Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)General outline and financial impact
State and Territory bodies
Amends the income and sales tax law to exempt wholly owned State and Territory bodies from income tax and sales tax, except for certain specified bodies. Many State and Territory bodies covered by the proposed new exemptions are already exempt, but the aim of the amendments is to clarify the existing law. From 1 July 1995, some bodies which are currently taxable will become exempt.
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- Income tax - in respect of 1994-95 and later years;
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- sales tax - in respect of dealings with goods occurring on or after 1 July 1994.
Proposal announced: The broad outline of the agreement reached at the 1994 Premiers' Conference was contained in a press statement issued by the Treasurer on 25 March 1994.
Financial impact: Expected to be revenue neutral.
Compliance cost impact: The cost of compliance with Commonwealth laws will not change. There are expected to be some costs for State and Territory bodies and State and Territory governments in putting tax equivalent regimes in place.
Employee share schemes
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- Amends the Income Tax Assessment Act 1936 to provide for the taxation of benefits received under employee share schemes. Concessional arrangements will apply to schemes meeting certain conditions.
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- Amends the Fringe Benefits Tax Assessment Act 1986 to ensure that there is no double taxation of those benefits.
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- Makes other consequential amendments to the above measures.
Date of effect: 6pm in the ACT (and the equivalent time elsewhere) on 28 March 1995
Proposal announced: 28 March 1995
Financial impact: The nature of this measure is such that a reliable estimate cannot be provided. However, revenue savings are expected as the measures counter a number of arrangements which exploited the existing provisions in the income tax law.
Compliance cost impact: There will be some increase in compliance costs where an employer is required to obtain valuations for shares and rights that remain subject to restrictions at the end of the tax deferral period of five years. The compliance costs will be minimal where the shares and rights are quoted on a stock exchange. In other cases there will be costs in having the shares and rights valued. It is anticipated that the number of these cases will not be substantial.
Moreover, in the case of share rights, the Bill contains tables that enable the employer to readily calculate the market value of the rights once the market value of the shares to which the rights relate and the exercise price of the rights are ascertained.
It is expected also that some employers will incur up front costs in restructuring existing employee share schemes to take advantage of the $500 concession and the five year deferral limit.
The new provisions have been written in a more explanatory drafting style using features developed by the Tax Law Improvement Project. The provisions are clearer and more readable than the current provisions of section 26AAC in the income tax law. This will assist employers and employees in understanding how the law applies to the taxation of benefits under employee share schemes. The drafting style should therefore help to minimise compliance cost impacts of the amendments.
Refunds of tax file number amounts deducted in error
Amends the income tax law to:
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- limit investment body refunds of tax file number (TFN) amounts deducted in error to amounts deducted in the current year only;
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- provide for the Commissioner, in appropriate cases where an amount has not been refunded earlier, to give a direct refund for amounts deducted in error rather than a credit on assessment;
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- allow investment bodies to offset TFN amounts refunded against future remittances in respect of the same year.
Date of effect: 1 July 1995.
Proposal announced: Not previously announced. Proposal developed in consultation with the 'Interest and Dividend Payers Consultative Forums' (which consists of industry and ATO representatives).
Financial impact: No impact on revenue is expected.
Compliance cost impact: This measure will reduce compliance costs as investment bodies will process a lesser number of refunds and, except for existing refund entitlements, will not have to lodge the amended forms presently required.
Pensions, allowances and benefits
Amends the income tax law to remove the exemption from income tax of the mature age partner allowance. Also makes some minor technical amendments relating to removal of obsolete references; insertion of inadvertently omitted references relating to supplementary amounts and the beneficiary rebate; and the correction of a date of application for the partner allowance.
Date of effect: 1 July 1995 for the removal of exemption of mature age partner allowance from income tax. The dates of effect for the minor technical amendments vary.
Proposal announced: Not previously announced.
Financial impact: The financial impact of the removal of the exemption for the mature age partner allowance is a negligible gain to the revenue. There will be no financial impact of the minor technical amendments.
Compliance cost impact: Mature age partner allowees who would otherwise not have to lodge an income tax return may have to do so. This will be so where they have non-allowance income which raises their taxable income to above the relevant pensioner rebate threshold. Because of the pensioner rebate most mature age partner allowees will not be subject to income tax and so will not have to lodge a return.
There will be no compliance costs for the minor technical amendments.
Capital gains tax - roll-over relief for merging superannuation funds
Amends the capital gains tax (CGT) provisions of the income tax law to allow certain superannuation funds which merge on or after 1 July 1994 and before 1 July 1997 to defer (roll-over) any CGT gains or losses that would be realised at the time of the merger on the assets transferred.
Date of effect: The amendment will apply to superannuation funds that merge on or after 1 July 1994 and before 1 July 1997.
Proposal announced: Treasurer's Statement on Superannuation Policy of 28 June 1994.
Financial impact: The notional cost to the revenue from the proposal is estimated to be $50 million for each of the three years of its operation. The actual cost to the revenue will be less because many funds would not merge if roll-over relief was not available.
Compliance cost impact: The amendments will only affect superannuation funds that merge and elect to have CGT roll-over relief. Such funds will need to comply with the conditions for relief and keep records which provide evidence that they have met those conditions.
Fund managers may incur costs in seeking advice on the effect of this measure. However, superannuation funds that merge will reduce their operating costs and improve their economies of operation.
Superannuation - various amendments to the income tax law
Amends the income tax law to ensure that:
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- the taxation arrangements for superannuation pensions and roll-over annuities operate as intended so that:
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- the deductible amount of a life time superannuation pension or annuity is calculated based on life expectancy at the beginning of the period in respect of which the pension or annuity is payable;
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- that people in receipt of disability pensions prior to 1 July 1994 retain their entitlement to a rebate;
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- The undeducted purchase price (UPP) that applies to pensions and annuities purchased prior to 1 July 1994 will also apply to pensions and annuities purchased with an eligible termination payment (ETP) representing the commutation or residual capital value of a pension or annuity that commenced prior to 1 July 1994;
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- deductions for employer superannuation contributions are not available when a contribution is made directly to a superannuation fund established primarily for the benefit of a spouse or another dependant of an employee; and
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- the 90 day roll-over period applies to ETPs received before 1 July 1994.
Date of effect: The amendments relating to the time the deductible amount is calculated and employer superannuation contributions will apply from the date of introduction of the Bill. The remaining amendments will apply from 1 July 1994 as they clarify and remove anomalies in respect of provisions inserted into the law with effect from that date.
Proposal announced: The first two amendments relating to superannuation pensions and annuities and the amendment relating to employer superannuation contributions have not been previously announced. The amendment to retain the UPP of pension and annuities that commenced to be payable prior to 1 July 1994 was announced by the Treasurer on 23 December 1994. The amendment to allow the 90 day roll-over period in respect of ETPs received prior to 1 July 1994 was announced by the Parliamentary Secretary to the Treasurer on 29 June 1994.
Financial impact: The amendments are not expected to have any significant impact on the revenue.
Compliance cost impact: The amendments related to the time UPP is calculated are expected to reduce compliance costs because all the calculations affecting the tax treatment of pensions and annuities will be carried out at one time. Similarly, the amendments relating to disability pensions are expected to reduce compliance costs because taxpayers in receipt of disability pensions prior to 1 July 1994 will continue to be entitled to the pension and annuity rebate without having to satisfy the new conditions.
The amendments related to retaining the higher UPP in respect of superannuation pensions and annuities that commenced to be paid prior to 1 July 1994 are expected to increase compliance costs. In order to gain the benefit of the higher UPP in respect of these superannuation pensions and annuities taxpayers and pension and annuity providers will need to keep additional records of any underlying pension or annuity that was commuted and used to purchase a new pension or annuity.
Superannuation guarantee - jurisdiction of the Australian Industrial Relations Commission
Amends the SGAA to make it clear that the Australian Industrial Relations Commission's (AIRC's) jurisdiction in the ambit of superannuation is unaffected by the enactment of the superannuation guarantee legislation.
Date of effect: Applies since the enactment of the SGAA, ie from 1 July 1992.
Proposal announced: Treasurer's Statement on Superannuation Policy of 28 June 1994.
Financial impact: None
Compliance cost impact: None
Superannuation guarantee - flat dollar contributions
Amends the Superannuation Guarantee (Administration) Act 1992 (SGAA) to ensure that the actual percentage level of superannuation support provided for an employee for flat dollar contributions is calculated based on the actual contributions paid by the employer.
Date of effect: 1 July 1994.
Proposal announced: Treasurer's Statement on Superannuation Policy of 28 June 1994.
Financial impact: None.
Compliance cost impact: Recognition of flat dollar contributions on the basis of actual contributions paid will result in a reduction in compliance costs for some employers. The amendment will relieve employers of the need to amend awards or to calculate the additional super contributions they are required to make based on each employee's ordinary times earnings. This is currently needed where the superannuation guarantee minimum contribution required exceeds the contribution specified in an employee's award.
Superannuation guarantee - local government councillors
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- Amends the SGAA to generally exempt from the scope of the SGAA the income which elected local government councillors derive in performing their duties as councillors.
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- Inserts new definitions of employee and employer in the Superannuation Industry (Supervision) Act 1993 (SIS) to overcome unintended consequences resulting from the exclusion of councillors from the SGAA.
Date of effect: 1 July 1993.
Proposal announced: 18 April 1994.
Financial impact: Cost to the revenue in the 1994-95 and subsequent years will be less than $500,000.
Compliance cost impact: Exemption of councillors' allowances under the SGAA means compliance costs will be reduced for local councils.
Retention of councillors as employees for the purposes of SIS reduces potential compliance costs to some funds that may otherwise have been treated as non standard employer-sponsored funds.
Superannuation - miscellaneous amendments
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- Amends the
Superannuation Industry (Supervision) Act 1993 to:
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- allow the Insurance and Superannuation Commissioner (or his delegates) to undertake statistical surveys of the superannuation industry and allow superannuation standards officers to provide information (such as statistical information derived from the surveys) to the Australian Bureau of Statistics for statistical purposes;
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- ensure that the trustee or an investment manager of a less than five member regulated superannuation fund is not precluded from taking advantage of the exception to the rule prohibiting acquisition of members assets simply because the members business is established in a company form and not in the form of a sole trader or partnership;
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- allow the financial backing requirements imposed on approved trustees and on custodians to be met by having an approved guarantee and net tangible assets which together sum to at least the prescribed amount (this has previously been provided for by a Temporary Modification Declaration made by the Insurance and Superannuation Commissioner);
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- allow for the Superannuation Industry (Supervision) Regulations to provide some flexibility in determining the date by which an application for a pre 1 July 1988 funding credit must be made.
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- Amends the Superannuation Entities (Taxation) Act 1987 to change the method of collection of the superannuation supervisory levy and to make some other largely consequential amendments, including changes to the manner in which the late payment penalty is calculated.
Date of effect: The amendments to the Superannuation Entities (Taxation) Act 1987, relating to the collection of the superannuation supervisory levy, apply in relation to the levy payable on annual returns lodged for the 1994-95 and later years of income. The other amendments commence on Royal Assent.
Proposal announced: Not previously announced.
Financial impact: No overall impact on revenue is expected.
Compliance cost impact: No significant compliance costs should result. The amendments generally lessen existing restrictions. Funds may incur some minor compliance costs in completing statistical survey questionnaires but these costs should not be significant, if any, as the data collected will be data which is readily accessible to fund trustees.
Late lodgment penalty
Amends the penalty provisions in the income tax law to introduce a new system of late lodgment penalties.
There will be a flat rate penalty on relevant entities and instalment taxpayers (ie companies, superannuation funds and some trusts) that are late in lodging their income tax returns. They will be liable for a penalty of $25 for each week a return remains outstanding, up to a maximum of $500. The penalty will apply irrespective of whether the taxpayer has a tax liability.
Taxpayers other than relevant entities and instalment taxpayers who are late in lodging their income tax returns will be liable for additional tax of 8% per annum on the amount of net tax payable for the year of income. In addition, they will also be liable for interest on the net tax payable at the same rate that applies for late payments and underpayments of tax. Taxpayers will not be subject to any late lodgment penalty if they do not owe any tax.
Date of effect: The amendments will apply to 1994-95 and later year income tax returns where the due date for lodgment occurs after 30 June 1995.
Proposal announced: Proposals to change the late lodgment penalty for ordinary taxpayers was first announced in August 1991 by the then Treasurer in an information paper titled 'Improvements to Self Assessment - Priority Tasks'. The flat rate penalty for relevant entities and instalment taxpayers has not been announced.
Financial impact: A reliable estimate cannot be provided.
Compliance cost impact: Taxpayers will receive a notice of their liability where they have failed to lodge a return on time. Apart from paying the liability there is no compliance cost. Taxpayers are already required to lodge their returns on time.
Sales tax - exemption for UHF transmitters
Amends the sales tax law to extend the operation of an earlier exemption for certain UHF transmitters, for use in commercial television broadcasting, to cover the period 1 January 1994 to 31 December 1995. The new exemption will only apply to transmitters to be used in connection with the equalisation program, which provides services in regional areas comparable to those in capital cities.
Date of effect: The amendment will apply to transmitters installed between 1 January 1994 and 31 December 1995.
Proposal announced: Not previously announced.
Financial impact: The total cost to revenue for the duration of the concession is likely to be about $2 million.
Compliance cost impact: Apart from any costs incurred in obtaining the necessary certificate from the Department of Communications and the Arts, the impact on compliance costs will be no greater than for any other exemption. In order to claim this exemption, most licensees will be required to give an exemption declaration either to the supplier, or to Customs, if the goods are imported. The Department of Communications and the Arts has advised that it will probably require a written application for the certificate, supported by a statutory declaration.
Sales tax - new credit ground for unregistered exemption users
Amends the Sales Tax Assessment Act 1992 to provide a new credit ground so that unregistered persons can claim refunds of sales tax where they have borne tax on an assessable dealing even though they were entitled to quote an exemption declaration.
Date of effect: Royal Assent.
Proposal announced: Not previously announced.
Financial impact: Negligible.
Compliance cost impact: If a claimant wishes to apply for a credit under the new credit ground the claimant must make application in the form approved by the Commissioner and send the form to his or her local Australian Taxation Office.
Minor amendments
The Bill also makes several minor technical amendments to the tax laws.
CHAPTER 1 - State and Territory Bodies
Overview
1.1 As a result of an agreement between the Commonwealth and the States and Territories, the income tax and sales tax laws will be amended by Schedule 1 of the Bill to provide exemption for most state and territory bodies.
Summary of the amendments
1.2 The proposed amendments arise out of a desire on the part of the Commonwealth, State and Territory governments to clarify the tax treatment of wholly-owned state and territory bodies as part of the reform process to which all those governments are agreed. The amendments will:
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- exempt the income of wholly-owned state and territory bodies, except those specified in regulations, from income tax.
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- exempt goods for use by wholly-owned state and territory bodies from sales tax, unless the body is listed in regulations.
1.3 Income tax: The amendments will apply in respect of income of state and territory bodies for the year of income ended 30 June 1995 and subsequent years.
1.4 Sales tax: The amendments will apply to dealings with goods on or after the date that the Bill receives Royal Assent. Credits will be available for the period from 1 July 1994 to the date of Royal Assent.
Background to the legislation
1.5 Under the terms of an agreement between the Commonwealth and the States and Territories reached at the March 1994 Premiers' Conference, State and Territory governments are committed to introducing tax equivalent regimes for their trading enterprises. The Commonwealth has therefore undertaken to exempt them from Commonwealth income and sales taxes. The amendments will introduce greater certainty in the tax treatment of wholly-owned state and territory bodies (STBs) generally.
1.6 There will be one set of legislative amendments, but some specific STBs will be excluded from exemption by regulations. Different rules will apply for 1994-95 and for subsequent income years. The combined effect of the amendments and the regulations during the period 1 July 1994 to 30 June 1995 will provide clarity in the operation of the law but is not expected to change the tax status of many STBs. Generally, bodies which were exempt on 25 March 1994 (the date of the 1994 Premiers' Conference) will remain exempt, and bodies which were taxable at the date, mainly trading enterprises, will remain taxable. From 1 July 1995, regulations will no longer prescribe as taxable certain previously taxable STBs, those that can be regarded as trading enterprises subject to a tax equivalent regime.
1.7 Many wholly-owned state and territory bodies are already exempt from income tax or sales tax, or both.
1.8 Paragraph 23(d) of the Income Tax Assessment Act 1936 exempts the revenue of 'public authorities' from income tax. Many public authorities are wholly-owned state or territory bodies. However, wholly-owned state or territory bodies are not necessarily public authorities.
1.9 Public authorities carry on some undertaking of a public nature for the benefit of the community or some section of it. They have some power or authority conferred on them by law in relation to their public undertaking that enables them to do things which those not so authorised cannot do. An entity which can make a profit for private interests, or contribute to a private gain, is never a public authority. (Renmark Hotel Incorporated v. FC of T(1949) 79 CLR 10; West Australian Turf Club v. FC of T (1978) 139 CLR 288, 78 ATC (4133). So no company with any shareholder representing private interests is ever a public authority. No entity whose assets can be distributed to private interests on a winding-up is ever a public authority.
1.10 Uncertainty has arisen in relation to the 'public authority' exemption in several ways. For example, as part of the process of micro-economic reform, states may wish to corporatise their STBs. The process of corporatisation could lead to liability to Commonwealth taxation for an otherwise wholly owned State or Territory body where the objects of the body no longer embrace 'public' purposes, or where the body no longer has any special power or authority denied to others.
1.11 Privatisation is not a source of uncertainty. Any degree of private interest in the entity means the entity is not a public authority.
1.12 Item 126 in Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (Exemptions and Classifications Act) exempts goods for use by government authorities which are completely controlled by, and whose expenditure is exclusively borne by, an Australian government or governments. Paragraph 127(c) in Schedule 1 exempts goods for use by harbour boards, harbour trusts and maritime boards.
