sum RBL. [Clause 107]

10.30 The qualifying portion of an ETP is the amount worked out under section140ZG. Essentially, it represents the amount of an ETP previously received by a person that has been counted for RBL purposes indexed by movements in full time adult average weekly ordinary times earnings.

10.31 The amendment will apply to pensions and annuities where the first day of the period to which the first payment of the pension or annuity relates is on or after 1 July 1994. [Clause 108]

Transitional provision - Alleviation of notice requirements

10.32 Clause 109 is a transitional measure which ensures that payers who are required to report benefits only because of the application of the proposed amendments will have 28 days after the commencement of the provisions to meet their obligations. This will ensure that payers will not be subject to penalties under the Taxation Administration Act 1953 for failing to report benefits as required by section 140M of the Act between 1July1994 and the Royal Assent of the Bill.

CHAPTER 11 - TAXATION OF AUSTRALIAN BRANCHES OF FOREIGN BANKS

Overview

11.1 The Bill will insert a new Part IIIB into the Income Tax Assessment Act 1936 (the Act). Part IIIB will include new measures for the taxation of an Australian branch of a foreign bank. It will also apply non-resident interest withholding tax to interest that is treated as being paid by an Australian branch of a foreign bank to the foreign bank. The Bill will also repeal existing section 128M of the Act.

Summary of the amendments

Purpose of the amendments

11.2 The amendments of the income tax law will establish a new regime for the taxation of Australian branches of foreign banks as announced in the former Treasurer's Banking Policy Statement on 18June1993. This new regime will recognise intra-bank loans, derivative transactions and foreign exchange transactions by treating the branch as an entity separate from the foreign bank for the purposes of determining the liability of the foreign bank to tax in Australia. Under the new measures non-resident interest withholding tax will be applied to interest treated as being paid by the branch to the foreign bank. [Clause 112]

Date of effect

11.3 The provision that treats certain foreign banks as Australian entities and Australian residents for withholding tax purposes will be repealed with effect from 18 June 1993.

11.4 The amendment relating to interest withholding tax on intra-bank interest will take effect on the first day of a taxpayer's income year beginning after the date of introduction of the Bill (30 June 1994).

11.5 The amendments allowing a foreign bank branch to receive and transfer both revenue losses and capital losses will apply to assessments in respect of the first year of income following the year of income in which the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 commenced and for all later years of income. The Financial Corporations (Transfer of Assets and Liabilities) Act 1993 commenced on 22 December 1993.

11.6 The other foreign bank branch taxation measures will take effect in respect of a taxpayer's first year of income following the date of introduction of the Bill (30 June 1994). [Clause 116]

Background to the legislation

11.7 In the 1992 One Nation statement the Government announced that it would legislate to allow foreign banks to carry on wholesale banking business in Australia through branches. However, the One Nation statement did not deal with the taxation aspects of foreign banks operating in Australia through branches.

11.8 Following consultation on the taxation issues with the banking industry the Treasurer's Banking Policy Statement of 18 June 1993 set out both the transitional and on-going taxation measures. The transitional measures were designed to assist the transition from subsidiary to branch banking for certain subsidiaries of foreign banks operating in Australia and were enacted in the Financial Corporations (Transfer of Assets and Liabilities) Act 1993. The on-going measures apply a new taxation regime for foreign banks operating through branches in Australia.

11.9 As a general principle, a foreign bank branch, its head office and other branches are part of the one legal person, the foreign bank. At law, a legal person cannot enter transactions with itself. This is called the single entity approach. For taxation purposes however, it is necessary to determine the taxable income of an Australian branch of a foreign bank. In that respect it is often difficult to ascertain the appropriate allocation of the foreign bank's income and deductions to the Australian branch.

11.10 For example, funding provided by the foreign bank to its Australian branch will generally be provided from the bank's pool of funds which has been formed by the aggregation of deposits and other funds. The pool of funds is used, amongst other things, by a bank to provide loans to customers. It will generally be difficult for the bank to know the precise cost of funds provided to the Australian branch because the foreign bank's pool of funds will have many sources with different costs. Further, the use of an average cost of funds mechanism is seen as being costly, inaccurate and time consuming.

11.11 It is common, however, for the branch of a foreign bank to operate as a separate profit centre and to notionally enter transactions with the foreign bank Accordingly, the new measures will treat the Australian branch and foreign bank as if they were separate entities in order to recognise certain intra-bank transactions for the purpose of determining the taxable income of the Australian branch. Under the new measures interest treated as being paid to the foreign bank by an Australian branch of the bank on an intra-bank loan will be subject to non-resident interest withholding tax.

11.12 A new measure, called the notional equity requirement, will treat part of the branch's overall funding as notionally representing equity funding of the Australian branch operations of the bank. This measure is consistent with existing policy on thin capitalisation. Therefore a part of a branch's interest expense arising from loan funding will not be deductible.

Explanation of the amendments

Definitions of terms used in new Part IIIB

11.13 The definitions for the new measures on the taxation of Australian branches of foreign banks are located in Division 1 of new Part IIIB. [Clause 114 - new section 160ZZV]

Treating an Australian branch as if it were a separate legal person

11.14 The tax liability of a foreign bank on income derived by the Australian branch of the bank will be determined by reference to the Australian branch's taxable income. The provisions of new Division 2 set out the methods for determining certain aspects of the branch's taxable income.

11.15 Under the new measures, the branch will be treated, for certain purposes, as if it were a separate company for determining the liability of a foreign bank to tax. The branch is treated as having been a company since its establishment. Under this legal fiction loans to the branch from the foreign bank and derivative transaction and foreign exchange transactions between the branch and the foreign bank will be treated as if they were made between two separate companies. Consequently loans, derivative and foreign exchange transactions are treated as if they were real transactions for taxation purposes.

11.16 These intra-bank transactions are recognised by virtue of the legal fiction in new section 160ZZW which applies in respect of new 160ZZZ, 160ZZZA, 160ZZZB, 160ZZZC, 160ZZZE and 160ZZZF . The legal fiction also extends to the other provisions of the Act as they operate in relation to those transactions to determine the taxable income of the branch.

11.17 It is intended that section 136AD of the Act is to apply to the notional transactions recognised by new Part IIIB. In order to put this beyond doubt, new subsection 160ZZW(4) confirms that the Australian branch is to be treated as not being an Australian permanent establishment of the foreign bank for the purposes of the transfer pricing provisions in Division 13 of Part III of the Act.