Explanation of the amendments
1.13 New Division 1AB contains a key principle [new section 24AK] which summarises the operation of the Division. Broadly, the division will exempt the income of wholly-owned State and Territory bodies (STBs) from income tax unless they are excluded STBs. New section 24AM will provide that the income of an STB will be exempt from income tax unless new section 24AN applies. New section 24AN removes excluded STBs and State Government Insurance Offices (SGIOs) from the income tax exemption.
1.14 An SGIO is generally exempt from income tax except on its life insurance and superannuation business (see subsection 112A(1A)).
1.15 A diagram or decision tree has been inserted into the Act. It helps in determining whether a body is exempt from tax under new Division 1AB. [New section 24AL]
1.16 The new income tax exemption will apply to STBs. An STB will be a body which is 'controlled' by one or more government entities. In essence, such bodies are wholly creatures of the States or Territories.
1.17 For the purposes of this legislation, a body will be 'controlled' by one or more State or Territory governments, if it satisfies one of the following tests:
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- the body is a company solely limited by shares and all of the shares are beneficially owned by one or more States or Territories, including any entities that are themselves exempt because they are controlled by the States or Territories [new section 24AO] . This will include the situation where a Governor, Minister or head of a department holds all the shares on behalf of the government, or where a body is a wholly owned subsidiary of another STB. The requirement of new paragraph 24AO(b) that all shares be beneficially owned by one or more government entities is not limited to voting shares. The issuing of preference shares to the public, for example, will disqualify a body from being an STB under new section 24AO . The body will also not be exempt under paragraph 23(d) as it is making profits for private interests.
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- the body is established by State or Territory legislation and is not a company solely limited by shares. If the Act establishing the body covers the following matters, it must do so in particular terms:
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- where the Act refers to distribution of profits, it provides that profits must be distributed only to one or more States or Territories, including any entities that are themselves exempt because they are controlled by a State or Territory. If the Act also refers to distribution of net assets on dissolution, it provides that assets must be distributed similarly [new section 24AP] . If the enabling legislation provides for profits to go to government but assets on dissolution to go to private interests then the body is not an STB under new section 24AP ;
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- if the Act refers to the power to appoint and dismiss the board, directors or other governing persons of the body, it gives that power only to one or more States or Territories, including any entities that are themselves exempt because they are controlled by a State or Territory [new section 24AQ] ; and
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- if the Act refers to the power to direct the conduct of affairs of the body, it gives that power only to one or more States or Territories, including any entities that are themselves exempt because they are controlled by a State or Territory [new section 24AR] . This requirement has a very broad ambit and has been intentionally given that broad ambit. The power need not be a specific power to give operational directions, as a more general power of direction of the conduct of the body's affairs is sufficient.
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- the body is not a company solely limited by shares and is not established by a State or Territory Act - for instance, a body owned by another STB which was set up without specific legislation, or a trust fund set up under a deed, rather than legislation. For a body which is not established by State or Territory legislation to qualify as an STB, it will have to be shown that all legal and beneficial interests, and all rights and powers (if any) to direct the affairs of the body, including appointments and dismissals, belong to one or more States or Territories, including any entities that are exempt themselves because they are controlled by a State or Territory [new section 24AS] .
1.18 The requirement in new sections 24AQ and 24AS that one or more States or Territories, including any entities that are themselves exempt because they are controlled by a State or Territory, have the power to appoint or dismiss a governing person or body would be satisfied, for example, if members of the governing body had to be nominees of such governments or entities. It would not be satisfied where, for example, a member of a governing body must be a person occupying a particular position (eg. the president of a State Law Society) and no such government or entity could reject that person.
1.19 There may be cases where the concepts of 'governing person' and 'governing body' overlap. For example, where a government entity is able to appoint only one director of a governing body but that director has overriding powers (eg. power of direction of board decisions) then that government entity has the power to appoint the 'governing person' of that STB.
1.20 New sections 24AO, 24AP, 24AQ, 24AR and 24AS use the concept of 'government entity' to ensure that entities not directly government controlled will themselves be exempt only if any government controlled entities involved are themselves exempt under these provisions. In new Division 1AB a 'government entity' means a State or Territory ('Territory' means the Northern Territory and the Australian Capital Territory) or another STB that is exempt under these provisions. [New section 24AT]
1.21 In addition certain other bodies can be taken to be STBs where the STB is established by state or territory legislation and it is not a company solely limited by shares [new sections 24AQ, 24AR and 24AS] . In those cases, where the power to appoint, dismiss or direct the governing body of an STB is given to or held by a Governor, Minister or Department Head (or a combination of any of those people) then the power is taken to be given to or held by a government entity [new section 24AU] .
1.22 New section 24AU was inserted in order to put beyond doubt that such persons are acting as government entities when they exercise powers such as those of appointment, dismissal, voting and direction. Otherwise they could be misunderstood as exercising those powers personally rather than as agents of the State or Territory. It is not necessary to include similar provisions to apply to new sections 24AO and 24AP . Any such shares or interests in profits and assets would clearly be vested in those individuals in right of the State or Territory; in other words, the State or Territory would have the interest in the shares, profits or assets.
1.23 Certain STBs have been excluded from the operation of new Division 1AB . These are known as excluded STBs and they are listed in new section 24AT .
1.24 The first type of excluded STB are STBs which have been prescribed as excluded STBs in relation to a particular time. An STB may be prescribed by regulation. However the Commonwealth will only prescribe an STB as an excluded STB if all States and Territories consent to the STB being prescribed [new subsection 24AV(1)] . That is, before an STB is prescribed not only must the State or Territory which "controls" that STB consent to it being prescribed but so must all other States and Territories. An STB so prescribed is subject to taxation unless the entity is exempt under another provision (except paragraph 23(d)).
1.25 The provision does not require the Commonwealth to prescribe an STB merely because all states and territories consent. New subsection 24AV(1) merely states the requirement to be satisfied before the Commonwealth may prescribe the STB. The Commonwealth must itself agree that an entity should be prescribed.
1.26 Because new Division 1AB will be effective from 1 July 1994, some regulations prescribing STBs to be excluded STBs may need to be retrospective. It is necessary, therefore, to insert a provision overriding the normal operation of Section 48 of the Acts Interpretation Act 1901 [new subsection 24AV(2)] . As far as is applicable, section 48 requires that regulations have no effect before the date of notification where the regulations would prejudice the rights of a person (where those rights existed at the date of notification) or would impose liabilities on a person in respect of anything done or omitted to be done before the date of notification.
1.27 The second type of excluded STB is a municipal corporation or other local governing body (within the meaning of paragraph 23(d)) [new section 24AT] . Local Government may be created or imposed by State or Territory legislation and local government entities may be creatures of a State or Territory. It was not the intention of the Commonwealth, States and Territories to subject such entities to tax equivalent regimes. Therefore, despite the fact that they may technically be STBs they have been excluded and their treatment will remain as if new Division 1AB had not been enacted.
1.28 Public educational institutions (within the meaning of paragraph 23(e)), public hospitals (within the meaning of paragraph 23(ea)) and superannuation funds are also excluded from the operation of new Division 1AB . Such bodies may otherwise be STBs because they are created under State or Territory legislation or are 'controlled' by State or Territory governments. The treatment of these entities under income tax and sales tax law will remain unchanged by the amendments contained in this Division.
1.29 Because an excluded STB is not a 'government entity', an entity wholly or partly owned or controlled by an excluded STB is also an excluded STB.
Consequential amendments to the Income Tax Assessment Act 1936
1.30 Because State and Territory bodies which used to claim income tax exemption under paragraph 23(d) will now claim exemption only under new section 24AM , paragraph 23(d) will have limited application. There are several sections in the Income Tax Assessment Act which have further tax effects because of the exemption provided by paragraph 23(d). The tax effect may be on the public authority itself or on persons who deal with that public authority. Those sections need to be amended to include STBs and new section 24AM .
1.31 Because SGIOs are to be taken to be STBs (and consequently so are any subsidiaries of SGIOs) but are subject to tax on certain income, special provision has to be made for them to ensure that their tax treatment remains the same. In order to ensure that where an SGIO changed its form (for instance by corporatising) its status as an SGIO would not be in doubt, it is necessary to amend the definition of SGIO in subsection 6(1). The reference to public authority is omitted and replaced with 'an STB (within the meaning of Division 1AB of Part III)' [item 2] . This gives SGIOs the benefit of the clarification of exempt status of all STBs.
1.32 Because the income of STBs is to become exempt from tax under new section 24AM , or taxable if they are excluded STBs, it is necessary to amend paragraph 23(d). Otherwise some excluded STBs might nevertheless be exempt as public authorities, contrary to the agreement between the Commonwealth, the States and Territories. The amendment will ensure that STBs obtain exemption from income tax only under new section 24AM and not paragraph 23(d). [Item 3]
Intercorporate dividend rebate
1.33 Where a company receives a dividend from a company the income of which is exempt under, amongst other provisions, paragraph 23(d) the rebate is disallowed. Because paragraph 23(d) will now have no application to most STBs it is necessary to include the new exemption provision, otherwise sub-sections 49(9) and 46A(16) will not apply correctly to dividends from STBs exempt from income tax under the new exemption provision. [Item 4]
1.34 Section 73CB precludes a deduction for research and development expenditure where it is incurred to a government body and some return is guaranteed. To ensure that the provision covers all government bodies it is necessary to include STBs as defined in new Division 1AB in the definition of 'government body'. [Item 6]
1.35 Section 73C reduces a deduction for research and development expenditure where the taxpayer claiming the deduction receives or becomes entitled to receive a recoupment of or grant in respect of the whole or any part of that expenditure by or from the Commonwealth, a State or Territory or an authority constituted by or under a law of the Commonwealth, a State or a Territory. To ensure that the provision has its intended effect it is necessary to amend paragraph 73C(2)(b) to include an STB as a potential source of such a recoupment or grant. [Item 7]
1.36 Division 6C of the Act deals with the income of certain Public Trading Trusts. A unit trust may be a public unit trust for the purposes of these provisions where an entity which is exempt from income tax holds a beneficial interest in 20% or more of the property or income of the trust, or during the year concerned was paid 20% or more of the moneys paid by the trust to unit holders, or an arrangement exists whereby such an entity could have been given such a holding during the year or could have been entitled to 20% or more of any moneys paid to unit holders during the year concerned.
1.37 The definition of exempt entity in Division 6C includes a body to which paragraph 23(d) applies. With the introduction of new section 24AM that paragraph will not apply to most STBs. It is necessary therefore to amend the definition of 'exempt entity' in section 102M, to include STBs the income of which is wholly exempt. [Item 8]
Income diverted under tax avoidance schemes
1.38 Division 9C makes liable to tax, certain organisations and funds which would otherwise be exempt from income tax. The Division applies where an exempt entity derives income from property which it has acquired as part of a tax avoidance agreement. If the exempt entity provided consideration for the property which is greater than that which it would have provided had it been taxable as a public company then section 121G operates to include the income derived.
1.39 The Division applies to bodies which are exempt under 'relevant exempting provisions' which are listed in section 121F. Paragraph 23(d) is one such exempting provision. As new section 24AM largely supersedes paragraph 23(d) for STBs it is necessary to include new section 24AM in the list of relevant exempting provisions in section 121F. [Item 9]
Capital expenditure on traveller accommodation
1.40 Division 10C provides for write-off deductions for capital expenditure incurred on construction in Australia of buildings used to provide short-term accommodation for travellers where work commenced before 18 July 1985 or after 26 February 1992.
1.41 Subsection 124ZC(6) disallows that deduction where the taxpayer enters into an arrangement with a tax-exempt body to pay an amount or transfer property with the aim of reducing the taxpayer's tax liability. The definition of 'exempt body' in subsection 124ZA(1) includes a body association or fund to which paragraph 23(d) applies.
1.42 New section 24AM will apply to many entities to which paragraph 23(d) now applies. It is necessary therefore to include in the definition of 'exempt body' an STB the income of which is wholly exempt. [Item 10]
1.43 Part IIIA of the Act deals with capital gains and losses. Section 160K defines 'relevant exempting provision'. Part IIIA has certain consequences for bodies which are exempt under a 'relevant exempting provision'. For example, such bodies cannot accrue capital gains or losses. Paragraph 23(d) is included as a 'relevant exempting provision'. It is necessary to include new section 24AM as a 'relevant exempting provision' in order to ensure that the definition covers STBs which are exempt from tax. [Item 13]
1.44 Part IX of the Act deals with the taxation of superannuation funds. Section 269B provides that nothing in certain exempting provisions (including paragraph 23(d)) exempts a trustee of an eligible entity from liability to tax as provided by Part IX.
1.45 Section 269B should have the same effect on STBs. So the section will be amended to include a reference to new section 24AM. [Item 14]
Consequential amendment to the Development Allowance Authority Act 1992
1.46 Chapter 3 of the Development Allowance Authority Act 1992 deals with infrastructure borrowings. Paragraph 93I(2)(e) provides that a borrower must not be a government body or government owned at the time of the borrowing. Government body is defined in subsection 93D(1) to include 'a body to which paragraph 23(d) of the Tax Act applies'. With the introduction of new section 24AM there will be very few such bodies. It is necessary therefore to amend the definition to include STBs the income of which is wholly exempt from tax, in order to ensure that those bodies exempt from tax as STBs, like those exempt from tax as public authorities will be included in the definition of 'government body'. [Item 15]
Special consequential amendments
1.47 Some STBs may be prescribed as excluded STBs from 1 July 1995 onwards. Although these STBs will become taxable, certain restrictions are to be placed on these STBs in order to minimise possible costs to the revenue. The adverse revenue consequences of allowing STBs to be prescribed in the year ended 30 June 1995 are to be disregarded.
1.48 New Subdivision B of new Division 1AB has been inserted to ensure that any losses made by an STB in the period from 1 July 1995 until the body is sold to private interests, are extinguished when the body is privatised.
1.49 New section 24AY prevents an STB's losses being carried forward from any year of income after 1July 1995 for which the body is an STB to any later year for which the body is not an STB.
1.50 Special provisions have been inserted to deal with the situation where a body ceases to be an STB during a year of income. New section 24AW ensures that any losses incurred during that year, but before the body ceases to be an STB, are not used in the calculation of taxable income for the 'cessation year'. It does this by referring to certain sections of Subdivision B of Division 2A in Part III of the Act (the current year loss provisions).
1.51 The current year loss provisions (sections 50A-50N) are designed to prevent profits derived by a company in one part of a year of income when owned by one set of shareholders from being offset by losses incurred by the company during another part of the year of income when the company is owned by a different set of shareholders. Those provisions ensure that current year losses are not taken into account in calculating taxable income for the year unless the company satisfies a continuity of ownership test or continuity of business test.
1.52 In effect when a body ceases to be an STB during a year of income, that year of income is divided into 'relevant periods'. The 'relevant periods' are treated as if they are separate years of income. In the 'relevant period' in which the body is an STB the STB cannot make a loss. This is due to the operation of new paragraph 24AW(e) which states that the 'notional loss' in the 'relevant period' before cessation is nil.
1.53 The term 'relevant period' as used in new Subdivision B of new Division 1AB has the same meaning as in Subdivision B of Division 2A. [New section 24AZ]
1.54 The 'notional taxable income' of each 'relevant period' (or 'notional loss' in the case of the 'relevant period' after cessation) is calculated taking into account income and deductions attributable to each period, either specifically or by apportionment over the whole year. General domestic losses will be attributed to the relevant period before cessation rather than apportioned over the entire year [new paragraphs 24AW(f) and (g)] . This ensures that prior year losses do not contribute to the body making a loss in the 'cessation year'.
1.55 These amounts are then added together and from them are deducted the 'eligible notional loss' for the year (which, because of the operation of new paragraph 24AW(e) can only be a loss made in a 'notional period' after cessation) and certain full year deductions. The result is the taxable income of the year.
1.56 In order to ensure that new section 24AW has automatic operation, the discretion not to apply Subdivision B of Division 2A has been removed. [New paragraph 24AW(c)]
1.57 For former STBs that are companies, the current year loss provisions will apply normally to any periods after the cessation year. As general domestic losses are specially dealt with for the cessation year, the current year loss provisions are modified in that respect for any periods during that year that happen after the company ceases to be an STB.
1.58 Because Subdivision B of Division 2A was enacted before Part 111A, special provision is necessary to ensure that capital gains and losses are correctly apportioned to each 'relevant period'. New section 24AX ensures that:
- •
- capital losses made in the relevant period before the body ceases to be an STB are disregarded [new subsection 24AX(2)] ; and
- •
- a capital loss for the 'cessation year' is not available to the body in a following year unless the loss for the 'relevant period' after cessation exceeds the gain for the 'relevant period' before cessation. [New subsection 24AX(5)]
No deduction for unfunded superannuation contributions
1.59 New section 24AYA is inserted to ensure that superannuation contributions made after such an STB is sold to private interests are not tax deductible to the extent that they are in respect of liabilities that had accrued during the period from 1 July 1995 until it is sold to private interests [new section 24AYA] . This is achieved in two steps. First, no deduction at all will be allowable to the body under section 82AAC of the Income Tax Assessment Act 1936 (the Act) unless it obtains a certificate from an actuary, stating the actuarial value of any unfunded superannuation liabilities which had accrued from 1 July 1995 until the time of the sale [new subsections 24AYA(2) and (3)] . The certificate must be obtained before the body lodges its tax return for the year in which it ceases to be an STB or within such further time as the Commissioner allows [new subsection 24AYA(4)] .
1.60 Secondly, if there is an amount of unfunded liabilities, deductions for superannuation contributions will be denied until, in total, they exceed the amount of the unfunded liabilities [new subsections 24AYA(5) and (6)] . This is achieved by providing for a threshold amount of superannuation contributions that must be made in a year before a deduction will be available. The threshold is called the 'unfunded liability limit' [new subsection 24AYA(7)] . In its first year of operation the limit will be the certified amount of unfunded liabilities. If the limit is not exceeded in the first year, it will be reduced in the second year by the amount of superannuation deductions denied under new section 24AYA in the first year. The limit will be progressively reduced in this way until it is extinguished.
1.61 Because it is possible to make more than one contribution in a year and each separate contribution is potentially deductible, where the sum of all superannuation contributions in a year exceeds the deduction limit new subsection 24AYA(6) allocates a part of the deduction limit to each superannuation contribution made in the year. This has been done purely as a technical matter and simply has the effect of allowing a deduction for the amount of contributions, in total, that exceeds the deduction limit. (The alternative, of denying deductions for contributions in a year until the deduction limit is reached, would be more complex and would be likely to produce undesirable timing and apportionment difficulties.)
1.62 Section 51AD operates to deny depreciation and other deductions to the owner of an asset if a tax-exempt entity is leasing the asset, has the right to use the asset, or has effective control of the asset and the whole or predominant part of the purchase price or construction cost of the property is financed by non-recourse debt. Non-recourse debt is debt where the rights of the lender against the borrower in the event of default are limited wholly or predominantly to the property, mortgages or other securities over the property the subject of the lease or the income derived from that lease.
1.63 Amendments to section 51AD will ensure that excluded STBs which have been prescribed as taxable ('prescribed excluded STBs') will be taken to be exempt entities for the purposes of Section 51AD. [Item 5]
1.64 Division 16D (sections 159GE to 159GO) places restrictions on the tax advantages of certain non-leveraged finance leases. In these arrangements the lessor of property receives from an exempt public body lessee, some of the tax benefits that would have been available to the lessee if it had owned the property and been subject to tax. The exempt public body also assumes many risks and benefits associated with ownership of the leased property.
1.65 The effect of the provisions contained in Division 16D is that, amongst other things, tax deductions related to the property are not allowed to the taxable lessor. Instead the lessor's position for tax purposes is recast, broadly as if the arrangement were a loan.
1.66 The definition of 'exempt public body' in subsection 159GE will be amended to include an STB (within the meaning of Division 1AB) the income of which is exempt from tax [item 11] . This a necessary consequential amendment in order to ensure that Division 16D has its intended effect.
1.67 The Division will also be made to apply to STBs which have been prescribed as taxable ('prescribed excluded STBs'). [Item 12]
Definition of 'prescribed excluded STB'
1.68 Several provisions affect STBs which are remaining in the Commonwealth tax net after 1 July 1995. For convenience sake such entities are called 'prescribed excluded STBs' because they are excluded STBs which are prescribed as taxable by regulation. A definition of 'prescribed excluded STB' is contained in proposed new section 24AZ .
1.69 A new exemption Item, Item 126A , will be inserted into Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (Exemptions and Classifications Act). The effect of the exemption Item will be that goods for use by certain wholly owned State and Territory bodies (STBs) will be exempt from sales tax. [Items 20 and 22]
1.70 The definition of an STB for sales tax purposes will be the same as the definition of an STB for income tax purposes. The tests discussed in paragraphs 1.16 to 1.22 will apply in relation to sales tax, as well as to income tax. [Item 19]
1.71 'Excluded STBs', including STBs prescribed by regulation, will not be eligible for exemption. The definition of 'excluded STB' for sales tax purposes will be the same as the definition for income tax purposes, except with regard to State and Territory superannuation funds (see paragraphs 1.23 to 1.25 and 1.27 to 1.29). Superannuation funds which are STBs will be 'excluded' under income tax law, but will qualify for sales tax exemption, if they are not prescribed or otherwise excluded. Regulations will be made separately under income tax and sales tax laws to prescribe 'excluded STBs', with the result that STBs which are taxable under sales tax law may be exempt from income tax, and vice versa.
1.72 The existing exemptions for government authorities and harbour boards and trusts and maritime boards will be unchanged, except that they will not apply to STBs. This will ensure that government authorities and harbour boards etc. which are not STBs will not lose their current exemptions. Nevertheless, 'excluded STBs' will have access to exemptions from which they have not been specifically excluded, so that, for instance, public educational institutions will still have access to the exemption for schools and universities. [Items 21 and 23]
1.73 The new exemption Item 126A will come into effect on the day that the Bill receives the Royal Assent. For the period from 1 July 1994 until Royal Assent, there will be transitional credit grounds which will apply to tax borne on dealings which would have been exempt, if the exemption for STBs had been in effect at the time of the dealings. Credits will not be available to prescribed STBs. There will be two separate credit grounds, to take account of the two different regulations which will be required - one to cover the period 1 July 1994 to 30 June 1995, and one to cover the period 1 July 1995 to the date of Royal Assent. Credits will not be paid until these regulations have been made, and a claimant will only be able to claim a credit if the tax borne has not been recouped from another person.
1.74 Many goods which are exempt under exemption Item 126 and paragraph (c) of subitem 127(1) of Schedule 1 to the Exemptions and Classifications Act will be exempt under the new exemption Item 126A when it takes effect. The Bill therefore contains a transitional provision which will translate periodic quotations under Items 126 and 127 into quotations under Item 126A, if Item 126A would have applied to the dealing if that Item had been in effect when the dealing occurred. [Item 25]
CHAPTER 2 - Employee share schemes
Overview
2.1 Schedule 2 of the Bill amends the Income Tax Assessment Act 1936 (ITAA) to provide a new regime for the taxation of benefits provided to employees under an employee share scheme. The new regime will replace section 26AAC of the ITAA.
2.2 The new regime will provide that, where the employer of an employee provides to the employee or his or her associate shares or rights to shares at a value less than market value, an amount is to be included in the assessable income of the employee. Where the shares or rights are qualifying shares or rights, i.e., certain conditions are satisfied, concessional arrangements will apply in taxing the amount.
2.3 The CGT provisions contained in Part IIIA of the ITAA are being amended to ensure that there is no double taxation and that the advantage gained by concessions for qualifying shares or rightswill not be clawed back under the CGT provisions. Amendments will also be made to the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to ensure that there is no double taxation .
2.4 The new regime will also apply to shares or rights provided to non-employees in return for services rendered.
2.5 Tables setting out guidance to a number of the provisions are set out in the Appendix to this chapter.
Summary of the amendments
2.6 A new Division 13A of Part III is inserted into the ITAA to provide for the taxation of shares or rights acquired under an employee share scheme. The assessable amount will be the difference between the value of the share or right and any amount paid by the employee to acquire the share or right. The new Division will also tax shares or rights provided to an associate of an employee as if they were provided to the employee. Concessions are provided where the shares or rights to shares are qualifying shares or rights, i.e., they satisfy certain criteria.
2.7 Item 1 of the Bill inserts provisions into the ITAA to:
- •
- provide that where a taxpayer acquires a share or a right to a share under an employee share scheme the discount on the share or right is to be included in the assessable income of the taxpayer [new subsection 139B(1)] ;
- •
- set out when a taxpayer is to include the discount on the shares or rights obtained under an employee share scheme in his or her assessable income [new subsections 139B(2) and (3)] ;
- •
- set out when a taxpayer is taken to have acquired a share or a right to acquire a share, under an employee share scheme [new section 139C] ;
- •
- set out how to calculate the discount [new section 139CC] ;
- •
- describe qualifying shares and rights including the non-discriminatory requirement that must be satisfied before a share or right will be a qualifying employeeshare or right [new section 139CD] ;
- •
- set out the concessional tax treatment that is available for qualifying employee shares or rights [new sections 139BA, 139CA, 139CB , 139CE and 139E] ;
- •
- set out the stricter non-discriminatory requirements that must be satisfied before the $500 exemption can apply to qualifying shares or rights [new sections 139CE and 139GE] ;
- •
- provide that shares or rights acquired by an associate of the employee under an employee share scheme will be taxed as if they were acquired by the employee [new section 139D] ;
- •
- set out the manner of determining the value of shares or rights acquired under an employee share scheme [new sections 139CC, 139F, 139FA-FN] ;
- •
- provide that where both a legal and a beneficial interest in a share or right are acquired by the same taxpayer or by more than one taxpayer only the taxpayer holding the beneficial interest will need to include an amount in his or her assessable income [new section 139DA] ;
- •
- set out when an employer is entitled to a deduction for the cost of providing shares or rights under an employee share scheme [new section 139DB] ;
- •
- provide a deduction to the employer for up to $500 of certain qualifying shares or rights provided to employees [new section 139DC] ;
- •
- provide that in certain circumstances an employee will be entitled to a refund of income tax paid on share rights [new section 139DD] ;
- •
- ensure that shares or rights provided to employees by a company group through investment companies are not texed concessionally [new section 139DF] ;
- •
- specify the meaning of 'acquiring a share or right' [new section 139G] ;
- •
- ensure that if an amount is assessable under new Division 13A of Part III then no amount will be assessable under section 26(e), 21A or section 26AAC of the ITAA [new section 139DE and items 2 and 3] ;
- •
- determine the cost base of an employee share or right for capital gains tax (CGT) purposes [item 7; new sections 160ZYJB, 160ZYJC, 160ZYJD and 160ZYJE of the ITAA] ;
2.8 The Bill will also make an amendment to the definition of 'fringe benefit' contained in subsection 136(1) of the FBTAA to ensure that there will be no double taxation of the benefits from employee share schemes [item 9] . To avoid any double taxation with the foreign investment fund provisions, the Bill will exempt shares or rights from the foreign investment fund provisions for the period up until they are taxed under the employee share scheme provisions. [Item 8, new section 530A]
2.9 The purpose of the changes is to counter the arrangements which exploit the existing legislation (section 26AAC of the ITAA). They also ensure that the concessions available are directed at employee share schemes which encourage investment by employees in their employer company, or in their employer company's holding company, and which are available to all permanent employees.
2.10 Subject to certain transitional arrangements [item 11] , the amendments will apply from 6pm in the ACT (and the equivalent times elsewhere) on 28 March 1995.
Background to the legislation
2.11 Section 26AAC was inserted into the ITAA to provide for the taxation of benefits that arise from shares, or rights to acquire shares, acquired under an employee share scheme by an employee, or a relative of an employee, for services rendered by the employee.
2.12 Section 26AAC replaced section 26(e) of the ITAA as the basis for taxing benefits acquired under an employee share scheme.
2.13 Under section 26AAC, a taxpayer is taken to have acquired a share or right to acquire a share in a company under a scheme for the acquisition of shares by employees if the share or right to acquire the share is in relation directly or indirectly to the employment or services rendered by the taxpayer or a relative of the taxpayer.
2.14 There are two types of arrangements under which shares or rights to acquire shares can be received. The first is where a company issues shares or rights to acquire shares to employees in the company, or in another company (or to the employee's relatives). The second is where shares of the company, or of another company, are issued to a trustee to be held on behalf of the employees (or their relatives). In this case, the trustee must be authorised to sell or transfer the shares to the employees or their relatives.
2.15 Shares can be subject to restrictions or conditions so that the right of the taxpayer to dispose of the share is restricted or the taxpayer can be divested of his or her ownership of the share. Section 26AAC operates to deem these shares to be acquired when the restrictions or conditions cease to have effect. An election is available in the case of shares which are subject to restrictions. The taxpayer can elect to be assessed in the year in which the shares are acquired and not in the year in which the restrictions or conditions cease.
2.16 In the case of rights to acquire shares, the normal taxing point is when the rights are sold or exercised. However, the taxpayer can elect to be assessed in the year in which the right is issued and not in the year in which the right is sold or exercised. The value of a share or right to acquire a share subject to restrictions or conditions is not to be discounted because of those restrictions or conditions.
2.17 Concessional treatment is available for certain employee share acquisition schemes. This concession will exclude up to $200 per year from the assessable income of an employee on shares or rights to acquire shares. The concession is limited to a discount of up to 10 per cent of a maximum of $2000 worth of shares. If this concession is used, the taxpayer cannot take advantage of the tax deferral opportunity outlined above. A taxpayer can elect not to apply the concession.
2.18 The CGT provisions apply generally to deem the cost of acquisition to the employee of the employee share scheme shares to be the market value of the shares that was taken into account in calculating the income arising to the taxpayer under section 26AAC. If the benefit arising from a right to acquire shares was taken into account in calculating the income arising to the taxpayer under section 26AAC, the cost of acquisition of the right will be the market value of the right at the time it was taken into account in calculating the income.
2.19 Where concessional treatment was provided for employee share scheme shares or rights, the CGT provisions also operate to reduce the cost base of the shares and rights to acquire shares. This is done by reducing the market value of the shares or rights to acquire shares by the amount of the exclusion allowed under section 26AAC. These provisions effectively 'claw-back' the concession made available by section 26AAC by reducing the cost base of the shares or rights to acquire shares and therefore increasing the taxpayer's liability to CGT.
Explanation of the amendments
2.20 The Bill inserts new Division 13A of Part III of the ITAA [item 1] . This Division will replace section 26AAC and will operate to tax benefits provided by an employer to employees and their associates in the form of shares or rights to acquire shares under an employee share scheme [item 3] . The Bill will also make other consequential amendments to the ITAA and the FBTAA.
Amount to be included in assessable income
2.21 If a taxpayer has acquired a share or right under an employee share scheme, the taxpayer is to include in his or her assessable income the discount given in relation to the share or right. [New subsection 139B(1)]
2.22 An employee will be taken to have acquired shares or rights under an employee share scheme if the share or right was acquired by the employee in respect of, or in relation directly or indirectly to his or her employment. A non-employee will also be taken to have acquired shares or rights under an employee share scheme if the shares or rights are acquired in respect of, or in relation to, services rendered. The new Division will also apply to associates of employees and non-employees. [New subsections 139C(1) and (2)]
2.23 A taxpayer is taken not to have acquired a share or a right to a share under an employee share scheme, for the purposes of new Division 13A, in the following circumstances:
- •
- where the share was acquired as a result of exercising a right that the taxpayer acquired under an employee share scheme; or
- •
- the share or right was acquired by the taxpayer, being the trustee of a trust where the sole activities of the trust are to obtain shares, or rights to acquire shares and provide those shares or rights to employees of the employer or associates of the employees [new subsections 139C(3) and (4)] .
When the discount has to be included in assessable income
2.24 The discount is to be included in the taxpayer's assessable income in the year of income in which the share or right is acquired [new subsection 139B(2)] . However, where the shares or rights are qualifying shares or rights and no election has been made under new section 139E to have the discount taxed in the year of income in which the share or right is acquired, the discount is to be included in assessable income in the year of income in which the 'cessation time' occurs [new subsection 139B(3)] . This will be:
- •
- in the case of shares without restrictions, or where the taxpayer is not liable to be divested of ownership of the shares, - the time at which the shares are acquired;
- •
- in the case of shares with restrictions or if the taxpayer is liable to be divested of ownership of the shares the earliest of the following times:
- -
- when restrictions are lifted;
- -
- when the shares are sold;
- -
- when the taxpayer ceases to be employed by the employer company, a holding company of the employer company, a subsidiary of a holding company, or a subsidiary of the employer company; or
- -
- five years from the time that the shares were provided to the taxpayer;
- •
- in the case of share rights, the earliest of the following times:
- -
- when the rights are exercised;
- -
- when the rights are sold;
- -
- when the taxpayer ceases to be employed by the employer company, a holding company of the employer company, a subsidiary of a holding company, or a subsidiary of the employer company; or
- -
- five years after the rights are provided to the taxpayer;
- •
- an exception will be where the rights are exercised to receive shares subject to restrictions (in which case the shares would be taxable at the earliest of when the restrictions were lifted, when the employee left the employer, or five years after the rights were received). [New sections 139CA and 139CB]
2.25 'Holding company' is defined to have the same meaning as in the Corporations Law. [New section 139GC]
Shares or rights acquired by associates to be taxed as if they were acquired by the taxpayer
2.26 If shares or rights to shares are acquired by an associate of the taxpayer under an employee share scheme, the taxpayer will be taxed in relation to those shares or rights as if they were the shares or rights of the taxpayer [new section 139D] . The measure ensures that no tax advantage can be obtained by a taxpayer through income splitting, e.g. an employee could benefit when an employer provides shares or rights to an associate of the employee who is on a lower marginal tax rate than the employee.
2.27 As noted in paragraph 2.23, this provision will not apply where the associate of an employee is a trust whose sole activities are to obtain shares or rights to acquire shares for the purpose of providing them to employees or associates of employees. These trusts have been excepted so as to avoid double taxation, i.e. the trustee of the trust will not be assessed on the same amounts that will be assessed under the new Division in the hands of the employees.
2.28 For the purposes of the Division, the term 'associate' is defined to have the same meaning as in section 26AAB(14). However this definition has been expanded to include an 'employee company' as an associate. An employee company is a company:
- •
- in which an employee or associate of the employee holds (indirectly or indirectly through interposed companies partnerships or trusts) a share or right to a share; and
- •
- to which an employer provides shares or rights in relation to the employment of the employee . [New section 139GD]
Meaning of 'acquiring a share or right'
2.29 For the purposes of the new Division, a share or right is taken to have been acquired by a person (i.e. the employee or associate, the trustee or company) when:
- •
- the share or right is transferred to that person;
- •
- the share is allotted to that person; or
- •
- the right is created in that person.