11.18 The separate entity legal fiction also applies to new section 160ZZZJ for the purpose of determining the liability of the foreign bank to interest withholding tax for interest treated as being paid by the Australian branch to the foreign bank. [New section 160ZZW]

Income of the branch to have an Australian source

11.19 The income attributable to the Australian branch of a foreign bank will be treated for the purposes of the income tax law as having an Australian source. This new provision places beyond doubt the source of income connected with the Australian branch of a foreign bank. [New 160ZZX]

11.20 A deduction will be available for foreign tax paid on income attributable to the Australian branch which is treated as having an Australian source under new section 160ZZX. [New section 160ZZY]

Interest expense deductions

Notional borrowing by an Australian branch from the foreign bank (intra-bank loans)

11.21 The Australian branch of a foreign bank is to be treated as having borrowed funds from the foreign bank where the foreign bank has made funds available for use by the branch and the branch's accounting records show those funds as having been provided to the branch by the foreign bank. The loan is treated as being borrowed in the currency in which the funds were provided to the Australian branch. [New section 160ZZZ]

Payment of interest on intra-bank loans

11.22 Interest on intra-bank loans will be treated as being incurred and paid when the accounting records of the branch show that an amount was borrowed by the Australian branch and an amount of interest, for a particular period, is entered in the branch's accounting records as being interest in respect of the borrowing. This acknowledges that, in the case of intra-bank loans, interest may be paid by means of a book entry instead of an actual payment of funds. [New paragraphs 160ZZZA(1)(a) & (b)]

Ceiling rate of interest on intra-bank loans

11.23 In relation to intra-bank loans to the Australian branch, there will be a ceiling rate of interest. The ceiling rate will be the London inter-bank offer rate (LIBOR). This is the rate of interest that a bank in London is willing to lend funds to other banks. LIBOR is quoted by international business information services such as the Reuter Monitor Money Rates Service. There is a LIBOR for most currencies for loan terms of up to one year. [New paragraph 160ZZZA(3)(a)]

11.24 Where intra-bank funds are provided at a rate that is in excess of LIBOR the branch will be denied a deduction for the excess. In other words, the maximum rate of deductible interest on intra-bank loans is LIBOR. [New paragraph 160ZZZA(1)(c)]

11.25 The applicable LIBOR is that which applies in respect of loans in that currency for a term equal to the number of days in the period in respect of which interest is calculated under the loan from time to time. The applicable LIBOR is to be determined at the beginning of each period that interest is reset. Where there is no LIBOR for a term equal to the particular period used for the calculation of interest, the applicable LIBOR will be that which applies in respect of loans for a term of days closest to the reset period. Where the term of the loan is such that there could be two applicable LIBOR's, the applicable LIBOR will be that which applies in respect of loans for the shortest term. [New subsections 160ZZZA(2) &(3)]

Example 1

Assume that an Australian branch of a foreign bank borrows $100m for 2years from its head office located in New York. The interest under the terms of the intra-bank loan are reset every 180 days at the 180 day LIBOR plus 100 basis points, at the beginning of the period. Under new section 160ZZZA the branch will have the 100 basis points of interest excess over LIBOR, as at each 180 day reset, disallowed as a deduction. The remainder of the interest expense will be allowable as a deduction. This deduction will then be subject to the notional equity requirement discussed in paragraphs 11.26 & 11.27.

Notional equity requirement

11.26 Under the notional equity requirement in new section 160ZZZB , a part of the branch's funds are treated as equity under the new rules. To give effect to this policy, part of the Australian branch's debt funding will be treated as equity funding for tax purposes and consequently a deduction for interest on this notional equity component will be denied.

11.27 Under the notional equity requirement a branch's total interest deduction is reduced by 4 per cent. To apply this measure the branch must determine its interest deduction under subsection 51(1) of the Act. This new rule is subject to the ceiling rate of interest, under new section 160ZZZA, which is discussed in paragraphs 11.23-11.25. This measure does not apply to the offshore banking unit (OBU) operations of a branch. [New section 160ZZZB]

Example 2

Assume that the Australian branch of a foreign bank is entitled to an interest deduction of $200m. Assume further that this interest expense is comprised of interest paid to resident third party lenders of $50m and interest paid to its London head office of $150m at LIBOR. The notional equity requirement in new section 160ZZZB will disallow 4 per cent of the branch's total interest expense that would otherwise have been an allowable deduction. Under the notional equity requirement, $8m is disallowed as a deduction, reducing the branch's deduction to $192m.

Derivative products traded between an Australian branch and the foreign bank

11.28 Derivative products are financial instruments used for the purposes of eliminating or reducing risk from interest rate or currency exposure, exploiting comparative advantages or for profit-making. Such products in relation to interest or currency may include swaps, futures, options and forward contracts.

11.29 Derivative product transactions between an Australian branch and the foreign bank, reflected in the accounting records of the branch, will be recognised for Australian taxation purposes. The time of either payment or receipt under an intra-bank derivative product transaction will be when the branch's accounts are either debited or credited. [New 160ZZZE]

Foreign exchange transactions between an Australian branch and the foreign bank

11.30 A foreign exchange transaction is a transaction in which one currency is exchanged for another.

11.31 Foreign exchange transactions between an Australian branch and the foreign bank, reflected in the accounting records of the branch, will be recognised for Australian taxation purposes. The time of either payment or receipt under an intra-bank foreign exchange transaction will be when the branch's accounts are either debited or credited. [New subsection 160ZZZF]

Offshore banking units

11.32 An OBU is defined in section 128AE of the Act to mean a legal person in relation to whom a declaration is in force under that section. OBUs are entitled to certain interest withholding tax and income tax concessions. Entities eligible to be an OBU are licensed banks or foreign exchange dealers. A foreign bank with an Australian branch may be approved by the Treasurer to operate an OBU provided that the OBU keeps separate accounts.

11.33 Where a foreign bank carries on OB activities within its Australian branch, the Act will treat the branch as if it were an OBU for the purposes of the Act. [New section 160ZZZC]

Thin capitalisation

11.34 Thin capitalisation is a term that refers to companies that are funded by an excessive amount of debt or borrowings and very little share or equity capital. This means that a thinly capitalised company is primarily financed by borrowings rather than equity capital of shareholders. The thin capitalisation rules of the income tax law, contained in Division 16F of Part III of the Act, are an anti-avoidance measure and impose a "foreign debt" to "foreign equity" ratio on loans to Australian companies from related non-resident parties. If the set ratio of 6:1 for financial institutions and 3:1 for other taxpayers is exceeded, a corresponding proportion of the taxpayer's interest expense is disallowed.

11.35 The thin capitalisation rules will not apply to a foreign bank operating a branch banking business in Australia through a permanent establishment. This effect is achieved by not treating the foreign bank as a "foreign investor". Consequently the Australian branch of a foreign bank may borrow funds from related non-resident parties without any thin capitalisation consequences. [New section 160ZZZD]

11.36 The notional equity requirement, discussed at paragraphs 11.26 & 11.27 will replace the thin capitalisation rules for foreign bank branches.

Transfer of group losses between an Australian branch of a foreign bank and Australian subsidiaries of the foreign bank

Background

11.37 Under section 80G, a company which is part of a wholly owned group, may transfer a loss to another resident company of the group. The transferor and transferee companies must have the same beneficial ownership in the year of income in which the loss is incurred, the income year in which the loss is transferred, and the intervening period. Following the transfer the loss is treated as the loss of the transferee.

11.38 Similar provisions apply to capital losses. Section 160ZP of the Act allows a resident company incurring a capital loss to transfer that loss to another company in the group that has an accrued net capital gain.

11.39 As the foreign bank is a non-resident for tax purposes, these rules preclude it from being able to transfer or receive losses.

Loss transfers between the Australian branch of a foreign bank and Australian subsidiaries of the bank

11.40 New Part IIIB will allow loss transfers between the Australian branch of a foreign bank and Australian subsidiaries of the bank. This will be achieved by treating an Australian branch of a foreign bank as if it were both a resident of Australia and a subsidiary of the foreign bank for the purposes of section 80G of the Act. [New 160ZZZG]

11.41 An Australian branch of a foreign bank and Australian subsidiaries of the bank will also be allowed to transfer and receive capital losses. This will be achieved by treating the Australian branch as if it were both a resident of Australia and a subsidiary of the foreign bank for the purposes of section 160ZP. [New section 160ZZZH]

Certain transactions by foreign bank to be disregarded

11.42 In determining the taxable income of the Australian branch of a foreign bank, any costs of the foreign bank in relation to fund raising, derivative transactions and foreign exchange transactions other than those incurred through its Australian branch will be disregarded. New Part IIIB provides the only mechanism for attributing the costs of such transactions to the branch. [New section 160ZZZI]

Withholding tax on interest paid by an Australian branch of a foreign bank to the foreign bank

11.43 The new withholding tax measures will give effect to the Treasurer's announcement in the Banking Policy Statement that foreign bank branches will pay interest withholding tax on 50 per cent of their intra-bank interest. Interest withholding tax will be applied to interest that is treated as being paid by the Australian branch of the bank to the foreign bank. The interest withholding tax will be applied to amounts allowed as interest deductions under Divisions 1 and 2 of new Part IIIB of the Act (see paragraphs 11.21-11.27). Thus where a branch is treated as paying interest to the foreign bank, an obligation is placed on the bank to deduct withholding tax. These measures will not apply to interest on borrowings by OBUs which are exempt from interest withholding tax under section 128GB of the Act (OBU interest).

11.44 Interest withholding tax will be applied where the following conditions are satisfied. Firstly, an amount must be treated under new subsection 160ZZZA(1) as interest paid and derived by the foreign bank. As stated in paragraphs 11.21-11.25, intra-bank interest is recognised under subsection 160ZZZA(1) through the legal fiction of treating the branch and foreign bank as if they are separate legal entities. Secondly, section 128B of the Act must apply to that amount, or part of that amount, which is called the "taxable amount". Where these requirements are satisfied the provisions of new subsection 160ZZZJ(2) apply. [New subsection 160ZZZJ(1)]

11.45 The amount of intra-bank interest which is subject to interest withholding tax under section 128B of the Act is worked out using the formula:

taxable amount less notional equity requirement/2


Under this formula the amount of the notional equity requirement (defined in new subsection 160ZZZJ(2), see paragraphs 11.26 & 11.27) is subtracted from the taxable amount (defined in new subsection 160ZZZJ(1)). The result is that the intra-bank interest for which the branch has been allowed a deduction, other than OBU interest, will be subject to interest withholding tax. This amount is then divided in half. [New subsection 160ZZZJ(2)]

11.46 The features of the new withholding tax are:

•

The term "notional equity requirement" is defined in new subsection 160ZZZJ(2) to mean 4 per cent of the taxable amount. The notional equity requirement amount, which is not allowed as a deduction to the branch, is not subject to interest withholding tax.

•

In accordance with section 128C of the Act, an amount of interest withholding tax is required to be paid at the expiration of 21 days after the end of the month in which the interest is treated as having been paid. [New subsection 160ZZZJ(3)]

•

At year end, when the branch's accounts are finalised certain discrepancies may be disclosed which have resulted in either the payment of insufficient or excess withholding tax. In this situation the discrepancy must be corrected by either a refund of withholding tax or the branch being required to pay additional withholding tax. [New subsection 160ZZZJ(4)]

Example 3

Using the assumptions in Example 2 (paragraph 11.27), the Australian branch of the bank paid interest to its head office of $150m at LIBOR. Under the notional equity requirement in new section 160ZZZB, 4 per cent of this interest expense will be disallowed as a deduction. This will reduce the branch's deduction for intra-bank interest to $144m.

New section 160ZZZJ sets out the method for determining the interest withholding tax payable by the branch. The "taxable amount" under new paragraph 160ZZZJ(1)(b) is $150m, ie the intra-bank interest. The "notional equity requirement" under new subsection 160ZZZJ(2) is $6m, ie 4 per cent of the taxable amount. Under the formula in new subsection 160ZZZJ(2) the interest withholding tax payable will be calculated as follows:

$150m-$6m/2 = $72m


The intra-bank interest that will be subject to interest withholding tax at a rate of 10 per cent will be $72m and the branch will be required to pay interest withholding tax of $7.2m.

Record keeping requirements

11.47 Foreign banks will be required under new subsection 262A(1B) to keep separate identifiable records in respect of money used in the activities of the Australian branch. This will require the bank to keep separate books of account for the branch and to keep the funds of the branch separate from those of the bank. [Clause 115]

Repeal of section 128M of the Act

11.48 As announced in the Treasurer's Banking Policy Statement, section 128M of the Act will be repealed with effect from 18 June 1993, the date of the statement. Section 128M treats certain Australian branches of foreign banks as Australian entities and Australian residents for the purposes of the section 128F interest withholding tax exemption. [Clause113]

CHAPTER 12 - MINING WITHHOLDING TAX

Overview

12.1 Mining withholding tax (MWT) is levied on certain mining payments made to Aboriginal communities and groups. This Bill will reduce the rate of MWT.

Summary of the amendments

Purpose of the amendments

12.2 The Bill proposes to amend the Income Tax (Mining Withholding Tax) Act 1979, which specifies the rate of MWT, to reduce the rate from 5.8 per cent to 4 per cent.

Date of effect

12.3 The measure will apply to payments on or after the date of introduction of the Bill (30 June 1994). [Clause 120]

Background to the legislation

12.4 MWT was introduced with effect from 1 July 1979 to tax, on a final withholding tax basis, certain revenues derived by Aboriginal communities and groups from the use of Aboriginal land for exploration and mining. It was introduced in order to:

•

ensure certainty and simplicity in the rules governing tax on the payments flowing to Aborigines from mining operations; and

•

apply a rate of tax that makes allowances for the fact that substantial amounts attributable to these payments are expected to be expended in tax exempt circumstances on the provision of facilities and services for Aboriginal communities and for the benefit of people on low incomes.

12.55 The affected payments are defined by section 128U of the Income Tax Assessment Act 1936. Broadly, these payments are mining royalty equivalent payments paid to the Aboriginals Benefit Trust Fund Account, agreement payments made by mining companies directly to Land Councils for distribution to Aborigines in affected areas and any other payments made under a Federal, State or Territory law which relate to Aborigines in respect of mining.

12.6 The reduction in the rate takes account of changes in the basic rate of personal tax.

Explanation of the amendments

12.7 The reference to 5.8% in section 6 of the Income Tax (Mining Withholding Tax) Act 1979 will be removed and replaced with a reference to4%. [Clause 119]

CHAPTER 13 - SALES TAX - CHILD CARE CONCESSIONS

Overview

13.1 The Bill contains two measures in respect of the sales tax exemption for child care services. The first will limit the existing exemption with regard to luxury motor vehicles and the second will be a new credit ground.