A person is also taken to acquire a share or right when a person acquires a legal or beneficial interest in a share or right. [New section 139G]
2.30 Under the new provisions a share or right obtained under an employee share scheme could be a qualifying share or right. Concessional taxation treatment (ie. the discount can be assessed in a later year - see paragraph 2.33 below) is available for qualifying shares or rights. These are shares or rights issued under a scheme where:
- -
- the shares or rights are acquired under an employee share scheme;
- -
- the shares or rights are shares or rights in the employer company or in the holding company of the employer company;
- -
- at the time the share or right is acquired each permanent employee is entitled to or has been entitled to acquire shares or rights under the employee share scheme. A transitional provision will apply so that an employee will be taken to have been entitled to acquire shares or rights under an employee share scheme if the shares or rights were offered under an employee share scheme operated by the employer or a holding company of the employer before this Division commenced [item 14] ;
- -
- the shares are 'ordinary shares' or the rights to acquire shares are rights to acquire 'ordinary shares';
- -
- the employee does not directly or indirectly hold - and after receiving the shares would not hold - more than 5% of the shares of the employer company or a holding company;
- -
- the employee is not in a position, after receiving the shares or rights, to cast or control the casting of more than 5% of the maximum number of votes at a general meeting of the company. [New section 139CD]
2.31 Where, however, shares or rights are issued and:
- -
- the taxpayer receiving the shares or rights is employed by an investment company and by another company;
- -
- the investment company and the other company are part of the same group; and
- -
- the predominant business of the investment company was to acquire, sell or hold shares, securities or other investment,
then those shares or rights are not qualifying shares or rights. [New section 139DF]
2.32 A holding company that holds shares in operating subsidiaries that are not investment companies will not itself be an investment company.
Calculation of discount received on shares or rights
2.33 As outlined in paragraph 2.21 above, a taxpayer is required to include in his or her assessable income the discount on shares or rights received under an employee share scheme. The discount is to be calculated as follows:
- •
- where the discount is to be included in the taxpayer's assessable income in the income year that the shares or rights are acquired (i.e. they are shares or rights to which subsection 139B(2) applies) the discount will be the market value of the share or right less any amount paid by the taxpayer as consideration for the share or right [new subsection 139CC(2)] ;
- •
- where the discount is to be included in the taxpayer's assessable income in a later year of income because the shares or rights are
qualifying shares or rights and the
'cessation time'
occurs at a later time (i.e. they are shares or rights to which new subsection 139B(3) applies) the value of the shares or rights will be:
- -
- if the shares or rights are disposed of within 30 days of the 'cessation time' , the discount will be the consideration received by the taxpayer for the disposal less any amount paid by the taxpayer as consideration for the acquisition of the share or right and, if a right has been exercised, any amount paid to exercise the right;
- -
- if the shares or rights are not disposed of within 30 days of the 'cessation time' the discount will be the market value of the share or right at the 'cessation time' less any amount paid by the taxpayer as consideration for the acquisition of the share or right and if a right has been exercised any amount paid to exercise the right [new subsections 139CC(3) and (4)] .
2.34 For the purpose of the above calculations the market value of a share or right is calculated in accordance with new section 139F which is explained at paragraph 2.40 below.
2.35 A taxpayer may make election that the discount received on qualifying shares or rights be included in their assessable income in the year of income in which the shares or rights are acquired. [New subsection 139E(1)]
2.36 An election must be made on or before the date of lodgement of the return of income of the taxpayer for the year of income in which the share or right was acquired, or before such later date as the Commissioner allows. [New subsection 139E(2)]
2.37 An income tax exemption up to a limit of $500 can apply to qualifying shares or rights in the year of income in which those shares or rights are acquired where an election has been made under new subsection 139E(1) and certain additional conditions are satisfied. [New subsection 139BA]
2.38 The additional conditions that must be satisfied before the $500 exemption can apply are:
- -
- the scheme cannot have any conditions that could result in any recipient forfeiting ownership of shares or rights; and
- -
- the employee cannot dispose of a share or right before the earlier of the end of a period of 5 years from the date they were acquired or the time when the employee ceases to be employed by the employer; and
- -
- the scheme must be conducted on a non-discriminatory basis. [New section 139CE]
2.39 An employee share scheme is taken to operate on a non-discriminatory basis where:
- -
- participation in a scheme is open to all permanent employees of an employer company or the holding company of the employer. The term 'permanent employee' means a full-time employee with at least 24 months service or a permanent part-time employee with at least 24 months service. The term does not include:
- -
- an employee who is in Australia on a temporary entry permit for up to a total of 4 years;
- -
- an employee who is not resident in Australia;
- -
- an employee who is a director of the employer company; or
- -
- persons not physically present in Australia [new section 139GB] ;
The terms 'employee' and 'employer' are taken to have the same meanings as in section 221A of the ITAA [new section 139GA] .
- -
- the time for acceptance of the offer is reasonable and is the same for all permanent employees;
- -
- the consideration for the acquisition concerned, the minimum and maximum number of shares or rights to acquire shares offered and the information made available about the offer is the same for all permanent employees; and
- -
- any scheme for the provision of financial assistance for the acquisition of shares or rights to acquire shares is open to all permanent employees and is the same for all permanent employees. 'Financial assistance' includes the making of a loan, the giving of a guarantee, the provision of security, the release of an obligation, and the forgiveness of a debt [new section 139GF] . [New section 139GE]
Market value of shares or rights
2.40 In determining the taxable value, the market value of a share or right to acquire a share on a particular day is to be determined as follows:
- •
- where a share or right to acquire a share is
quoted on an approved
stock exchange, the
market value will be:
- -
- the last published price of the share on that day; or
- -
- if this information was not published or if there is no transaction relating to that share on that day - the last price at which an offer was made for the share or right on that day; or
- -
- if no offer was made on that day - the weighted average of the prices at which those shares or rights were traded on that stock market during the one week period before that day; or
- -
- if there were no transactions on the stock market in that one week period in such shares or rights - the last price at which an offer was made on that stock market in that period to buy such a share or right [new section 139FA] ;
- •
- where a share is not
quoted on an approved
stock exchange, the
market value will be the value determined by an arm's length company auditor
[new subsection 139FB(1)]
:
- -
- in valuing a partly paid share a number of factors are required to be taken into account including (but not limited to) the amount of the value of the share that is already paid, the amount and timing of future calls and rights to dividends that arise from holding the shares [new subsection 139FB(2)] ;
- •
- where a right to acquire a share is
not quoted on an approved stock exchange, the
market value of the right will be determined by reference to the Tables at new
sections 139FJ-FN
. If the right to acquire a share is for a period exceeding 10 years from the date of acquisition of that right, the
market value will be the greatest of:
- -
- the value determined by a suitably qualified person;
- -
- the value that would have been calculated by using the Tables at sections 139FJ-FNas if the right to acquire the share was for a period of 10 years; and
- -
- the market value of the share that may be acquired by the exercise of that right less the lowest amount that must be paid to exercise the right to acquire the share.
The last lower limit applies to the valuation of all rights which have not been quoted on an approved stock exchange [new section 139FC] ;
- •
- in determining the market value of a non-quoted share or a right to acquire a share any restrictions placed on the share or right to acquire the share are to be disregarded [new section 139FD] ;
- •
- where the exercise price of a right to acquire a share cannot be determined, or is nil, the market value of the right to acquire a share will be the market value of the share on that day [new section 139FE] ;
- •
- where a person acquires a legal or beneficial interest in a share or right, that person is taken to have acquired a share or right and the market value to be taken into account is the market value of the share right [new section 139FF)] ;
- •
- what constitutes an 'approved stock exchange' is set out in new section 139GCA .
2.41 To the extent that it is reasonably possible, an employer will be required to provide to the taxpayer information relating to the market value of the shares or rights as is necessary for that taxpayer to determine the amount to be included on his or her assessable income. This information is to be provided within 30 days of the day that the request for such information was received by the employer. [New subsection 139FI]
2.42 As indicated above, the method used to value rights to acquire shares which are not quoted on an approved stock exchange is set out in new subsection 139FC. It will not be necessary to value rights using the tables set out in new subsections 139FJ-FN where the rights are qualifying rights, no election has been made and the rights are exercised within a period of five years (provided the rights are not sold or the employee does not cease employment before five years).
2.43 The Tables contained in new sections 139FJ-FN use an accepted methodology for valuing options, which has been modified to make them easier to use. Further, the variable factors underlying the tables are generally concessional.
2.44 Situations may arise where rights to acquire shares are given to employees and there are conditions attached to those rights which result in the employee being unable to exercise the rights. These rights to acquire shares would have been valued as if the restrictions did not apply. Where an employee loses these rights to acquire shares without ever having had the power to exercise the rights, solely because of termination of employment or because the exercise of the rights was conditional on certain employer performance targets being met, the employee, on application, will be treated as never having provided thebenefit.
2.45 The refund will only be provided in respect of rights received in the employer company or holding company of the employer company. [New section 139DD]
2.46 New Division 13A will also provide that no deduction will be available to the provider of shares or rights under an employee share scheme until the share or right is acquired by the taxpayer. For example, where an employer provides money or property to a trust so that the trustee can acquire shares which will later be passed on to employees, no deduction will be available to the employer until the shares or rights are acquired by the employee. [New section 139DB]
2.47 Where an employer provides qualifying shares or rights to an employee and the exemption conditions of new section 139CE are satisfied, the new Division will allow a deduction to the employer in respect of the shares or rights. That deduction cannot exceed $500 per employee for an income year. No deduction will be available where the employer is otherwise entitled to a deduction for those shares or rights. [New section 139DC]
2.48 The ITAA is also being amended to set out the basis upon which shares or rights provided under an employee share scheme will be subject to CGT. [Item 7]
2.49 Where a share or right under an employee share scheme is provided by a provider to an employee (or trust or company), there will generally not be a disposal of the share or right where the share or right is newly created (paragraphs 160M(5)(a) and 160ZZC(3A)(c)).
2.50 Where a share or right under an employee share scheme is acquired by an employee, the amount that will be taken to have been paid by the taxpayer as consideration for the purposes of the CGT provisions will be:
- -
- where the discount on the share or right to acquire a share is to be included in assessable income in the year of income in which the share or right was acquired - the greater of the amount actually paid for the share or right or the market value of the share or right at the time of acquisition of the share or right [new subsection 160ZYJB(2)] ;
- -
- where the share or right is a
qualifying share or right and the discount has been included in the taxpayer's assessable income in a later year of income, i.e., the year of income in which the
'cessation time'
occurs, then:
- -
- if the share or right is disposed of by the taxpayer at the 'cessation time' or within 30 days of the 'cessation time' , Part IIIA of the ITAA does not apply in respect of the disposal of the share or right by the taxpayer [new subsection 160ZYJB(3)] ;
- -
- if the share or right is not disposed of by the taxpayer at or within 30 days of the 'cessation time', the taxpayer will be taken to have paid, at the 'cessation time' an amount equal to the market value of the share or right [new subsection 160ZYJB(4) of the ITAA] .
2.51 A provision is inserted which applies to shares or rights disposed of by an associate of a taxpayer. For the purpose of calculating the capital gain on the disposal of the share or right, the associate will be taken to have paid the greater of the amount paid by the associate and the market value of the share or right at the time of acquisition. [New section 160ZYJC]
2.52 A provision is also inserted that applies to shares or rights acquired by a trustee of a trust where under the terms of the trust the trustee is authorised to transfer or sell the shares or rights to employees. Where the share or right is provided through a trust arrangement, the CGT provisions will not apply to the disposal of the share or right by the trustee unless the consideration paid for the share or right on disposal exceeds the indexed cost base of the share or right. If the trustee held the share or right for a period of less than 12 months, the CGT provisions will not apply to the disposal unless the consideration paid for the share or right on disposal exceeds the cost base of the share or right. [New section 160ZYJD]
2.53 Section 27A of the ITAA is amended to ensure that amounts which will be taxed under new Division 13A of the ITAA will not be included as, or as part of, an eligible termination payment on termination of employment [item 4] . The Superannuation Entities (Taxation) Act 1987 is also being amended to ensure that eligible termination payments representing discounts on shares or rights will not count towards superannuation reasonable benefit limits. This measure will be retrospective to 24 December 1991 to ensure that taxpayers who did receive such benefits which were counted for RBL purposes between 24 December 1991 and 28 March 1995 will not be disadvantaged compared to other taxpayers [item 10; new section 21 of the Superannuation Entities (Taxation) Act 1987] .
2.54 The amendment to the definition of 'fringe benefit' contained in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 will ensurethat benefits acquired by employees and their associates under an employee share scheme will not be subject to fringe benefit tax.
2.55 Also, where an employee share scheme is operated through a trust, the trustee will not be liable to fringe benefits tax on any money or property transferred to the trustee where the sole activities of the trust are to obtain shares or rights to acquire shares and to provide those shares or rights to employees of the employer. [Item 9]
Foreign investment fund provisions
2.56 Some shares which fall to be taxed under the new employee share scheme provisions may also be subject to tax under the foreign investment fund provisions of the ITAA. To avoid any double taxation, and to ensure that the deferral concession of the new employee share scheme provisions remains available, the Bill will insert a new section which exempts shares or rights from the foreign investment fund provisions for the period prior to the time at which those shares or rights are taxed under the new employee share scheme provisions. [Item 8, new section 530A]
2.57 Where a share is acquired by a taxpayer after 6pm in the ACT (and the equivalent time elsewhere) on 28 March 1995 - referred to in this section as the relevant time - as a result of exercising a right which was acquired under an employee share scheme prior to that time and which was held by the taxpayer at that time, section 26AAC of the ITAA will continue to apply to that share. [Item 11]
2.58 Section 26AAC will also continue to apply where any one set of the conditions stated below is satisfied:
- -
- offers to employees of employer company (or holding company) shares or rights or invitations to employees to make offers to acquire such shares or rights made prior to the relevant time where the benefits are provided prior to 1 July 1995;
- -
- employer (or holding company) shares and rights provided to employees prior to 1 July 1996 by public companies (as defined in Corporations Law) or their subsidiaries under schemes approved by shareholders prior to the relevant time; and
- -
- offers of non-employer company shares up to a value of $1000 per recipient (not just employees) or offers of rights to acquire shares up to a value of $1000 of shares where the offer was made prior to the relevant time and the shares or rights are acquired prior to 1 July 1995. For the purpose of this transitional provision the value of the right is equivalent to the value of its underlying share.
2.59 A taxpayer may elect that these transitional arrangements do not apply. That is, the new employee share scheme provisions will apply. [Item 12]
The following charts provide general guidance to the employee share provisions.
| Shares or rights provided to: | Time when the acquisition occurs: |
|---|---|
| An employee | Time when employee gets any legal or beneficial interest in the shares or rights. |
| An associate of the employee | Time when associate gets any legal or beneficial interest in the shares or rights. |
| A trust of which the employee or an associate is a beneficiary and has a beneficial interest in the shares or rights | Time when the beneficiary acquires the beneficial interest in the shares or rights. |
| A trust of which the employee or an associate is a beneficiary who does not have a beneficial interest in the shares or rights | Time when the trust transfers any legal or beneficial interest in the shares or rights to the employee or associate of the employee. |
| A company controlled by the employee or an associate. The concept of 'control' has a wide coverage. | Time when the company gets any legal or beneficial interest in the shares or rights. |
| A company where it is reasonable to conclude that the shares or rights were provided for the benefit of an employee, e.g. a company not controlled by an employee but of which employees are shareholders. | Time when the company gets any legal or beneficial interest in the shares or rights. |
| An 'interposed company or trust' to which an employer provides funds so that the interposed company or trust can directly or indirectly provide shares or rights to employees. | Time when company or trust transfers legal or beneficial interest in the shares or rights to employee. |
| Transaction | Taxing point |
|---|---|
| Employee or associate acquires share | Employee subject to income tax on discount in year of income that share was acquired. |
| Employee disposes of share | Any gain or loss is taxed in year of disposal. |
| Transaction | Taxing point |
|---|---|
| Employee or associate acquires share or rights that is not qualifying share or right | Employee subject to income tax on discount in year of income that share or right was acquired. |
| Employee acquires qualifying share or right | Employee subject to income tax on reduced amount where $500 exemption applies in the year that share or rights were acquired. In other cases, the full amount is taxable in year of income in which the 'cessation time' occurs. (see paragraph 2.24) |
| Share or right disposed of | Any gain or loss is taxed in year of disposal but CGT does not apply where shares or rights are disposed of on or within 30 days of the 'cessation time'. |
| Transaction | Taxing point |
|---|---|
| Employee or associate acquires right that is not a qualifying right | Employee subject to income tax on discount in year of income that right is acquired. |
| Employee or associate acquires right that is a qualifying right | Employee subject to income tax in year of income that 'cessation time' occurs. |
| Employee or associate acquires right that is converted into share with restrictions | Employee subject to income tax in year of income that 'cessation time' occurs. |
| Share disposed of | Any gain or loss is taxed in the year of disposal. |
| When the share or right is not a qualifying share or right: |
| The amount to be included in the assessable income of the employee is the market value of the share or right at the time of acquisition reduced by the consideration paid by the employee or associate. |
| When the share or right is a qualifying share or right: |
| Where an election has been made to have the amount included in the assessable income in the year the share or right was acquired, the amount as calculated above can be reduced by up to $500 where certain other conditions apply. |
| Where an election has not been made, the amount included in assessable income is: |
| the market value of the shares at the 'cessation time' (or if the shares or rights are sold within 30 days of the 'cessation time', the consideration received by the employee or associate) |
| less |
| any amount paid by the employee or associate as consideration for the share or right; and |
| if the share has been obtained as a result of the exercise of a right, any amount paid to exercise the right. |
| Rule 1. | |
| Share or right quoted on a stock market of an approved stock exchange on the valuation date: | |
| * | If there was at least one transaction on that day - the last published price at which the share or right was traded on that day. |
| * | If the above information is not published or there were no transactions in such shares or rights on that day - the last price at which an offer was made on that day to buy such a share or right. |
| * | If no offer was made on that day - the weighted average of the prices at which those shares or rights were traded on that stock exchange during the one week period before that day. |
| * | If there were no transactions on the stock exchange in that one week period in such shares or rights - the last price at which an offer was made on that stock exchange in that period to buy such a share or right. |
| Rule 2. | |
| Where Rule 1 does not apply, the market value of a share is the arm's length value of the share shown in a report provided by a person who is registered as a company auditor. | |
| Rule 3. | |
| Where Rule 1 does not apply, the market value of a right is the value determined in accordance with the Regulations. If no such Regulations are in force, the tables in sections 139FF-FG are to be used to value the rights. Rights which can be exercised beyond 10 years must be valued using a qualified valuer but the value cannot be less than the value that would have been determined if the right could only be exercised for 10 years. | |
| In any case, the market value of a right to acquire a share cannot be less than the market price of the share less the lowest exercise price of the right. | |
| Rule 4. | |
| If the exercise price of a right is nil, or cannot be determined, the market value of the right will be the market value of the share on that day. | |
| Rule 5. | |
| The market value of a share or right is determined as though there were no restrictions applying to the shares or rights. The market value of a beneficial interest in a share or right is the market value of that share or right. | |
| * | The consideration paid by a taxpayer for the employee shares not subject to restrictions or non qualifying rights is the greater of the amount actually paid or the market value of the shares or rights at the time the taxpayer acquired any legal or beneficial interest in the shares or rights. |
| * | Where the shares or rights are qualifying shares subject to restrictions or qualifying rights and the shares or rights are disposed of at, or within 30 days of, the 'cessation time', CGT does not apply. If the shares or rights are disposed of outside 30 days of the 'cessation time' the consideration will be the market value of the shares or rights at the 'cessation time'. |
CHAPTER 3 - Refunds of tax file number amounts deducted in error
Overview
3.1 This measure, which is contained in Part 1 of Schedule 3 of the Bill, will amend the Income Tax Assessment Act 1936 to:
- •
- limit the refunds to be made by investment bodies to requests for refunds received on or before 15 July following the year of income in which an incorrect deduction of tax file number (TFN) amounts occurred;
- •
- enable an investment body to ensure it has correct records concerning an investor's TFN before it refunds an amount which was deducted in error;
- •
- ensure that an investor who does not obtain a refund from an investment body is able to receive either a credit on assessment or a refund from the Commissioner;
- •
- allow investment bodies to offset against later remittances in respect of the same financial year, TFN amounts refunded to investors and recoverable from the Commissioner.