Summary of the amendments

Limitation of exemption for luxury motor vehicles for exempt child care bodies

Purpose of the amendments

13.2 To limit the value of the exemption for luxury motor vehicles for use mainly in providing certain child care services. The portion of the taxable value of the vehicle below the luxury vehicle threshold will still be exempt, but tax will be paid on the balance of the taxable value at the rate of 45%. [Paragraph (a) of clause 121]

Date of effect

13.3 The amendments will apply from 1 July 1994 (the day after the date of introduction of the Bill into Parliament). [Subclause 2(4) and clauses 125 and 128] .

Credit for exempt child care bodies

Purpose of the amendments

13.4 There will be a credit for tax paid by certain exempt child care bodies before they became eligible for exemption. The credit will apply to child care bodies which are providing care for the first time and which have borne the tax within a year before becoming exempt. [Paragraph (b) of clause 121]

Date of effect

13.5 The amendment will apply to dealings after 23 December 1993. [Clause 124]

Background to the legislation

13.6 Since 24 December 1993, exempt child care bodies have been entitled to sales tax exemption for certain goods under Item 144A of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (E& C Act).

13.7 Under Item 144A, an exempt child care body can currently purchase or lease a motor vehicle, including a luxury motor vehicle, free of sales tax if it will be used in providing the specified child care services.

13.8 Luxury motor vehicles, in this context, are motor cars and station wagons with a taxable value above 67.1% of the motor vehicle depreciation limit set by section 57AF of the Income Tax Assessment Act 1936 (referred to here as the luxury vehicle threshold). For the financial year commencing on 1 July 1994, luxury vehicles have a taxable value over $34,403.

13.9 A child care body only qualifies for sales tax exemption if it is eligible to receive child care funding from the Commonwealth or a State or Territory government, or if it has been approved by the Minister for Family Services for sales tax purposes (section 3B E & C Act). In practice, most child care bodies rely on eligibility for government funding to establish that they are entitled to exemption.

13.10 In many cases, a child care body is only eligible for government funding, and sales tax exemption, after a child care centre run by the body has been licensed by a State or Territory government. The licence is not granted until the centre has been fully fitted out and is ready to begin operating. Consequently, there is no exemption for the equipment acquired before the centre is licensed, although these goods are for use in the provision of child care.

Explanation of amendments

Luxury motor vehicles

13.11 There are two amendments in relation to luxury motor vehicles for child care bodies. The combined effect of both amendments will be that most luxury motor vehicles purchased or leased by exempt child care bodies will be taxable, but that the part of the taxable value of a vehicle up to and including the luxury threshold will be exempt. The rate of tax on the taxable value of the vehicle over the luxury threshold will be 45%.

13.12 The first of these amendments will amend Item 144A in Schedule 1 to the E & C Act to exclude most luxury motor cars and station wagons from the exemption for exempt child care bodies.

13.13 Some luxury vehicles, however, will still be exempt. These are vehicles which are specially equipped to carry disabled people in wheelchairs and which are not covered by subitem (1) of either Item 96 or 97 in Schedule 1 to the E & C Act. Items 96 and 97 apply to motor vehicles for certain disabled people. The exclusion for goods covered by these Items is necessary to prevent persons who could claim exemption under either Item 96, 97 or 144A from using Item 144A to by-pass the exclusions to Items 96 and 97. [Clause 127]

13.14 The other amendment is to section 49 of the Sales Tax Assessment Act 1992 (Assessment Act). It is this amendment which will exempt from tax the taxable value of the luxury vehicle up to and including the luxury threshold. Section 49 already has this effect with regard to motor vehicles excluded from Items 96 and 97 because they are over the luxury vehicle threshold. The operation of section 49 will be extended to luxury motor vehicles for exempt child care bodies. [Clause123]

13.15 These two amendments will apply from the day after the date of introduction of this Bill into the Parliament. [Subclauses 2(4) and clauses 125 and 128]

13.16 A new credit ground, CR20A, will be inserted into Table 3 in Schedule 1 to the Assessment Act to overcome the problem of child care bodies not being entitled to sales tax exemption until they have purchased most of their capital equipment. The credit ground will allow an exempt child care body to claim credits for tax borne on certain goods before the body became eligible for exemption. [Clause 124]

13.17 The credit will only apply to exempt child care bodies whose principal function is the provision of either long day care, outside school hours care, vacation care and/or occasional care. It will not extend to family day care co-ordination units.

13.18 There are four conditions which will have to be satisfied before the entitlement to the credit will arise:

•

the claimant qualified for sales tax exemption (became eligible for government funding or was approved by the Minister for Family Services) within 3 months of starting to provide the relevant kinds of child care (long day care, outside school hours care, vacation care and/or occasional care). This is to restrict access to the credit to child care bodies which are opening child care centres for the first time;

•

the dealing for which the credit is claimed took place after 23December 1993;

•

the dealing occurred up to 12 months before the child care body became exempt. For many child care bodies, this will be the period when a child care centre is being fitted-out, before it is licensed and opened for business; and

•

the goods the subject of the credit claim would have been exempt under Item 144A if the child care body had been an exempt child care body at the time of the dealing. These are goods which are for use mainly in providing long day care, outside school hours care, vacation care and/or occasional care.

13.19 The amount of the credit will be the tax borne on the relevant dealings. The time for payment of the credit will be after the claimant has become an exempt child care body.

13.20 The credit ground comes into effect on the date the Bill receives Royal Assent, but applies to dealings after 23 December 1993. [Subclause2(1) and clause 124]

CHAPTER 14 - SALES TAX - CREDIT FOR PARTS USED IN THE ALTERATION OF GOODS INTENDED FOR EXPORT

Overview

14.1 The Bill will amend the Sales Tax Assessment Act 1992 to allow a credit for tax borne on parts, fittings or accessories used in the repair, renovation or upgrading of goods to be exported, to the extent that the tax has not been passed

14.2 To remove the element of sales tax on parts, fittings or accessories that are used in the repair, renovation or upgrading of goods that are to be exported, whilst ensuring that where the goods that were exported, return to Australia, sales tax is levied on the parts, fittings and accessories that were used in the earlier repair, renovation or upgrading. [Clause 129]

Date of effect

14.3 The amendment to provide the credit will apply from 1January1993 whilst the amendment to tax the returned goods will apply from the date the Bill receives Royal Assent. [Subclause 2(1) and clause137]

Background to the legislation

14.4 The general scheme of the legislation is that assessable goods which are the subject of an assessable dealing will be taxable, unless an exemption applies. One of the exemptions available is in respect of an assessable dealing with goods that are to be exported.

14.5 The legislation provides a range of exemptions and credit grounds to deal with the export of goods. In general these provisions are tied to a requirement that the goods are not used in Australia prior to export.

14.6 Using goods as raw materials in manufacture or repair of other goods to be exported results in the raw materials being used in Australia prior to export. Where the raw materials are used in manufacture, provision is made for exemption to apply. However, where the raw materials are used in repair of goods to be exported, exemption does not apply.

14.7 Thus, for example, an Australian engine put in a new car that is exported will qualify for exemption, but an Australian engine put in a boat brought to Australia for repair and later export will be taxable.

14.8 Where raw materials are imported from overseas to be used in the repair of goods imported into Australia for repair and to be exported after the repair, a credit of sales tax is provided as a result of an interconnection with the Customs legislation. However if Australian raw materials are used as mentioned earlier, sales tax is payable.

14.9 Under the sales tax legislation that existed prior to 1 January 1993, the exemption item covering goods for export or to be exported lead to doubt as to what could be covered. It was argued that raw materials used in the repair of goods for export were actually goods to be exported. It is doubtful that such an interpretation was valid, however the new legislation applying from 1 January 1993 ensured that exemption did not apply.

14.10 The effect of taxing raw materials in these circumstances is to have an element of sales tax in the cost of the goods being repaired and exported.

Explanation of the amendments

14.11 The amendments are broken up into two distinct facets:

•

a credit for parts, fittings and accessories used in the repair, renovation or upgrading (alteration) of goods to be exported, including parts etc. that are used in the alteration of goods that in turn will be used in the alteration of other goods for export [clauses 131, 133, and 136] ; and

•

a set of taxing provisions where the goods that were altered are re-imported [clauses 131, 132, 134 and 136] .

Credit

Export alteration goods

14.12 The available credit is built around a new concept, "export alteration goods". This concept has a number of important facets:

•

the materials used must be parts, fittings or accessories;

•

the materials must become an integral part of the altered goods;

•

these altered goods can in turn be used as parts, fittings or accessories of other altered goods (this process can occur any number of times, for example a gear can be used to repair a gearbox which in turn can be used to repair a boat);

•

before export, all of the various altered goods cannot be used in any way apart from being used to alter other goods as described above;

•

if the person who exports the final altered goods is not the person who actually carried out the alteration, then that first person must give the claimant a certificate, in a form approved by the Commissioner, attesting to the fact that the goods have been exported;

•

for a claimant to be entitled to a credit, the claimant must be able to show that the tax borne has not been passed on, and if it has, then that it has been refunded to the customer. [Clauses131,133and 136]

What is an integral part?

14.13 This is not a term defined in the legislation so the ordinary meaning applies in the context of the legislation. To be an integral part means that the material must belong as a part of the whole unit. It is a component or constituent of the unit which is required for the unit to operate. Thus gears in a gearbox, oil in a motor, hydraulic oil in a car braking system and an engine in a car are all integral parts. However, film in a camera, petrol in the fuel tank of a motor vehicle and batteries in a torch are not integral parts because they are not a permanent part of the whole unit.

What if I am not the person altering the goods to be exported but am altering other units that are to be used in the final alteration?

14.14 The provision is wide enough to cover a range of persons carrying out alterations that will ultimately be part of goods being exported. The provisions will cover persons who carry out subcontract work for others as well as the primary person carrying out the alteration.

14.15 Thus, as depicted in the following diagram, various persons subcontracting to carry out part of the alteration will be covered. An example would be an engine reconditioner, a radar repairer and an upholsterer contracting to a boat repairer to carry out the necessary repairs to those parts of a boat during the course of a refit by the boat yard for an overseas owner.

14.16 Similarly, contractors who carry out work for others who in turn are supplying to the primary claimant, as depicted in the diagram below will also be able to claim the credit, provided all the other requirements are met. An example of this type of work is a machine shop, purchasing materials to recondition a marine engine for a marine engine builder. The marine engine builder then uses the reconditioned unit plus other new parts to fully rebuild an engine which will be supplied to the boat yard carrying out a refit of an overseas yacht.

14.17 There is no impediment, within the legislation, to any number of contractors in either scenario nor to a mixing of the types. However, in practical terms it may prove very difficult to ensure that both the required certificates are received from the exporter and the passing on provisions are met. The purpose of the passing on requirement is to ensure that where a credit is being claimed, no part of the tax borne will ever be passed on in respect of any of the work being carried out on the goods being exported. [Clause 133]

What does it mean to export and can I do anything with the goods prior to export?

14.18 Export means to send the goods overseas to a foreign destination. Where the goods being exported return to Australia, specific provision has been incorporated to tax the goods.

14.19 For goods to be "export alteration goods" they must not be used other than in further alteration before they are exported. At times, export involves some small amount of usage. For example an overseas boat may be sailed into Australia for repair and will then sail out again. The time taken to sail directly from Australia is considered to be insignificant and will not affect the entitlement. However, where the boat was used to spend 3 months sailing around Australia before it left, that would be considered use that would prevent an entitlement to credit.

14.20 Where goods are stored for a period prior to export, this will also not be use that would prevent the credit. However, placing goods into retail stock in a retail store and later deciding to export the goods would be use that would prevent an entitlement to a credit. [Clause 133]

Format of certificate

14.21 The Commissioner will issue an advice detailing the format of the required certificate for claimants who are not the exporter. Exporters will need to provide evidence of export without use, apart from further alterations, before the export. [Clause 133]

14.22 The credit will apply to "export alteration goods" where the alteration of the goods occurred, or occurs, on or after 1 January 1993. [Subclause 137(1)]

Taxing provisions

14.23 As a means of both preventing tax avoidance and ensuring that goods that return to Australia are taxed, provisions have been incorporated to subject the reimported goods to sales tax.

14.24 The effect of the provisions is as follows:

•

if the goods that were exported have not gone into use or consumption in Australia (where goods are entered for repair etc. on a duty drawback system, they do not go into use or consumption in Australia), the goods will be taxed in the same way as any other goods being imported into Australia, that had not been used in Australia i.e. on their full value;

•

if the goods that were exported are goods that have gone into use or consumption in Australia, for example second hand computers that were used in business in Australia, and have been further altered overseas, they will be taxed on the value of the overseas alterations (as per section 42 of Sales Tax Assessment Act 1992) plus the value of the export alteration goods:

Value of overseas alterations + value of export alteration goods


[clauses 132, 134 and 135];

•

if the goods that were exported are goods that have gone into use or consumption in Australia, for example second hand computers that were used in business in Australia, and have not been altered overseas, they will be taxed on the value of the export alteration goods:

Value of export alteration goods

[clauses132,134and136].

14.25 The taxing provisions will apply to goods that are imported on or after the Bill receives Royal Assent. [Subclauses 2(1) and 137(2)]

CHAPTER 15 - SALES TAX - PARTS USED TO REPAIR FAULTY GOODS REPLACED UNDER WARRANTEE

Overview

15.1 The Bill will amend the Sales Tax Assessment Act 1992 to reduce the clawback of sales tax credit involved with goods that have been replaced under warranty, repaired and resold. The reduction will be the amount of sales tax borne on the parts used in the repair.

Summary of the amendments

Purpose of the amendments

15.2 To remove the element of double taxation involved in the current amount payable under the clawback of credit provision applying when repaired defective goods are resold. [Clause 138]

Date of effect

15.3 The amendment will apply in relation to sales of defective goods that occur from the date of introduction of the Bill (30 June 1994). [Subclause 2(5)]

Background to the legislation

15.4 A sales tax credit is available when taxable goods are returned and replaced free of charge and under warranty, where the value of the warranty was included in the taxable value of the defective goods. The credit is equal to the amount of tax borne on the replacement goods.

15.5 If the original defective goods are repaired and later resold by the supplier, the credit on the replacement goods is reduced or clawed back. The clawback is calculated according to a formula that represents the extent of the proportion of the original value that is recouped in the sale of the repaired goods. For example, if the sale price of the repaired goods is one-third of their original price, then one-third of the credit allowed is clawed back.