Summary of the amendments
3.2 The general purpose of these amendments is to institute some new procedures associated with the refund of TFN amounts incorrectly deducted by investment bodies, that is by unit trusts and bodies that pay dividends or interest. The amendments are intended to make it easier and be less costly for investment bodies in their dealing with amounts incorrectly deducted.
3.3 Existing investor rights are being maintained in relation to past errors and also for new errors where investors exercise those rights up until 15 July of the financial year after a new error has occurred. Where an investor does not exercise refund rights by that time, he or she generally will now be required to wait until assessment to obtain a credit for the amount incorrectly deducted. If that is not appropriate, new procedures are to be instituted for investors to obtain refunds from the Commissioner.
3.4 The substantive amendments will apply to deductions of amounts from 1 July 1995. [Item 12]
3.5 Item 5 is a technical amendment and will apply from the date of Royal Assent.
Background to the legislation
3.6 An investment body must deduct a prescribed amount (TFN amount) from investment income unless the investor has quoted or been taken to have quoted a tax file number. The investment body is then required to remit TFN amounts deducted to the Commissioner (subsections 221YHZC(1A) and 221YHZD(1A) respectively).
3.7 Where a TFN amount has been deducted in error and has been remitted to the Commissioner, the Act provides that the investment body must refund the amount to the investor and can recover that amount from the Commissioner. Investors who are entitled to a refund under this provision are prohibited from obtaining a credit on assessment of their income tax returns (section 221YHZDA).
3.8 These refund procedures are costly to both investment bodies and the Australian Taxation Office, particularly where the TFN amount was deducted in error during a prior financial year.
Explanation of the amendments
How will an investor obtain a refund of any TFN amount deducted in error on or after 1 July 1995?
3.9 These amendments will provide that, for financial years commencing on or after 1 July 1995, the refund provisions described in paragraph 3.7 above apply only if the information requested by an investment body under new subsection 221YHZDA(1A) has been supplied and:
- •
- the investor has applied to the investment body for a refund; or
- •
- the investment body has otherwise become aware of the error on or before 15 July following the financial year in which the amount was deducted. Existing subsection 221YHZDA(2), which presently prohibits a credit on assessment being available where subsection 221YHZDA(1) applies, is to be amended to make the operation of that subsection tied to the operation of subsection 221YHZDA(1) as now amended. [Items 6,7, 9 and 10]
3.10 If an investor did not apply for a refund by 15 July following the financial year in which the amount was deducted, and the investment body did not otherwise become aware by that date that a TFN amount was deducted in error, section 221YHZDA will no longer apply. In such a case, the investor will be entitled to claim a credit on assessment for the amount deducted (as is the case for TFN amounts correctly deducted - subsection 221YHZK(1)) or, if that is not appropriate, the investor can apply to the Commissioner for a direct refund of the amount.
3.11 The new provisions dealing with refunds directly from the Commissioner are contained in new section 221YHZDAA . [Item 11]
3.12 New subsection 221YHZDAA(1) provides that where:
- •
- a TFN amount was deducted in error and remitted to the Commissioner; and
- •
- the investor did not apply to obtain a refund from the investment body by 15 July of the following financial year
the investor may request a direct refund of the amount from the Commissioner.
3.13 New subsection 221YHZDAA(2) provides the conditions for a refund to be obtainable from the Commissioner. The conditions are:
- •
- the person provides a TFN or the basis on which he or she has been taken to have quoted it to the investment body;
- •
- the Commissioner is satisfied that the person is entitled to apply for a refund from the Commissioner; and
- •
- the Commissioner considers that one of three requirements is satisfied.
3.14 The requirements are:
- i)
- it is unlikely that the person will become entitled to a credit on assessment before the end of the financial year following the financial year in which the TFN amount was deducted in error; or
- ii)
- the person would suffer hardship if the Commissioner did not refund the TFN amount deducted in error; or
- iii)
- it would otherwise be fair and reasonable to refund the amount.
3.15 The first requirement is intended to deal with situations such as those where a person would not otherwise need to lodge an income tax return (for example a company or individual who has been granted exemption from lodging an income tax return) or is unable to lodge before the end of the financial year (for example because of a delay in receiving information from overseas). An example of the second requirement would be where a person depended on using the full amount of the investment income to pay immediate living expenses.
3.16 The third requirement is designed to cover other cases which do not meet one of the first two requirements and where, based on the facts of those cases, it would be fair and reasonable that a refund be given rather than waiting for an assessment to obtain a credit. It is expected that there will be few cases in this category.
3.17 New subsection 221YHZDAA(3) will ensure that an investor who obtains, under this new provision, a refund of any TFN amounts deducted is not then entitled to claim those amounts as a credit on assessment.
3.18 Item 9 will insert new subsections 221YHZDA(1A) and (1B) to provide that when an investment body refunds a TFN amount deducted in error, it will be authorised to ensure it has a record of the investor's tax file number or the basis on which the tax file number was taken to have been quoted. This will ensure that when a TFN amount was deducted because the investment body had not properly recorded an investor's TFN, that error may be corrected thus preventing any future deduction in error. An investment body's entitlement to request information from the investor is to be limited to 7 working days (of the investment body) to ensure that refunds are not unduly delayed.
How will an investment body recover TFN amounts deducted in error and remitted to the Commissioner, and which are later refunded to the investor?
3.19 Item 4 inserts new subsections 221YHZD(1AB) and 221YHZD(1AC). New subsection 221YHZD(1AB) provides that where an investment body:
- •
- has refunded the whole or part of a TFN amount deducted in error; and
- •
- is required to remit any other TFN amounts deducted in respect of the same financial year to the Commissioner;
it may decide to offset the whole or part of the amount refunded against other amounts to be remitted in respect of the same financial year. Where the investment body makes this decision and makes a record to that effect, the amount to be remitted is so reduced. An investment body that does not decide to offset will still have available the existing avenue of recovery from the Commissioner.
3.20 New subsection 221YHZD(1AC) ensures that an investment body is not entitled to offset any part of an amount refunded if it has previously offset that amount or has applied to recover the amount under subsection 221YHZDA(1). This provision will ensure that an investment body is not entitled to obtain more than one refund from the Commissioner in respect of a TFN amount deducted in error, remitted to the Commissioner and later refunded to the investor.
3.21 Subsection 221YHZDA(1) is amended to provide that an investment body may not recover an 'excess amount' from the Commissioner where it has offset the amount against a remittance under new paragraph 221YHZD(1AB)(c). [Item 8]
3.22 An investment body which has been required to deduct any TFN amounts and remit them to the Commissioner during the financial year is required by paragraph 221YHZC(1A)(f) to give the Commissioner a statement reconciling all amounts deducted in the previous financial year with amounts paid to the Commissioner.
3.23 Item 1 amends paragraph 221YHZC(1A)(f) to link the reconciliation with requirements under new subsection 221YHZC(1AA) . Item 2 inserts new subsection 221YHZC(1AA) to require certain details to be included in the investment body's reconciliation statement to the Commissioner. The statement must reconcile the total of all deductions with the total of amounts remitted to the Commissioner plus the total of amounts offset against remittances. This provision will ensure that the records maintained by the investment body and forwarded to the Commissioner will equate with amounts to be allowed to investors as credits on assessment.
3.24 Item 3 make subsection 221YHZD(1A) subject to new subsection 221YHZD(1AB) . The effect of this is that TFN amounts deducted must be remitted to the Commissioner only to the extent that they are not offset under the new subsection.
3.25 Item 5 contains a technical amendment to clarify the law. Paragraph 221YHZDA(1)(a) refers to a deduction 'under this Division'. The only provision in the Division which requires an investment body to deduct TFN amounts from investment income is subsection 221YHZC(1A). Paragraph 221YHZDA(1)(a) is accordingly proposed to be amended to refer to subsection 221YHZC(1A) rather than the Division.
CHAPTER 4 - Pensions, allowances and benefits
4.1 Section 1 of this chapter explains the amendments to the Income Tax Assessment Act 1936 (ITAA) to remove the exemption of the mature age partner allowance from income tax. Section 2 deals with minor technical amendments to the ITAA related to social welfare measures.
Section 1 - Mature age partner allowance
Overview
4.2 Part 2 of Schedule 3 of this Bill amends the ITAA to change the tax status of the mature age partner allowance (MAPA), paid to persons under age pension age, from non-taxable to taxable.
Summary of the amendments
4.3 The amendments will ensure that, subject to the pensioner rebate, MAPA payments will be taxable. Only supplementary amounts will be exempt from tax.
4.4 1 July 1995. [Item 22]
Background to the legislation
4.5 From 20 March 1994 the mature age allowance (MAA) has been available to persons aged 60 and over but less than age pension age. To be eligible for the MAA the applicant must otherwise be eligible for the newstart allowance and have been in receipt of an income support payment from either the Department of Social Security or the Department of Veterans' Affairs for longer than 12 months.
4.6 A separate benefit, the MAPA, was introduced at the same time as the MAA. The MAPA has similar entitlements to a wife pension which is payable to the wife of an age or disability support pensioner when the wife is not eligible for an age pension in her own right. Payments of the wife pension to recipients below age pension age are not exempt from tax unless the partner is a disability support pensioner.
4.7 Although it was the Government's intention that the MAPA be taxable it was inadvertently exempted from tax. Therefore an amendment of the tax legislation is necessary. However, recipients would be eligible for a pensioner rebate to offset the tax, subject to the level of other taxable income received.
Explanation of the amendments
4.8 Subsection 24ABMB(1) of the ITAA is omitted and replaced with a new subsection 24ABMB(1) so that, in respect of the mature age partner allowance, the supplementary amount is exempt from income tax and the balance is subject to income tax [item 21] . This change applies to payments received on or after 1 July 1995 [item 22] .
Section 2 - Minor technical amendments
4.9 Schedule 1 of the Bill also makes a number of minor technical amendments.
4.10 The index of social security measures to which tax treatment applies, contained in section 24AB, is being amended to omit the reference to section 24ABDA, which is being repealed. [Item 13]
4.11 Section 24ABDA exempts the pharmaceutical allowance from income tax. Part 2.22 of the Social Security Act 1991 (SSA91) to which section 24ABDA refers, has now been repealed with effect from 1 January 1993. Since that date, provisions relating to the pharmaceutical allowance have been scattered throughout SSA91. Pharmaceutical allowance is paid fortnightly as a supplementary amount in conjunction with the basic pension and certain other social security payments. Section 24ABDA is therefore obsolete and is to be repealed. [Item 15]
4.12 To continue to exempt the pharmaceutical allowance from income tax, new paragraph 24ABA(1)(aa) is to be inserted in both parts of the column headed 'Supplementary amounts' in the table of supplementary amounts in subsection 24ABA(1) [item 15] . Supplementary amounts are exempt from income tax.
4.13 Amendments made by clauses SS1, SS2 and SS3 apply to payments of pharmaceutical allowance received on or after 1 January 1993. [Item 16]
4.14 Paragraph (b) of the supplementary amounts table in subsection 24ABA(1) relates to a concept no longer used in DSS calculations and can now be omitted from the table [item 17] . The change applies to payments received on or after 1 July 1994 [item 18] .
4.15 The incentive allowance was exempt from income tax under section 23AD of the ITAA. When section 23AD was rewritten as Division 1AA of Part III (effective 1 July 1991) the reference to incentive allowance was inadvertently missed.
4.16 The incentive allowance is paid to recipients of disability support pension (DSP) as a supplementary amount in lieu of rent assistance. Recipients of DSP cannot receive both rent assistance and incentive allowance.
4.17 As payments of supplementary amount are exempt from income tax the Bill proposes to exempt the incentive allowance from income tax by inserting new paragraph 24ABA(1(d) in the table of supplementary amounts [item 19] . This change applies to incentive allowance payments received on or after 1 July 1991 [item 20] .
4.18 The youth training allowance (YTA) replaces the job search allowance (JSA) for persons aged less than 18 years. Like job search allowees, youth training allowees will be eligible for pharmaceutical allowance. In the ITAA, subsection 24ABZE(1) describes YTA supplementary amounts which subsection 24ABZF(1) exempts from income tax. When subsection 24ABZE(1) was inserted in the ITAA, the pharmaceutical allowance was inadvertently omitted. That omission is to be corrected by insertion in subsection 24ABZE(1) of new paragraph 24ABZE(1)(c) [item 23] . This change applies to payments of pharmaceutical allowance to youth training allowees received on or after 1 January 1995 [item 24] .
4.19 AUSTUDY payments made under the Student and Youth Assistance Act 1973 have always qualified for the beneficiary rebate under section 160AAA of the ITAA. However, an amendment of the ITAA in 1994 to reflect changes to the Student and Youth Assistance Act 1973 inadvertently removed the reference to AUSTUDY payments from the definition of a rebatable benefit. Item 25 corrects this and applies to AUSTUDY payments received at any time [item 26] .
CHAPTER 5 - Capital gains tax - roll-over relief for merging superannuation fund
Overview
5.1 Part 3 of Schedule 3 of the Bill amends the capital gains tax (CGT) provisions of the Income Tax Assessment Act 1936 (ITAA) to allow certain superannuation funds which merge on or after 1 July 1994 and before 1 July 1997 to defer (roll-over) any accrued capital gains or losses that would be realised as a result of the merger on the assets transferred.
Summary of the amendments
5.2 This measure gives effect to one of the changes announced by the Treasurer in his Statement on Superannuation Policy of 28 June 1994 to alleviate problems with small amounts in superannuation funds.
5.3 The amendment will apply to superannuation funds that merge on or after 1 July 1994 and before 1 July 1997. [New paragraph 160ZZPIA(2)(d)]
Background to the legislation
5.4 The following examples outline ways superannuation funds can merge.
5.5 Superannuation funds A, B and C ( transferor funds ) merge to form new superannuation fund D ( transferee fund ) with a new trustee and a new superannuation trust deed. Superannuation funds A, B and C are terminated.
5.6 Superannuation fund E merges with existing superannuation fund F. Superannuation fund F retains its existing trustee and its superannuation trust deed is modified to accommodate the merger. Superannuation fund E is terminated.
Current CGT treatment of the transferor fund
5.7 Currently if superannuation funds merge, section 160M of the ITAA provides that a change in ownership of the assets of the transferor fund has occurred. That is, the transferor fund is deemed to dispose of the assets and the transferee fund is deemed to acquire them.
5.8 Accordingly Part IIIA of the ITAA brings to account a capital gain or loss in respect of the assets transferred. If there is no consideration for the disposal it is deemed to be the market value of the assets transferred (subsection 160ZD(2)).
5.9 Although the application of Part IIIA is generally limited to the disposal of an asset acquired on or after 20 September 1985, subsection 306(1) provides that Part IIIA also applies to assets acquired by the trustee of a complying superannuation fund prior to 20 September 1985.
Current CGT treatment of the transferee fund
5.10 If superannuation funds merge there is no change in ownership of the assets owned by the transferee. That is, there is no transfer or notional disposal of the transferee's assets as a result of the merger. Therefore, Part IIIA will not apply as a result of the merger to the assets owned by the transferee.
Current CGT treatment of members
5.11 Part IIIA will not apply to any disposal of a member's interest in a superannuation fund (whether the member has a beneficial interest in the assets of the fund or merely a contingent right to receive a benefit) (section 160ZZJ).
5.12 When superannuation funds merge the transferor can not transfer losses of a capital or revenue nature to the transferee.
5.13 If a transferee disposes of a merger asset and makes a capital gain or loss, it may be offset against capital gains and losses from other assets of the fund and against any CGT losses carried forward.
Problem with the current tax treatment
5.14 With the adoption of 'member protection' measures, superannuation funds may come under greater pressure to merge to improve their economies of operation. The payment of CGT arising from these mergers may affect the short term liquidity of such superannuation funds.
Explanation of the amendments
5.15 The Bill will allow the trustee of a transferor fund that merges on or after 1 July 1994 and before 1 July 1997 to defer (roll-over) any CGT gains or losses that would be realised as a result of the merger if:
- •
- the merging funds are qualifying superannuation funds;
- •
- the transferor fund is in existence on 1 July 1994;
- •
- the disposal of the asset occurs under a merger between the transferor and the transferee;
- •
- the transferor and transferee elect that CGT roll-over relief will apply to all the assets transferred under the merger; and
- •
- the transferor keeps the election and gives a copy of it to the transferee.