15.6 Where parts are used in the repair there is no provision to allow for an exemption, thus sales tax is payable on the parts. When the clawback occurs, no consideration is given to the tax borne previously on the parts and thus the effect is to again tax the value of the repair parts.

Explanation of the amendments

15.7 Section 58 is amended by reducing the amount payable by the original credit claimant (the claimant), by any amount of tax borne on goods that were used as raw materials in the repair of the defective goods. [Clause 140]

15.8 For the reduction to occur, the claimant must have actually borne tax on the raw materials. Thus, for example, where the claimant buys parts tax paid, repairs the goods with the parts and re-sells the repaired goods, tax has been borne. However, where the claimant arranges for someone else to repair the goods for them and parts used are part of a service contract, the claimant has not borne tax. In this circumstance for tax to be borne, the claimant would need to either supply the parts, having purchased them tax paid, or buy them tax paid separately from the repairer.

15.9 The amendment will apply to amounts payable under section 58 that arise from sales of defective goods that occur from the introduction of this Bill. [Subclause 2(5) and clause 141]

CHAPTER 16 - SALES TAX - PERIODIC QUOTATION

Overview

16.1 The Bill will amend the Sales Tax Assessment Act 1992 to allow both registered and unregistered persons to supply a single quotation for all their exempt purchases in a period, where that period does not exceed one year. The Bill will also provide for the quotations to be made to both registered and unregistered suppliers.

Summary of the amendments

Purpose of the amendments

16.2 To provide purchasers who are permitted to quote for taxable goods, the flexibility to supply a single quotation to each supplier to cover all their purchases for periods up to one year. [Clause 142]

Date of effect

16.3 The amendments apply from the date the Bill receives Royal Assent. [Subclause 2(1)]

Background to the legislation

16.4 The quoting of a registration number or an exemption declaration is a mechanism for exempting an assessable dealing from sales tax. If a purchaser of goods quotes at or before the time of the dealing, the vendor is generally exempted from a sales tax liability on that dealing, and the liability rests with the purchaser.

16.5 In order to reduce the cost of administration involved with quoting, persons who are registered for sales tax purposes can, with the approval of the Commissioner of Taxation, make one quote at the beginning of a month to a supplier to cover all purchases for that month. The quote then applies to all purchases, unless the quoter notifies the supplier that the quoter is not entitled to quote for particular transactions.

16.6 Unregistered persons, such as Government Departments and Public Benevolent Institutions, do not have access to monthly quotations. Further, unregistered suppliers are not able to accept monthly quotations.

Explanation of the amendments

16.7 The amendments will expand the scope of the monthly quoting provisions in section 85 of the Sales Tax Assessment Act 1992 to:

•

extend the period for which quotes may be made from 1 month to 1 year;

•

allow both registered and unregistered persons to supply periodic quotations; and

•

allow both registered and unregistered suppliers to accept periodic quotations. [Clauses 142, 143 and 144]

16.8 The periodic quotation will be required to be in the form and manner approved by the Commissioner of Taxation and be made at or before the time of the first dealing. [Clause 145]

16.9 For the purposes of the new periodic quoting, a monthly quote made before this provision is enacted will be taken to be a periodic quotation. [Clause 146]

What about Commissioner approval?

16.10 There will be no requirement for the purchaser to seek the approval of the Commissioner of Taxation before making use of the provision. This will ensure that business is able to base their periodic quotation decisions around their needs and take into account the needs of their suppliers.

How flexible are the new provisions?

16.11 The new provisions are designed to allow business the maximum flexibility to meet their needs within the bounds of the allowable quoting grounds. It is envisaged that purchasers and suppliers would come to agreement on the period that best suits both their needs and allows for the realities of the business world to be accommodated.

Why is the period limited to one year?

16.12 The limitation reflects the normal maximum period business has indicated is used in most supply contracts. However, the main reason is to ensure that purchasers are able to focus on their responsibilities with respect to quoting and their liabilities on the goods they buy under quotation.

CHAPTER 17 - SALES TAX - EXTENSION OF HE CREDIT FOR POST_TRIAL SALES AND LEASES

Overview

17.1 The Bill will amend the Sales Tax Assessment Act 1992 to allow a credit for sales tax paid on goods that are the subject of multiple trials or demonstrations in exempt circumstances and are subsequently sold, or leased for the remainder of the statutory period, to any exempt person.

Summary of the amendments

Purpose of the amendments

17.2 To extend the current credit provision in respect of post-trial sales and leases, to allow for multiple trials or demonstrations in exempt circumstances and for the ultimate sale or lease to be made to any exempt person. [Clause 147]

Date of effect

17.3 The amendment will apply from the date the Bill receives Royal Assent. [Subclauses 2(1) and clause 150]

Background to the legislation

17.4 The sales tax legislation allows a credit for tax borne on goods that are the subject of a post-trial sale or lease, to the extent that it has not been passed on, where:

•

the goods have been loaned or leased to a person (usually for the purposes of a trial of the goods); and

•

the goods are sold, or leased to that person for the remainder of the statutory period, immediately after the lease or loan; and

•

the purchaser/lessee gives evidence that they will use the goods in exempt circumstances.

17.5 The existing credit ground only applies when goods are sold or leased to an exempt person immediately after the trial and that exempt person is the person who trialed the goods. If the goods are returned to the supplier after the trial, loaned to other possible customers or put into stock and later sold or leased to an exempt customer, no credit is available.

17.6 Thus, even though a particular piece of equipment, for example a mining dump truck, may be exclusively used by a number of trial users in the mining industry and then sold to a mining company, no credit will be available. The purchasing mining company will effectively be paying sales tax on its business inputs.

17.7 Similarly, where a supplier demonstrates, over a period of time, equipment to exempt users and finally sells the equipment to an exempt user, no credit is applicable and the exempt user effectively bears the sales tax in the purchase price.

Explanation of the amendments

17.8 Section 15B of the Sales Tax Assessment Act 1992 has been repealed and replaced by a much wider provision that allows for:

•

multiple exempt trial-leases or trial-loans;

•

multiple demonstrations to exempt persons; and

•

sale, or lease for the remainder of the statutory period, to any exempt person. [Clause 149]

What do I have to do to qualify for the credit?

17.9 To fulfil the requirements of the new section and thus qualify for the credit of tax borne to the extent that it has not been passed on, the claimant must ensure that:

•

the goods concerned were assessable goods immediately before the first exempt trial; and

•

the only use of the goods from the time of the first trial to the time of the ultimate sale or lease is in exempt trials or demonstrations; and

•

the ultimate sale, or lease for the remainder of the statutory period, is in exempt circumstances. [Clause 149]

Exempt trial-lease

17.10 This term is defined within the section to cover a lease to a person who uses the goods to satisfy an exemption item. The lessee must give the lessor evidence in a form approved by the Commissioner. The Commissioner will issue advice as to the format of the particular certificate that will fulfil his requirements. The new section will permit any number of such leases provided the other requirements are met. [New 15B(2)]

Exempt trial-loan

17.11 This term is defined within the section to cover a loan to a person who uses the goods to satisfy an exemption item. The person to whom the goods are lent must give the lender evidence in a form approved by the Commissioner. The Commissioner will issue advice as to the format of the particular certificate that will fulfil his requirements. As with trial-leases, any number will be permitted provided the other requirements are met.