[New subsections 160ZZPI(1) and (2)]
What is a qualifying superannuation fund
5.16 A qualifying superannuation fund is a superannuation fund that is not an excluded superannuation fund or an eligible roll-over fund. [New subsection 160ZZPIA(5)]
5.17 A fund is a superannuation fund if:
- •
- it is a resident or non-resident scheme that pays superannuation benefits upon retirement or death; or
- •
- it qualifies as a superannuation fund under section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA)
(subsection 6(1) of the ITAA).
5.18 An excluded superannuation fund is a superannuation fund with less than 5 members (section 10 of the SISA). A superannuation fund is an eligible roll-over fund if it has been declared by the Insurance and Superannuation Commissioner as being eligible to receive roll-over benefits from other funds (section 242 of the SISA).
When is a disposal of an asset under a merger?
5.19 A disposal of an asset between a transferor and a transferee occurs under a merger if:
- •
- the disposal is during the merger period; and
- •
- the disposal relates to a merger between the transferor and the transferee.
[New subsection 160ZZPIA(1)]
5.20 The merger period is the period in which the conditions for roll-over relief need to be met. The merger period is from the merger beginning to the merger end. [New subsection 160ZZPIA(3)]
5.21 The merger beginning is the time the first asset that relates to the transfer of member benefits is disposed of by the transferor to the transferee (as determined by section 160U) [new paragraph 160ZZPIA(2)(a)] . Member benefits include a member's beneficial interest in a fund and a member's future and contingent rights to receive a benefit from the fund (including benefits not yet allocated to the member).
5.22 If the first asset transferred to the transferee is unconnected with member benefits, for example, if the asset only represents the entitlement of the employer sponsor in the fund, this will not be the merger beginning and CGT will apply to the asset. However the asset will receive CGT roll-over relief if it is transferred to the transferee after the first asset which represents the transfer of member benefits.
5.23 The merger end is the time when the transferor fund does not have any assets, member benefits or members and is closed to new members [new paragraph 160ZZPIA(2)(b)] . CGT roll-over relief will not apply if the transferor only transfers part of its assets to a transferee fund or transfers all of its assets but continues to operate as a superannuation fund and receives contributions.
5.24 The merger period must start on or after 1 July 1994 and end before 1 July 1997. [New paragraph 160ZZPIA(2)(d)]
5.25 The merger beginning and merger end must be during one year of income of the transferor fund [new paragraph 160ZZPIA(2)(e)] . However, as a transitional measure, the merger period can be during more than one year of income if:
- •
- the transferor's income year ends on or before 30 September 1995; and
- •
- the merger begins on or after 1 July 1994 and ends on or before 30 September 1995.
[New subsection 160ZZPIA(6)]
5.26 The Toosmall superannuation fund wants to merge with Maxeff superannuation fund. Toosmall transfers its first asset which represents part of a member's benefit to Maxeff on 15 June 1995. Toosmall's year of income ends on 30 June 1995.
5.27 Toosmall completes the merger by 15 August 1995. Although the merger period was not completed within Toosmall's 1994/95 year of income, the merger ended on or before 30 September 1995. Therefore, if all of the conditions are met, Toosmall will not be liable to CGT on any of the assets transferred to Maxeff in the merger period.
When is there a merger between the transferor and the transferee?
5.28 There is a merger between the transferor and the transferee if:
- (a)
- there is a merger beginning (explained in paragraph 5.21);
- (b)
- there is a merger end (explained in paragraph 5.23);
- (c)
- all of the transferor fund's member benefits, other than eligible benefit payments, that exist at any time during the merger period are transferred to the transferee fund and;
- (d)
- the transferor and the transferee involved in the merger are complying superannuation funds during the year or years of income of each fund in which the merger beginning and the merger end occurs. Therefore CGT roll-over relief will not apply if either fund is a non-resident superannuation fund during this time.
[New subsection 160ZZPIA(2)]
5.29 A payment is an eligible benefit payment if:
- •
- the payment is an eligible termination payment (as defined in subsection 27A(1));
- •
- it is paid to a member because he or she meets a payment standard prescribed under subsection 31(1) of the SISA; and
- •
- all of the payment relates to one or more of the following matters:
- (a)
- retirement;
- (b)
- death;
- (c)
- permanent or temporary incapacity;
- (d)
- permanent departure from Australia;
- (e)
- financial hardship;
- (f)
- the attainment of a particular age; or
- (g)
- termination of employment.
[New subsection 160ZZPIA(4)]
5.30 The conditions that relate to the above matters are prescribed under subsection 31(1) of the SISA in Division 6.3 of the Superannuation Industry (Supervision) Regulations.
5.31 The transferor and transferee involved in the merger must jointly elect in writing that CGT roll-over relief will apply to all the assets transferred during the merger period. The election must be made before the merger starts [new paragraph 160ZZPI(1)(c)] . However, if a fund starts to merge before the date the Bill receives Royal Assent, the election can be made within 2 months from the date of Royal Assent [new subsection 160ZZPI(5)] .
5.32 A transferor can only make one election which results in a successful merger. A transferee can make an election with more than one transferor in a merger period.
The effect of gaining roll-over relief
5.33 If all the conditions are met, the capital gains tax provisions in Part IIIA will not apply to the merger assets until the transferee disposes of them.
5.34 When the transferee disposes of a merger asset, the amount that is taken to have been paid as consideration for the acquisition of the merger asset will depend on whether the transferee makes a capital gain or loss.
5.35 To work out whether the transferee makes a capital gain , the consideration paid for the merger asset will be as follows:
- •
- if the asset was sold by the transferee within 12 months after the day on which the asset was acquired by the transferor, the consideration will be the amount that would have been the cost base to the transferor if the CGT roll-over provisions did not apply to the asset when it was transferred to the transferee [new paragraph 160ZZPI(3)(a)] ; or
- •
- if the asset was sold by the transferee 12 months or more after the day on which the asset was acquired by the transferor, the consideration will be the amount that would have been the indexed cost base to the transferor if the CGT roll-over provisions did not apply to the asset when it was transferred to the transferee [new paragraph 160ZZPI(3)(b)] .
5.36 To work out whether the transferee makes a capital loss , the transferee is deemed to have paid as consideration for the merger asset the amount that would have been the reduced cost base to the transferor if the CGT roll-over provisions did not apply to the asset when it was transferred to the transferee. [New subsection 160ZZPI(4)]
What if any of the conditions for CGT roll-over relief are not met?
5.37 If any of the conditions for CGT roll-over relief are not met, the current tax treatment will apply to the assets transferred.
5.38 The transferor must keep the original election as well as records that prove:
- •
- the identity of the transferee;
- •
- that an asset was a merger asset; and
- •
- that all of the conditions for CGT roll-over relief were met
[New subsection 160ZZU(6A)]
5.39 The transferor must also give a copy of the election to the transferee. [New paragraph 160ZZPI(1)(d)]
5.40 The transferor must keep these records for five years after the end of the merger period. [New paragraph 160ZZU(6C)(a)]
5.41 The transferee must keep a copy of the original election as well as records that prove:
- •
- the identity of the transferor;
- •
- that an asset was a merger asset;
- •
- that all of the conditions for CGT roll-over relief were met; and
- •
- the amount of consideration it is taken to have paid for acquiring each asset. That is, the amount used to work out if the transferee made a capital gain or loss when it sells the asset
[New subsection 160ZZU(6B)]
5.42 The transferee must keep these records for five years after the transferee disposes of the last merger asset. [New paragraph 160ZZU(6C)(b)]
5.43 The records must be kept in the English language [new subsection 160ZZU(6A)] . If the transferor fails to keep the necessary records it is liable to a penalty of up to 30 penalty units. A penalty unit is currently $100 (subsection 4AA(1) of the Crimes Act 1914). The same penalty applies to the transferee in these circumstances. However, the penalty will not apply if the trustee has a reasonable excuse for failing to comply with the requirements. For example, a trustee will have a reasonable excuse if the records are lost or destroyed due to factors outside the trustee's control [new subsection 160ZZU(6D)] .
CHAPTER 6 - Superannuation - various amendments to the income tax law
Overview
6.1 The amendments contained in Parts 4 to 7 of Schedule 3 and Part 5 of Schedule 10 of the Bill amend the Income Tax Assessment Act 1936 (ITAA) and the Taxation Laws Amendment (Superannuation) Act 1992 to clarify the operation of the law and overcome some technical anomalies relating to a range of superannuation matters.
6.2 This chapter explains the amendments as they affect the income tax law in relation to:
- •
- superannuation pensions and roll-over annuities (part 1);
- •
- employer superannuation contributions (part 2); and
- •
- rolling-over eligible termination payments (ETPs) received before 1 July 1994 (part 3).
Part 1 - Superannuation pensions and roll-over annuities
Summary of the amendments
6.3 The purpose of the amendments is to ensure that the taxation arrangements for superannuation pensions and roll-over annuities operate as intended so that:
- •
- the deductible amount of a life time superannuation pension or annuity is calculated based on life expectancy at the beginning of the period in respect of which the pension or annuity is payable; and
- •
- taxpayers in receipt of disability pensions prior to 1 July 1994 retain their entitlement to a rebate.
6.4 In addition, the amendments ensure that the undeducted purchase price (UPP) that applies to pensions and annuities purchased prior to 1 July 1994 will also apply to pensions and annuities purchased wholly with an ETP representing the commutation or residual capital value of a pension or annuity that commenced prior to 1 July 1994.
6.5 The first amendment applies from the date of introduction of the Bill. The remaining amendments will apply from 1 July 1994 as they clarify the operation of the income tax law and remove some anomalies.
Background to the legislation
6.6 A superannuation pension or annuity is included in assessable income under section 27H of the ITAA. The assessable amount of the pension or annuity is reduced by the deductible amount. Generally, the deductible amount is the UPP of the pension or annuity divided by the term the pension or annuity is expected to be payable.
6.7 In addition, pensions and annuities which are paid from a taxed source may qualify for a rebate of tax of 15% of the assessable pension or annuity. The rebate applies to pensions and annuities paid to a person who is aged 55 years or more or who is in receipt of a death or disability benefit.
6.8 The Bill makes amendments affecting:
- •
- the time the deductible amount is calculated;
- •
- retaining the UPP of pension and annuities that commenced to be payable prior to 1 July 1994; and
- •
- disability superannuation pensions.
Time the deductible amount is calculated
6.9 The deductible amount allowed under section 27H in respect of a life time pension or annuity is calculated on the basis of the life expectation factor of the recipient (or, in the case of a pension or annuity that continues to be payable to a dependant on the death of the recipient, the life expectation factor of the recipient or the reversionary beneficiary, whichever is longer). The life expectation factor is determined by the Australian Life Tables at the time the pension or annuity commences to be payable.
6.10 Section 27H applies to pensions and annuities payable after 30 June 1983. Pensions and annuities that first became payable before that date are entitled to a similar concession under the former section 26AA.
6.11 It has always been considered that the time a pension or annuity commences to be payable is the beginning of the period in respect of which the pension or annuity is payable.
6.12 However, recently some pension and annuity providers have argued that the deductible amount should be calculated at the time the first pension or annuity is actually paid. This alternative approach results in the use of a slightly shorter life expectancy, and hence a higher deductible amount, than the life expectancy at the commencement of the period in respect of which the pension or annuity is payable.
6.13 The purpose of the deductible amount concession is to allocate the capital value of the pension which has not received a tax concession during the accrual phase over the whole of the period that the pension or annuity is expected to be payable.
6.14 In addition, the determination of the deductible amount of a pension or annuity at the beginning of the period in respect of which the pension or annuity is payable is consistent with the determination of other factors relating to pensions and annuities. For example, from 1 July 1994 the following factors are all determined at the beginning of the period in respect of which the pension or annuity is payable:
- •
- the measurement of the pension or annuity for reasonable benefit limit purposes;
- •
- the calculation of the rebatable proportion of the pension and annuity; and
- •
- the calculation of the minimum and maximum payment levels for allocated pensions and annuities.
Retaining the UPP of pension and annuities that commenced to be payable prior to 1 July 1994
6.15 Another effect of the change in the definition of UPP is that the UPP for superannuation pensions purchased with a rolled-over ETP and roll-over annuities was reduced. That is, if such a pension or annuity commenced to be paid prior to 1 July 1994, the UPP consists of the whole of the ETP reduced by the post-June 1983 component of the ETP. If the pension or annuity commences to be paid after 30 June 1994, the UPP consists only of the undeducted contributions component of the ETP.
6.16 Therefore, taxpayers who have a superannuation pension purchased with a rolled-over ETP or a roll-over annuity that commenced to be payable prior to 1 July 1994 are to some extent locked into their current pension or annuity provider because, if they commute their pension or annuity entitlement and roll-over the resulting ETP to purchase a new pension or annuity, the new lower definition of UPP will apply to the new pension or annuity. That is, as a result of changing the pension or annuity provider the UPP will be reduced and a higher amount of the pension will be included in the taxpayer's assessable income.
Disability superannuation pensions
6.17 One of the changes made to the income tax law associated with the introduction of the new superannuation pension and roll-over annuity rebate provisions related to the conditions which apply to categorise a benefit as a disability pension.
6.18 A benefit qualified as a disability benefit in accordance with the previous definition of death and disability benefit in section 159SJ if the benefit was provided to the person because of the permanent disability of the person. The payer of the benefit (usually the trustee of the superannuation fund) had to be satisfied that the person was permanently disabled. The new test of disability requires certification by two legally qualified medical practitioners that the disability is likely to result in the person being unable ever to be employed in a capacity for which the person is reasonably qualified because of education, training or experience.
6.19 A problem which arises as a result of this change is the impact on pensions paid in circumstances which satisfied the previous test of disability but which fail to satisfy the new test of disability. Prior to 1 July 1994 those pensions would have qualified for a rebate on the post-June 1983 portion of the capital value of the pension. However, from 1 July 1994 a rebate will no longer be available in respect of those pensions.
6.20 In addition, disability pensions which commenced prior to 1 July 1994 may satisfy the new test of disability but recipients of such pensions will be forced to go to the cost and inconvenience of seeking appropriate certification from two legally qualified medical practitioners in order to continue their entitlement to a rebate.
Explanation of the amendments
Time the deductible amount is calculated
6.21 The definition of life expectation factor in subsection 27H(4) will be amended so that the deducible amount of a lifetime superannuation pension or annuity is determined at the beginning of the period to which the first payment of the pension or annuity relates. [Item 31]
6.22 The amendment will apply to superannuation pensions or annuities where the first payment of the pension or annuity is made after the date of introduction of the Bill. [Item 32]
6.23 The amendment will ensure that all pension and annuity providers will have to use the same basis for working out the deductible amount. In particular, people who receive pension or annuity payments 12 months in arrears, for example, will not receive an unjustifiable advantage over people who receive more regular payments.
Retaining the UPP of pension and annuities that commenced to be payable prior to 1 July 1994
6.24 Paragraph (a) of the definition of undeducted purchase price in subsection 27A(1) will be extended to include an annuity or superannuation pension that commences to be paid on or after 1 July 1994 provided that new section 27AAAA applies to the annuity or pension. That is, the UPP of such an annuity or pension will consist of the whole of the ETP rolled-over to purchase the annuity or pension reduced by the post-June 1983 component. [Items 39 and 40; new sub-subparagraph (a)(ii)(C) of the definition of undeducted purchase price in subsection 27A(1)]
6.25 An annuity or superannuation pension will come within new sub-subparagraph (a)(ii)(C) of the definition of UPP in section 27A(1) if:
- •
- the annuity or superannuation pension has one or more underlying commutation ETPs; and
- •
- the commencement day of each of those underlying commutation ETPs that is an original underlying commutation ETP was before 1 July 1994.
[Item 41; new subsection 27AAAA(1)]
6.26 New section 27AAAA only applies to annuities and superannuation pensions purchased with commutation ETPs. An ETP is a commutation ETP if it represents:
- •
- the commutation of the whole or a part of a superannuation pension or annuity (that is, a paragraph (d) or (g) ETP); or
- •
- the residual capital value of a superannuation pension or annuity (that is, a paragraph (e), (f), (h) or (j) ETP).
[Item 41; new subsection 27AAAA(2)]
6.27 The commencement day of an annuity or superannuation pension is the first day of the period to which the first payment of the annuity or pension relates. [Item 41; new subsection 27AAAA(6)]
6.28 A commutation ETP is an underlying commutation ETP if the purchase price of the current annuity or superannuation pension consists only of the whole or a part of the commutation ETP (or the whole or a part of two or more commutation ETPs). [Item 41; new paragraph 27AAAA(3)(a)]
6.29 Similarly, a commutation ETP is an underlying commutation ETP if this condition is satisfied in respect of another annuity or superannuation pension and that other annuity or pension gave rise to a commutation ETP that is subsequently an underlying commutation ETP of the current annuity or pension. That is, if a taxpayer has a series of annuities and pensions that are, in turn, commuted and rolled-over to purchase a new pension or annuity, each of the commutation ETPs will be an underlying commutation ETP of the current pension or annuity. [Item 41; new paragraph 27AAAA(3)(b)]
6.30 An important part of the test to determine an underlying commutation ETP is that the current annuity or superannuation pension must be purchased only with one or more commutation ETPs. Therefore, if an ETP from another source (such as a complying superannuation fund, an approved deposit fund (ADF) or a deferred annuity) is joined with a commutation ETP to purchase the current annuity or pension, the current annuity or pension will not come within new section 27AAAA .
6.31 Similarly, if a commutation ETP is rolled-over into a complying superannuation that does not immediately commence to pay a pension or into a deferred annuity (that is, it re-enters the accrual phase), the purchase price of any subsequent annuity or pension will consist partly of a commutation ETP and partly of earnings in the superannuation fund or deferred annuity. Therefore, the subsequent annuity or pension will not come within new section 27AAAA . This situation will not change even if an amount equivalent to those earnings are extracted and taken as a lump sum ETP.
6.32 An underlying commutation ETP is an original underlying commutation ETP if the annuity or superannuation pension that gave rise to it has no underlying commutation ETP. That is, the original underlying commutation ETP is the initial underlying annuity or pension in a series of annuities and pensions. [Item 41; new subsection 27AAAA(5)]
6.33 An annuity or superannuation pension gives rise to a commutation ETP if:
- •
- the commutation ETP results from the commutation of the whole or a part of the annuity or pension; or
- •
- the commutation ETP is a payment of the residual capital value of the annuity or pension.
[Item 41; new subsection 27AAAA(4)]
6.34 The consequence of the amendments is that, if a taxpayer who started receiving an annuity or superannuation pension prior to 1 July 1994 decides to commute that annuity or pension and roll-over the resulting ETP to purchase a new annuity or pension, the UPP of the new annuity or pension will be the whole of the ETP reduced by the post-June 1983 component. The deductible amount for the new annuity or pension will be worked out ordinarily under section 27H. If the new annuity or pension is payable for life, the deductible amount will be worked out on the basis of the relevant life expectancy at the time of commencement of the new annuity or pension.
6.35 The amendments apply to the calculation of the UPP of an annuity or superannuation pension where the commencement day of the annuity or pension is on or after 1 July 1994. [Item 42]
6.36 Gavin received an ETP of $240 000 on 30 June 1993. Gavin's eligible service period was 20 years (10 of which occurred prior to 1 July 1983). Gavin's ETP contained the following components:
- •
- undeducted contributions - $40 000
- •
- pre-July 1983 component - $120 000
- •
- post-June 1983 component - $80 000
6.37 On 30 June 1995 Gavin rolled-over the whole of his ETP to purchase a reversionary allocated pension. Therefore, the UPP in relation to the pension is $160 000 (ie, $40 000 + $120 000). Gavin's wife was aged 57 and her life expectancy was 25.22 years. Consequently the deductible amount in relation to the pension was $6 344 per annum. Gavin took pension payments of $15 000 per annum.
6.38 On 30 June 1995 Gavin elected to commute his allocated pension and roll-over the whole of the resulting commutation ETP of $220 000 to purchase a reversionary allocated annuity from a different provider. The components of the ETP were:
- •
- undeducted contributions - $36 828
- •
- pre-July 1983 component - $100 000
- •
- post-June 1983 component - $83 172
6.39 As Gavin's allocated annuity has an underlying commutation ETP and the sole original underlying commutation ETP commenced before 1 July 1994, new section 27AAAA will apply to Gavin's annuity. Therefore, the UPP in respect of the annuity will be $136 828. Gavin's wife now has a life expectancy of 23.50 years. Consequently the deductible amount in respect of the annuity will be $5 823 per annum.
6.40 Tracey purchased a roll-over annuity on 1 April 1993. She also started to receive a superannuation pension on 15 March 1994. On 30 November 1995 Tracey decides to commute both the roll-over annuity and the superannuation pension.
6.41 Tracey elects to roll-over the whole of the ETP she receives on the commutation of the annuity and 50% of the ETP received on commutation of the superannuation pension to purchase a new immediate annuity. The balance of the ETP is taken as a lump sum. On 16 July 1996 Tracey decides to commute the annuity. The whole of the ETP she receives is rolled-over to purchase another immediate annuity.
6.42 Tracey's new annuity has a series of underlying commutation ETPs. The whole of the purchase price of the new annuity consisted of underlying commutation ETPs. As the original underlying commutation ETPs (that is, Tracey's original roll-over annuity and superannuation pension) both commenced prior to 1 July 1994, new section 27AAAA will apply to Tracey's new annuity.
6.43 Ivan purchased a roll-over annuity on 12 February 1994. On 25 August 1994 he purchased a separate immediate annuity by rolling-over an ETP he received from an ADF. On 2 October 1995 he commutes both entitlements and rolls-over the resulting commutation ETPs to buy a single new immediate annuity. new section 27AAAA will not apply to Ivan's new annuity because the original underlying commutation ETPs did not all commence to be paid prior to 1 July 1994.
6.44 Helen purchased an allocated pension on 1 April 1994. On 16 November 1994 she decided to commute the allocated pension and elected to roll-over the resulting commutation ETP into a deferred annuity. On 17 July 1996 Helen started receiving an immediate annuity. new section 27AAAA will not apply to Helen's immediate annuity because the purchase price did not consist wholly of an underlying commutation ETP. Rather, the purchase price was the sum of the underlying commutation ETP and earnings in the deferred annuity between 16 November 1994 and 17 July 1995.
Death or disability superannuation pensions
6.45 The definition of death or disability benefit in subsection 159SJ will be omitted and substituted with a new definition of death or disability annuity/pension . The new definition will ensure that:
- •
- if the first payment date of the annuity or pension was before 1 July 1994, the annuity or pension will be a death or disability annuity/pension if it was provided to the person because of the permanent disability of the person; and
- •
- if the first payment date of the annuity or pension was after 30 June 1994, the annuity or pension will be a death or disability annuity/pension if it is provided to the person because of the disability of the person, where two legally qualified medical practitioners have certified that the disability is likely to result in the person unable to be employed in a capacity for which the person is reasonably qualified because of education, training or experience.
[Item 37]
6.46 The first payment date is defined in subsection 159SJ(1) and, so far as is relevant, means the first day of the period to which the first payment of the pension or annuity relates.
6.47 A consequential amendment will be made to the definition of rebatable 27H amount in subsection 159SJ(1). [Item 36]
6.48 The amendment will ensure that disability pensions which qualified for a rebate under the arrangements in place before 1 July 1994 will continue to qualify for a rebate under the new arrangements. That is, the new 15% rebate will apply to such pension or annuities. In addition, the test for disability will only have to be satisfied at the time of the first payment date for the annuity or pension to qualify as a rebatable 27H amount .
6.49 The amendments will apply to payments of annuities and pensions made on or after 1 July 1994 [item 38] . This will ensure that the new provisions operate as intended in respect of assessments for the 1994-95 financial year.
Part 2 - Employer superannuation contributions
Summary of the amendments
6.50 The purpose of the amendments is to remove any doubt that deductions for employer superannuation contributions are available only if they are made to a superannuation fund established primarily for the benefit of an employee.
6.51 The amendments will apply to contributions made by an employer on or after the date of introduction of the Bill. [Item 34]
Background to the legislation
6.52 Section 82AAC of the ITAA allows an employer a deduction for contributions to an eligible superannuation fund for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee.
6.53 The clear intention of section 82AAC is to allow a deduction for employer superannuation contributions made for the benefit of an employee or, in the event of the employee's death, for the benefit of dependants of an employee. However, it has recently become apparent that some employers are claiming that a deduction is available for contributions made to a superannuation fund established primarily for the benefit of a spouse or another dependant of an employee.
6.54 To allow deductions for employers in these circumstances would encourage income splitting and effectively allow an employee and his or her dependants to obtain a greater reasonable benefit limit.
6.55 Moreover, there is no justification for allowing tax concessions to encourage the provision of superannuation support for a person with whom the employer has no actual employment relationship.
Explanation of the amendments
6.56 Amended paragraph 82AAC(1)(a) will restrict deductions for employer superannuation contributions to contributions made to a superannuation fund established for the benefit of an eligible employee (whether or not the benefits are payable to a dependant of the employee in the event of the employees death). [Item 33]
6.57 The amendment ensures that a deduction is not available to an employer for contributions to a superannuation fund established directly for the benefit of a spouse or any other dependants of an employee.
6.58 The purpose of the amendment is to remove any doubt about the intention of the existing law and does not affect the interpretation of the former paragraph 82AAC(1)(a) or any other provision of the ITAA. [Item 35]
Part 3 - Rolling-over eligible termination payments received before 1 July 1994
Summary of the amendments
6.59 The purpose of the amendment is to ensure that the 90 day roll-over period applies to eligible termination payments (ETPs) received before 1 July 1994.
6.60 The amendment will apply to ETPs made on or after 1 July 1994.
Background to the legislation
6.61 Taxation Laws Amendment (Superannuation) Act 1992 amended the income tax law to implement a number of the announcements made by the former Treasurer in the Security in Retirement statement.
6.62 One of the amendments related to the replacement of the 90 day roll-over period that applied to ETPs with a requirement that ETPs be rolled-over directly from the payer of the ETP to the roll-over fund. Associated with the new arrangements, the Superannuation Industry Supervision Act 1994 was introduced and allows superannuation funds and roll-over funds to retain moneys in the fund until the member decides how they want to deal with their entitlement.
6.63 The amendment removing the 90 day roll-over period applies to ETPs paid to a roll-over fund on or after 1 July 1994. As a consequence people who received ETPs between 1 April 1994 and 30 June 1994 have been denied access to both the full 90 day roll-over period and the facility which allows funds to retain moneys while the member decides how to invest their entitlement.
Explanation of the amendments
6.64 New section 49 of the Taxation Laws Amendment (Superannuation) Act 1992 will ensure that the amendments relating to the abolition of the 90 day roll-over period apply to ETPs paid on or after 1 July 1994. [Item 9 in Part 5 of Schedule 10]
6.65 The amendment will ensure that a taxpayer who received an ETP between 1 April 1994 and 30 June 1994 will have 90 days, or such longer period as the Commissioner of Taxation allows, to roll-over his or her ETP.
CHAPTER 7 - Superannuation guarantee - jurisdiction of Australian Industrial Relations Commission
Overview
7.1 The amendments contained in Part 1 of Schedule 4 of the Bill will make technical amendments to the Superannuation Guarantee (Administration) Act 1992 (SGAA).
Summary of the amendments
7.2 The amendments clarify the jurisdiction of the Australian Industrial Relations Commission (AIRC). [Item 1, new subsection 5B]
7.3 The amendments will apply from the enactment of the SGAA and the Superannuation Guarantee Charge Act 1992 ie from 1 July 1992.
Background to the legislation
7.4 The Treasurer announced a range of measures in his statement on Superannuation Policy on 28 June 1994, modifying the operation of the superannuation system and the interaction between award superannuation and the superannuation guarantee regime. This measure is one of the changes announced in the Statement.
7.5 With the enactment of the superannuation guarantee legislation, there have been doubts expressed concerning the power of the AIRC to continue to arbitrate on superannuation matters. In light of the superannuation guarantee legislation, the AIRC itself has acknowledged concerns about its on going role and jurisdiction in this area.
Explanation of the amendments
7.6 The AIRC's principal function is to prevent and settle industrial disputes by conciliation and arbitration. In doing so, the AIRC must, amongst other things, ensure that the system of awards and other employment agreements provide for secure, relevant and consistent wages and conditions of employment. In this regard, superannuation is a burgeoning area that falls for consideration by the AIRC.
7.7 The principal object of the superannuation guarantee legislation is to establish minimum standards of superannuation support for employees, whilst at the same time, leaving employers and employees free to negotiate higher standards. It complements the legal and administrative framework which regulates industrial relations and award superannuation generally.
7.8 In this regard, the superannuation guarantee legislation complements the AIRC's objectives and functions. The superannuation guarantee legislation is not intended to be an all encompassing or exhaustive code regulating the field of superannuation. Rather, it establishes minimum standards of superannuation support, and is one method of encouraging employers to comply with their award obligations.
7.9 It is generally accepted that the operation of the superannuation guarantee legislation has not affected the jurisdiction, powers, or functions of the AIRC, although there is no express statement in the SGAA or the Industrial Relations Act 1988 to this effect.
7.10 For this reason, and because there has been doubt expressed in some quarters concerning the powers of the AIRC, the amendment inserts a new subsection 5B into the SGAA. This provision makes it clear that the SGAA and the Superannuation Guarantee Charge Act 1992 (SGCA) do not alter in any way the substantive jurisdiction, functions and powers of the AIRC. [Item 1, new subsection 5B(1)]
7.11 The operation of the amendment can be illustrated in the following way. Under paragraph 170MD(1)(a) of the Industrial Relations Act 1988, the AIRC may refuse to certify an agreement if it thinks that any of the terms is one that the Commission would not have power to include in an award. It is conceivable that the AIRC might consider that a term relating to superannuation entitlements is one that the Commission does not have power to include in an award because of the operation of the superannuation guarantee legislation.
7.12 The amendment to the SGAA ensures that this cannot occur. That is, under the amendment, the AIRC must ignore the operation of the superannuation guarantee legislation in determining whether it has power to certify an agreement. This preserves the jurisdiction, functions and powers of the AIRC.
7.13 The amendment makes it clear that apart from three specific provisions, the operation of the Industrial Relations Act 1988 and the jurisdiction, functions and powers of the AIRC under that Act, are unaffected by the operation of the superannuation guarantee legislation.
7.14 Specifically, under subparagraphs 113B(a)(ii), 170MC(2)(a)(ii) and 170NC(2)(a)(ii) of the Industrial Relations Act 1988, the AIRC may take into account the SGAA and the SGCA in determining whether employment agreements disadvantage employees by reducing their entitlements or protections in relation to their terms and conditions of employment [new paragraph 5B(2)(b)] . The AIRC has the power to veto agreements which do not provide adequate superannuation support. The amendment preserves the AIRC's right to take account of the superannuation guarantee legislation when addressing superannuation matters under employment agreements/awards.
7.15 This amendment does not apply to any express reference to the SGAA or the SGCA in the Industrial Relations Act 1988. [Item 1; new paragraph 5B(2)(a)]
CHAPTER 8 - Superannuation - flat dollar contributions
Overview
8.1 The amendment made in Part 2 of Schedule 4 of the Bill will ensure that the percentage level of superannuation support provided for an employee under flat dollar arrangements is calculated based on the actual superannuation contribution paid by the employer.
Summary of the amendments
8.2 The amendment to the Superannuation Guarantee (Administration) Act 1992 (SGAA) will ensure that flat dollar contributions are calculated by reference to actual contributions as a proportion of the standard employee's notional earnings base for the contribution period, rather than by reference to the amount specified in the award. [Item 2]
8.3 The amendment will apply from 1 July 1994. [Item 5]
Background to the legislation
8.4 In order to determine if an employer has an individual superannuation guarantee shortfall in respect of an employee, it is necessary to determine:
- •
- the percentage level of superannuation support the employer is expected to provide for the employee (charge percentage: sections 20 and 21 of the SGAA); and
- •
- the percentage level of superannuation support actually provided for the employee (sections 22, 23 and 25A of the SGAA).
8.5 If the actual percentage level of superannuation support is less than the expected percentage level of support a shortfall (sections 17 to 19 of the SGAA) will arise.
8.6 Section 25A of the SGAA recognises superannuation guarantee contributions made by employers based on a fixed sum rather than a percentage of employee earnings.
8.7 The actual percentage level of superannuation support for flat dollar contributions determined under subsection 25A(2) is the amount specified in the award divided by the standard employee's notional earnings base set out in the award.
8.8 There are two problems with the current provision. Firstly, if an employer makes a contribution under an award which requires a flat dollar superannuation contribution to be made based upon the earnings of a standard employee, but the employer contributes less than the award amount, paragraph 25A(2)(b) deems that the award contribution has been made. It was however intended that only the actual amount of employer contributions reduce the charge percentage.
8.9 Secondly, where an employer is required to contribute more than the flat dollar amount required under an award in order to avoid the superannuation guarantee charge, the charge percentage is only reduced under section 25A by the amount in the award. To ensure that any additional contributions are recognised employers are currently having to amend awards to increase contributions up to the required superannuation guarantee minimum amount or they are having to make the additional contributions on the basis of each employee's ordinary time earnings.
Explanation of the amendment
8.10 To overcome these problems subsection 25A of the SGAA will be repealed. [Item 4]
8.11 New subsections 23(4A) and (4B) will be inserted after subsection 23(4). The new subsections will ensure that the actual percentage level of superannuation support is calculated by reference to actual contributions as a proportion of the standard employee's notional earnings base for the contribution period, rather than by reference to the amount specified in the award. (The standard employee is known as the adjustment employee under the new subsections). The new provisions will be similar to subsection 25A except that they will refer to actual contributions. The calculation of the percentage level of employer support will also be calculated with reference to actual contributions. [Item 2]
8.12 The percentage level of superannuation support actually provided in relation to the contribution period, by which the charge percentage is reduced, is worked out as follows:
((actual contribution amount)/(notional earnings base))*(period of employment factor)*100%
where:
- (a)
- in the case of a full-time employee, the earnings of the adjustment employee mentioned in paragraph 23(4A(b); or
- (b)
- in the case of a part-time employee, the amount worked out as follows:
8.13 The reference to 'subsection (2), (3) or (4)' in paragraph 23(5)(b) will be omitted and replaced by 'subsection (2), (3), (4) or (4A)'. [Item 3]
CHAPTER 9 - Superannuation guarantee - local government councillors
Overview
9.1 The amendment made in Part 3 of Schedule 4 of the Bill will exempt from the scope of the Superannuation Guarantee (Administration) Act 1992 (SGAA), the payments received by local government councillors in the course of their duties. However, the amendment will ensure that payments to members of eligible local governing bodies (as defined in section 221A of the Income Tax Assessment Act 1936 (ITAA) will continue to be subject to the requirements of the superannuation guarantee legislation.
Summary of the amendments
9.2 To exclude local government councillors and the payments they receive in the course of their duties from definitions of 'employee, employer' and 'salary or wages' contained in the SGAA. [Items 8 and 9]
9.3 To include members of eligible local governing bodies as defined in section 221A of the ITAA in the definition of employee under the SGAA and to ensure that the payments they receive are included in the definition of 'salary or wages' under the SGAA. [Item 9]
9.4 1 July 1993. [Item 10]
Background to the legislation
9.5 Payments by way of remuneration or allowances to a member of a local governing body are exempt from the pay-as-you-earn (PAYE) collection mechanism in the income tax law (by exclusion from the definition of 'salary or wages' in section 221A) unless the body elects (under section 221B), by unanimous resolution, to be treated as an 'eligible local governing body'.