17.12 The major extension to this concept is to provide for demonstrations to exempt users. The act of demonstrating the goods to an exempt user is included as a use by the exempt person. This will ensure that businesses are able to demonstrate to exempt users without affecting an ultimate sale or lease to an exempt person. It should be noted that some demonstrations are so insignificant that they could be considered to be covered by the concept of de minimus non curat lex, ie. the Act does not concern itself with trifles. [New subsection 15B(3)]

All AOU's must be exempt trial-leases or exempt trial-loans

17.13 The object of the provision is to provide for multiple exempt trial-leases and exempt trial-loans. Should there be demonstrations, leases or loans to persons not entitled to exemption, the object is to deny a credit. Thus if a machine was trialed by a Government Department, then a mining company, then a plumber who is a taxable person, the ultimate credit will no longer be available.

17.14 Storage of goods awaiting another trial or sale for example is not considered to be an AOU in these circumstances nor is transportation to a trial user's premises and back to the claimant's premises. [Paragraph (e) of new subsection 15B(1)]

Can I claim exemption on the goods when I buy them for loan or lease?

17.15 The legislation does not specifically provide for a quotation in these circumstances. Further, the first trial is an application to own use by the claimant, which would be a point of liability should the goods have been purchased under quotation. The credit does not have application until all the conditions are met, thus it is not possible to know at the time of the purchase whether or not all the conditions will be met.

17.16 It has been noted that particular equipment in some industries, (e.g. large mining compressors) will, in almost all cases, be used in exempt circumstances. The legislation does contain a number of very flexible provisions that allow the Commissioner wide discretion. However, before such discretion can be exercised, the Commissioner must be satisfied that it is reasonable to exercise the discretion and that the revenue will be protected.

When does the provision come into effect?

17.17 The new provision will apply from the date the Bill receives Royal Assent. It will only apply to goods where the first exempt trial-lease or exempt trial-loan occurs on or after that date. For situations where the first exempt trial-lease or exempt trial-loan occurs before that date, the old section will apply. The Commissioner has no discretion to vary this to accommodate the latter occurrence. [Subclauses 2(1) and clause 150]

CHAPTER 18 - SALES TAX - INCENTIVES FOR REGIONAL HEADQUARTERS

Overview

18.1 Approved companies which are establishing regional headquarters in Australia will be entitled to the benefit of either sales tax exemption or refunds in respect of certain imported computer equipment and related equipment. The same companies will also be eligible for income tax concessions which are described in Chapter 3.

Summary of the amendments

Purpose of the amendments

18.2 The purpose of these amendments is two-fold:

•

to exempt from sales tax certain imported, second-hand computer equipment and related equipment for use in newly-established regional headquarters in Australia by approved companies; and

•

to provide credits or refunds in respect of tax borne on such goods after 15 December 1993 and before the exemption comes into effect.

[Clause 152]

Date of effect

18.3 The exemption amendment will apply from the date that the Bill receives Royal Assent. [Subclause 2(1) and clause 154]

Background to the legislation

18.4 There are no concessions in the existing sales tax legislation particularly aimed at companies setting up regional headquarters in Australia. These amendments are part of a package which reflects the desire to encourage multi-national companies to relocate their regional headquarters operations to Australia.

Explanation of the amendments

Exemption item

18.5 Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (E & C Act) identifies goods which are exempt from sales tax. A new Item 38A , will be inserted into Schedule 1 of the E& C Act to exempt from sales tax imported computer related equipment for use by an RHQ company mainly in providing regional headquarters support where particular conditions are satisfied. [Clause 153]

Computer related equipment

18.6 "Computer related equipment" will be:

•

computer equipment;

•

equipment mainly used for producing, supplying, monitoring or regulating power for the computer equipment; and

•

equipment mainly used for controlling the temperature in areas where computer equipment is housed.

18.7 "Computer equipment" includes equipment which goes to make up an integrated computer system, such as central processing units and disk drives, as well as:

•

equipment for networking between computers;

•

equipment mainly used for communicating between computers (including, for instance, modems but not including ordinary telephone handsets); and

•

monitors.

"Computer equipment" does not extend to consumables such as floppy discs, tapes or paper, and does not refer to equipment for use with computers such as office furniture.

18.8 The imported computer related equipment which will qualify for exemption will be:

•

in existence for 9 months. This is to avoid the possibility that the goods only had to fulfil the conditions of the exemption for the time they were in existence, even if this was less than 9 months before local entry;

•

owned or leased, for a period of 9 months before local entry, by:

•

the RHQ company; or

•

a company which is a group company in relation to the RHQ company at the time of local entry; or

•

a company which was a group company in relation to an RHQ group company at any time during the 9 months before local entry. This will cover the situation where the equipment has been owned or leased during the 9 months by a group company which subsequently ceased to exist;

•

not leased or sub-leased to an unrelated company during that time; and

•

locally entered within 2 years from the date of the first local entry of equipment for use by the RHQ company which is exempt under this exemption Item. A later expansion of regional headquarters support activities, more than 2 years after the first RHQ goods were locally entered, would not qualify for exemption.

The exemption, however, is not confined to local entry. Any assessable dealing with goods covered by the exemption Item, such as movements of the goods between companies in the group, will be exempt.

18.9 "Group company" is defined in section 3A of the E & C Act. Basically, one company will be a group company of another if it is either a subsidiary of the first company, or both companies are subsidiaries of the same company, and in either case, there is 100% common ownership. Generally speaking, local entry usually occurs when goods are entered through Customs for home consumption in Australia.

RHQ company

18.10 An RHQ company will be a company which:

•

the Treasurer has determined under new section 82CE of the Income Tax Assessment Act 1936 to be an RHQ company. The determination will take the form of a disallowable instrument, which will be made in accordance with written guidelines (see paragraphs 3.15-17 for further information); or

•

is a transitional RHQ company (see paragraphs 16-18 in this chapter).

Regional headquarters support

18.11 The provision of regional headquarters support will be defined in new subsection 82CB(2) of the Income Tax Assessment Act 1936 and is discussed in more detail at paragraphs 3.22-28.

18.12 Briefly, however, it will involve a company providing certain services to either an associated company located overseas or another part of the same company located overseas. The relevant services are:

•

management related services, including finance and treasury services, business planning services, marketing services, accounting services and research and development services;

•

data services involving substantial input, transmission or manipulation of data, or the production of information from that data; and

•

software support services provided by companies to purchasers of their software.

Application

18.13 This exemption will apply to dealings which take place from the date that the Bill receives Royal Assent. [Subclause 2(1) and clause 154]

Transitional credit

18.14 Prior to 15 December 1993, some companies had already been granted approval for sales tax exemptions for goods imported as part of the process of relocating regional headquarters to Australia. To cover those companies who import goods under these circumstances but before the exemption comes into effect, the Bill will contain a transitional credit ground.

18.15 This will provide credits for tax paid or borne on dealings to be known as "transitional RHQ company dealings". Because of its transitional nature, the credit ground will not actually be incorporated into the Assessment Act, but that Act will apply in relation to the relevant dealings as though the credit ground was included. [Subclause 155(1)]

Transitional RHQ company

18.16 The Treasurer may determine that a company is a "transitional RHQ company" if the company is a "pre-approved company" or a group company of a "pre-approved company". The determination will take the form of a disallowable instrument which will specify the day on which a company commences to be a transitional RHQ company and any other matter which the Treasurer considers appropriate. [Subclauses 155(4), (5) and (7)]

18.17 A "pre-approved company" is one of the companies granted approval by the Treasurer or another Minister for either sales tax exemption or compensation for the cost of sales tax on imported computer equipment for regional headquarters prior to 15 December 1993. Approval was given in respect of imported equipment owned by the company for at least 9 months prior to importation. [Subclause 155(6)]

18.18 A transitional RHQ company will be an RHQ company for sales tax purposes. However, a transitional RHQ company which wishes to take advantage of the income tax concessions will have to make application under new subsection 82CD(1) of the Income Tax Assessment Act 1936 (see paragraph 3.15).

Transitional RHQ company dealings

18.19 A transitional RHQ company dealing will be a dealing with imported goods which would have satisfied all the conditions for exemption under the new exemption Item for computer related equipment for RHQ companies, but for two points:

•

the dealing occurs before the exemption will have come into effect. The credit ground only covers dealings which take place on or after 15 December 1993 and before the exemption comes into effect;

•

the goods are for use by a "transitional RHQ company". [Subclause 155(3)]

2 year limit with regard to transitional RHQ companies

18.20 In the process of setting up a particular regional headquarters in Australia, goods may be locally entered after 14 December 1993, but before the new exemption takes effect. Thus for some companies, the sales tax concession will be in the form of credits for dealings with relevant goods before the new exemption takes effect, while dealings with the goods after that time will be exempt.

18.21 If this is the case, the requirement for exemption that goods were locally entered within 2 years after the first local entry of goods covered by the exemption item for use by a particular RHQ company, will be read as a requirement that the goods were locally entered within 2 years after the goods the subject of a transitional RHQ company dealing were first locally entered. [Subclause 155(2)]

Claiming the credit

18.22 Claimants will only be able to claim credits under these provisions after the date that the Bill receives Royal Assent. The amount of the credit will be the amount of tax borne on a transitional RHQ company dealing to the extent that it has not been passed on to, or recouped from, the purchaser or lessee of the goods. [Subclauses 2(1) and 155(1)]

CHAPTER 19 - SALES TAX - TAKE-AWAY FOOD CONTAINERS

Overview

19.1 The Bill will amend Item 27 of the Sales Tax (Exemptions and Classifications) Act 1992 to ensure that containers used to deliver take-away food and beverages, and certain ice-cream and biscuit goods are excluded from the exemption.

Summary of the amendments

Purpose of the amendments

19.2 To clarify the current wording of Item 27 of the Sales Tax (Exemptions and Classifications) Act 1992 to ensure that the exclusions in sub-item 27(3) encompass containers used to deliver the specified goods.

Date of effect

19.3 The amendment will apply from the date of introduction of the Bill (30June1994). [Subclauses 2(5) and 158(2)]

Background to the legislation

19.4 The basic scheme of the sales tax legislation is to treat containers for goods in the same way as their contents. The exception to this concept are containers for take-away beverages or foodstuffs and containers for certain ice-cream goods and biscuit goods.

19.5 In general, the legislation taxes the inputs to retail or catering establishments such as hotels, restaurants, kitchens, take-away food shops and the like. Thus containers used in connection with these establishments are taxed separately.

19.6 Containers are defined in terms of being packaging for the purposes of "marketing or delivery" of the contents. However, the exclusion to exemption Item 27 for containers for take-away food and the like is expressed only in terms of the "marketing" of the contents.

19.7 There is a large degree of overlap in the scope of the terms "marketing" and "delivery". In the context of the exemption item for containers, it is considered that the term "marketing" covers the scope of both terms.

Explanation of the amendments

19.8 Item 27 of the Sales Tax (Exemptions and Classifications) Act 1992 is amended by adding the term "delivery" to the exclusion sub-item 27(3). The amendment is merely to clarify the meaning of the exclusion and provide certainty to taxpayers. [Paragraph (a) of clause 157]

CHAPTER 20 - SALES TAX - WIRELESS TRANSCEIVER FOR USE WITH THE ROYAL FLYING DOCTOR SERVICE OF AUSTRALIA

Overview

20.1 The Bill will amend item 169 of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1992 (E & C Act ) to correct a consequential amendment made to the item by the Radiocommunications (Transitional Provisions and Consequential Amendments) Act 1992. It will also provide a transitional credit to cover dealings with goods that occurred after 30 June 1993 and before the Bill receives Royal Assent.

Summary of the amendments

Purpose of the amendment

20.2 To reinstate the exemption for persons who use wireless transceivers to make contact with radio services conducted by the Royal Flying Doctor Service of Australia and similar bodies.

Date of effect

20.3 The amendment to the exemption will apply to dealings with goods from the date that the Bill receives Royal Assent. The credit will apply to dealings with goods after 30 June 1993 and before the Bill receives Royal Assent. [Subclauses 2(1), 158(2) and clause 159]

Background to the legislation

20.4 Item 169 of the First Schedule to the E & C Act was designed to allow limited exemption from sales tax for wireless transceivers used by persons mainly to make contact with radio services conducted by the Royal Flying Doctor Service and similar bodies. The exemption was primarily obtained by farmers in the outback areas of Australia.

20.5 In late 1992, a consequential amendment was made to subitem 169(2) of the E & C Act by the Radiocommunications (Transitional Provisions and Consequential Amendments) Act 1992. The purpose of that amendment was to align the terminology of item 169, which was expressed in terms of the Radiocommunications Act 1983, to that used in the new Radiocommunications Act 1992 (Radcom Act).

20.6 The amendment, which was made to the definition of 'authorised person' in subitem 169(2), basically removed the exemption for people who are authorised to use wireless transceivers, as they do not conduct the service under the Radcom Act. The amended legislation in effect provided exemption to the Royal Flying Doctor Service of Australia and similar bodies which are already exempted from sales tax under another provision.

Explanation of the amendments

20.7 The Bill amends the definition of 'authorised person' in subitem 169(2) of the E & C Act, so that persons who use wireless transceivers to connect with services provided by the Royal Flying Doctor Service or similar bodies, are able to gain exemption on the equipment.

20.8 The current definition of 'authorised person' is amended to allow exemption to a person who is authorised to 'operate the wireless transceiver'. The term "wireless transceiver" is not defined. Accordingly the ordinary meaning of the term will apply namely, a radio capable of both transmitting and receiving radio waves. The authorisation to use the wireless transceiver in the specified circumstances is currently by being licensed as an "outpost station", a category of licence under the Radiocommunications Regulations made under the Radcom Act. [Paragraph (b) of clause 157]

20.9 A transitional credit is provided to cover persons, entitled to the exemption, who have purchased a wireless transceiver inclusive of sales tax after 30 June 1993 and before this Bill receives Royal Assent. [Clause159]

20.10 Any person in this position may apply to the Australian Taxation Office for a refund.