9.6 Because the definition of 'employer', 'employee' and 'salary or wages' in the PAYE provisions are relied upon in other taxation laws, a resolution under section 221B will also affect members of the local governing body through the application of other taxation laws and laws relating to child support. For consistency, a resolution under section 221B should also have a similar effect on the application of the SGAA.
9.7 Under the ITAA(subsection 82AAS(3)), where a person earns more than 10 percent of their total assessable income from 'eligible employment' (activities that result in the person being treated as an employee for superannuation guarantee purposes) they are not entitled to a tax deduction in respect of any personal superannuation contributions.
9.8 Under the SGAA (subsection 12(10)), councillors are regarded as employees of the council. The payments they receive (essentially for attendance at meetings and the cost of travelling to those meetings) are in most cases regarded as salary or wages for superannuation guarantee purposes (paragraph 11(1)(e)). It follows, therefore, that where such amounts paid to an otherwise self-employed councillor exceed 10 percent of his or her total assessable income, the councillor will be unable to claim income tax deductions for personal superannuation contributions.
9.9 The amendment made by this Bill will exempt from the scope of the SGAA the payments received by a person who holds office as a member of a local government council. This is consistent with the PAYE treatment of payments received by local government councillors.
9.10 The payments to members of eligible local governing bodies are to be excluded from the exemption. In order to retain the income of members of eligible local governing bodies within the scope of the SGAA, the amendment to the definition of employee in subsection 12(10) will make reference to a person who is a member of an eligible local governing body under sec 221A of the ITAA.
9.11 The Superannuation Industry (Supervision) Act 1993 (SIS Act) adopted the definition of employee (and employer) as used in the SGAA which includes councillors. If councillors were not to be included in the definition of employee for SIS purposes, an unintended consequence would be that some funds may have to meet the provisions relating to non standard employer-sponsored funds. The SIS Act therefore is to be amended to retain councillors within the definition of employee for SIS purposes.
Explanation of the amendments
9.12 To overcome these problems, the definitions of 'salary or wages' and 'employee, employer' in the SGAA will be amended as follows:
- •
- subsections 12(9) and 12(10) to specifically exclude a person in the capacity of a local government councillor from the definition of employee [items 8 and 9; new subsections 12(9) and 12(9A)] ;
- •
- subsection 12(10) to include a person who is a member of an eligible local governing body under section 221A of the ITAA in the definition of employee under the SGAA [item 9, new subsection 12(10)] ;
- •
- by these amendments, the definition of 'salary or wages' in paragraph 11(1)(e) will exclude payments made to local government councillors (other than those who are members of an eligible local governing body).
9.13 The SIS Act will be amended to ensure that councillors continue to be treated as employees for the purposes of SIS as follows:
- •
- amend section 10 to delete the definition of 'employee' and 'employer'; and
- •
- insert a new section 15A to provide for definitions of 'employee' and 'employer' for the purposes of the SIS Act.
CHAPTER 10 - Superannuation - miscellaneous amendments
Overview
10.1 The amendments contained in Schedules 5, 6 and 7 of the Bill consist of a number of miscellaneous amendments to superannuation law administered by the Insurance and Superannuation Commissioner (the Commissioner). The amendments comprise:
- •
- allowing the Commissioner (or his delegates) to undertake statistical surveys of the superannuation industry and allowing superannuation standards officers to provide information (such as statistical information derived from the surveys) to the Australian Bureau of Statistics for statistical purposes (part 1)
- •
- ensuring that the trustee or an investment manager of a less than 5 member regulated superannuation fund is not precluded from taking advantage of the exception to the rule prohibiting acquisition of members assets simply because the members business is established in a company form and not in the form of a sole trader or partnership (part 2)
- •
- allowing the financial backing requirements imposed on approved trustees and on custodians to be met by having an approved guarantee and net tangible assets which together sum to at least the prescribed amount (this has previously been provided for by a Temporary Modification Declaration made by the Commissioner) (part 3)
- •
- allowing for the Superannuation Industry (Supervision) Regulations to provide some flexibility in determining the date by which an application for a pre 1 July 1988 funding credit must be made (part 4)
- •
- changing the method of collection of the superannuation supervisory levy and making some other largely consequential amendments, including changes to the manner in which the late payment penalty for the levy is calculated (part 5).
Part 1 - Conducting statistical surveys of the superannuation industry and provision of information to the Australian Bureau of Statistics
Summary of the amendments
10.2 The purpose of these amendments is:
- •
- to give the Commissioner (or his delegates) the ability to conduct surveys to collect superannuation statistics and to require trustees of superannuation entities to comply with any requests for statistical information;
- •
- to allow superannuation standards officers (such as Insurance and Superannuation Commission staff) to provide to the Australian Bureau of Statistics protected information or documents, or information sourced from such information (such as aggregate statistical data derived from the survey), where that information or those documents are being provided for statistical purposes. This will allow the Australian Bureau of Statistics to make use of the information when compiling, for example, the National Accounts.
- •
- to allow the Commissioner to charge fees for statistical publications.
10.3 The amendments apply from the date of Royal Assent.
Background to the legislation
10.4 Section 348 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) provides the Commissioner with the power to publish statistical information, but the information must not be published in a way that would identify and disclose information about a superannuation entity or identify a person to whom a payment has been made.
10.5 There is, however, no specific provision in the SIS Act which would allow the Commissioner to conduct surveys to collect superannuation statistics and to require trustees of superannuation entities to complete any survey questionnaires sent to them.
10.6 Section 346 of the SIS Act details the secrecy provisions that apply with respect to information or documents which have been given, produced or obtained under, or for the purposes of, the SIS Act. This information and these documents are known as protected information and protected documents.
10.7 Protected information and protected documents can not normally be disclosed, either directly or indirectly, to a person unless the disclosure is specifically allowed for in section 346. Subsection 346(6) currently provides that protected information or protected documents can be provided to various Commonwealth bodies, such as the Australian Securities Commission and the Superannuation Complaints Tribunal. Protected information and protected documents would include information and documents collected under statistical surveys which are to be carried out pursuant to the new survey power given to the Commissioner under these amendments. There is, however, currently no allowance for statistical information obtained under the SIS Act, or aggregated statistical data sourced from surveys, to be provided to the Australian Bureau of Statistics for statistical purposes.
Explanation of the amendments
How will the Commissioner collect statistical information?
10.8 Item 5 of Schedule 6 inserts a new section 347A into the SIS Act.
10.9 New subsection 347A(1) provides that the Commissioner may collect such statistical information about superannuation entities as the Commissioner considers appropriate.
10.10 New subsection 347A(2) provides that for the purposes of collecting statistical information the Commissioner may approve one or more survey forms.
10.11 New subsections 347A(4), (5) and (6) provide that the Commissioner may by written notice sent to the trustee of a superannuation entity determine that the trustee is a participant in the Insurance and Superannuation Commissions statistics program. The trustee is then obliged to complete and return any survey forms sent to the trustee.
Who will be requested to provide statistical information
10.12 New subsection 347A(4) provides the Commissioner with the power to determine that the trustee of any superannuation entity is to be a participant in the statistics program. If the Commissioner wishes to include a trustee of a superannuation entity in the statistics program the Commissioner is required to issue a written notice to the trustee advising the trustee that they are to be a participant in the statistics program.
10.13 The notice will not only inform the trustee that they are in the program but will also advise the trustee of their obligations as a participant.
What are the trustees obligations as a participant in the statistics program
10.14 If a trustee has been advised by written notice from the Commissioner that they are a participant in the statistics program then the trustee is required to complete, in accordance with instructions, any survey forms sent to them and return the completed forms (by the time specified in the instructions) to the authorised recipient (who will be specified in the instructions). [New subsections 347A(3), (4), (5) and (8)]
What if a trustee does not comply with these obligations?
10.15 If a trustee, intentionally or recklessly, fails to comply with the trustees obligations then they are guilty of an offence punishable on conviction by a fine not exceeding 50 penalty units ($5,000 for an individual, $25,000 for a body corporate). [New subsection 347A(6)]
Is a trustee obliged to complete and return a survey form if it is sent to them at the same time as a notice saying they are in the statistical program?
10.16 Yes, refer to new subsection 347A(7) .
Will there be instructions in the survey form?
10.17 Survey forms approved by the Commissioner are required to contain instructions about certain matters. These instructions relate to how to complete the form and who to return the form to. The instructions will also state the time by which the trustee must return the completed form. All survey forms must relate to one or more particular periods of time. [New subsections 347A(3) and (8)]
How long will a trustee have to complete a form?
10.18 The instructions contained in a form must not require the form to be returned to the authorised recipient earlier than 28 days after the end of the survey period to which the particular form relates. If there is more than one survey period covered by one form then the instructions contained in the form must not require the form to be returned to the authorised recipient earlier than 28 days after the end of the most recent survey period. [New subsection 347A(8)]
10.19 Example: A survey form for the period 1 January to 31 March may be sent to a trustee who is a participant in the statistics program. The instructions contained in the survey form will not require the form to be returned to the authorised recipient earlier than 28 April.
Can the time for returning a survey form be extended?
10.20 The Commissioner has the ability to extend the period for returning a completed survey form. The Commissioner may exercise this power on a specific basis for a particular trustee or more generally for all trustees. [New subsections 347A(9) and (10)]
10.21 The Commissioner is unlikely to use this power unless there are good reasons why a survey form could not be returned within the required time.
10.22 Where the Commissioner makes a decision to extend, or not extend, the period for returning a completed survey form under new subsection 347A(9) that decision will be a reviewable decision, as the decision relates to a particular case. A decision of the Commissioner under subsection 347A(10) is not reviewable as such decisions apply generally to all trustees. [Item 1 of Schedule 6 - amendment to definition of reviewable decision in section 10]
Can the Commissioner delegate his statistical collection powers?
10.23 The Commissioner can delegate any or all of his powers under the new section 347A and can delegate those powers to any person. [New subsection 347A(11)]
10.24 This would enable the Commissioner to contract out the task of collecting the statistical information if, for commercial cost reasons, the Commissioner considered the task could be more effectively and efficiently undertaken outside the Commission.
If the Commissioner contracts out the statistical collection program would the information provided still be subject to secrecy provisions?
10.25 The definition of superannuation standards officer in section 10 of the SIS Act is to be amended to ensure that any person who, as a result of being a delegate of the Commissioner under section 347A, comes into contact with protected information or documents (such as statistical survey information collected from superannuation entities) will become a superannuation standards officer. Accordingly, such persons will be subject to identical secrecy provisions as those applying to the Commissioners staff. [Item 2 of Schedule 6]
Can the Commissioner charge a fee for statistical publications?
10.26 The Commissioner has the ability, under new subsection 348(3) to charge a fee for statistical publications. [Item 6 of Schedule 6]
Why has subsection 348(2) been amended?
10.27 Paragraph 348(2)(b) of the SIS Act is amended so that the Commissioner may not publish statistical information in a manner that would enable the identification of a person. Previously the restriction was that the publication must not identify a person to whom a payment had been made. The amendment ensures that a person should not be identified irrespective of whether the person is one to whom a payment has been made. [Item 6 of Schedule 6]
Can protected information or documents be provided to the Australian Bureau of Statistics?
10.28 A new paragraph 346(6)(da) is inserted into the SIS Act to allow superannuation standards officers to provide to the Australian Bureau of Statistics protected information or documents, or information sourced from such information (such as aggregate statistical data derived from the survey), where that information or those documents are being provided for purposes in connection with statistics. [Item 3 of Schedule 6]
10.29 This will allow the Australian Bureau of Statistics to make use of the information when compiling, for example, the National Accounts.
10.30 If the Australian Statistician or a member of the Statisticians staff are provided with information or documents under new paragraph 346(6)(da) then they would become superannuation standards officers and subject to the same secrecy provisions in respect of that information or document as Insurance and Superannuation Commission staff. New subsections 346(9A) and (9B) make it clear that becoming a superannuation standards officer does not prevent the Australian Statistician from publishing statistics (such as total contributions made to superannuation funds in the National Accounts) derived from information or documents provided under paragraph 346(6)(da) or the charging of fees for such publications. [Item 4 of Schedule 6]
Does the new s347A affect existing provisions in the SIS Act?
10.31 No. Other provisions, such as the power for the Commissioner to seek information under subsection 254(2) are not affected. This is made clear by new subsection 347A(12), which also makes it clear that section 347A does not affect anything in the Census and Statistics Act 1905. [New subsection 347A(12)]
Part 2 - Acquisition of member's assets used in the member's company business
Summary of the amendment
10.32 The purpose of this amendment is to ensure that the trustee or investment manager of a less than five member regulated superannuation fund is not precluded from taking advantage of the exception to the rule prohibiting acquisition of members assets simply because the members business is established in a company form and not in the form of a sole trader or partnership.
10.33 The amendment applies from the date of Royal Assent.
Background to the legislation
10.34 Section 66 of the SIS Act places restrictions on the acquisition, by the trustee or investment manager of a regulated superannuation fund, of assets from members of the fund or from relatives of such members.
10.35 Subsection 66(1) places a blanket restriction on the acquisition of such assets. However, subsection 66(2) provides that, in certain circumstances, such assets may be acquired. Among other things, the restrictions involve a requirement that the fund must be an excluded superannuation fund (ie: a fund with fewer than 5 members) and that the asset acquired must be exempt business real property of the member or relative, or a listed security.
10.36 If the asset of the member or relative is not a listed security then it can only be acquired if it is exempt business real property of the member or relative. For an asset to be considered exempt business real property it must first be business real property and both these terms are defined in subsection 66(5) of the SIS Act.
10.37 For an asset to be business real property of the member or relative it must be a freehold or leasehold interest in real property and be used wholly and exclusively in a business carried on by the member or relative .
10.38 The effect of the definition of business real property is that the business of the member or relative must be established in the form of a sole trader or partnership. If the asset is used in a business carried on by a body corporate then, despite the fact that the member or relative may control the body corporate (and the body corporates business is, therefore, effectively the members or relatives business) the asset will not meet the test of being used wholly and exclusively in the members or relatives business. This is because the asset is actually being used in the body corporates business, not the members business (even though the member may control the company).
10.39 Therefore, if the member operates a business, but does so through an interposed company, and a freehold or leasehold interest in real property of the member is used in that business, the trustee or investment manager cannot take advantage of the exception in subsection 66(2) and the asset cannot therefore be acquired by the trustee or investment manager.
Explanation of the amendment
What amendments have been made to section 66?
10.40 Section 66 of the SIS Act is amended by adding two new definitions, and two notes, to subsection 66(5) and by inserting three new subsections. [Items 7, 8 and 9 of Schedule 6]
What is the purpose of new subsection 66(6)?
10.41 The new subsection 66(6) provides a test for determining whether a business carried on by a body corporate is controlled by a person and therefore should be considered the persons business for the purposes of section 66.
10.42 If the test is passed then the person, not the body corporate, is considered to be carrying on the body corporates business, when applying the definitions of business real property and exempt business real property in subsection 66(5). [Item 9 of Schedule 6]
When will a person be considered to be controlling a body corporate and therefore carrying on the business of the body corporate?
10.43 The control test in subsection 66(6) provides that, if the aggregate of the direct control interests of the person and the direct control interests of close associates of the person is greater than 50% then the person will be considered to be carrying on the business of the body corporate. [Item 9 of Schedule 6 - new subsection 66(6)]
What is a direct control interest?
10.44 In determining whether a person is taken to carry on the business of a body corporate, new subsection 66(6) provides that the direct control interests of the person and of any close associates must exceed 50%.
10.45 Direct control interest is defined in new subsection 66(8). The direct control interest of a person in a body corporate is the percentage of the maximum number of votes that might be cast at a general meeting of the body corporate that are controlled by the person.
10.46 Example: If the maximum number of votes to be cast at a general meeting of a body corporate is 50 and a person controls 20 of those votes then that person has a direct control interest of 40% (being the percentage represented by 20/50). [Item 9 of Schedule 6 - new subsection 66(8)]
Who is a close associate of a person?
10.47 A close associate of a person is defined in new subsection 66(7) and consists of:
- •
- the spouse or a child of the person;
- •
- a body corporate where 100% of the votes that might be cast at a general meeting of the body corporate are controlled by either the person, spouse or a child or children of the person, or any combination of such people;
- •
- the trustee of a trust where the only people capable of benefiting from the trust are the person, spouse or a child or children of the person, or any combination of such people. [Item 9 of Schedule 6 - new subsection 66(7)]
10.48 Mr Smith is a member of a less than 5 member regulated superannuation fund. Mr Smith owns some real property which is used wholly and exclusively in the business carried on by Company AAA (Company AAA is in the business of manufacturing paint tins). Mr Smith also controls 75% of the maximum number of votes that might be cast at a general meeting of Company AAA.
10.49 Prior to this amendment, the trustee of the fund would not be able to acquire the real property from Mr Smith. This is because the property is not business real property as defined in subsection 66(5) and accordingly cannot be exempt business real property and therefore cannot be acquired by the fund trustee. It is not business real property as it is not used wholly and exclusively in Mr Smiths business, rather it is used in Company AAAs business.
10.50 As a result of new subsection 66(6) , Mr Smith ( not Company AAA ) would now be considered to carry on the business of manufacturing paint tins, that is, Mr Smith ( rather than Company AAA )is taken to carry on the business of Company AAA. The effect of this is that Mr Smiths real property, which is used wholly and exclusively in the business carried on by Company AAA, is now considered to be used wholly and exclusively in Mr Smiths business. Accordingly, the real property is now business real property and, provided it is also taken to be exempt business real property, the fund trustee could acquire the property from Mr Smith. Provided, of course, that paragraphs (b) and (c) of subsection 66(2) are also complied with.
10.51 Whether it would be taken to be exempt business real property would depend on whether it is Mr Smiths only business. If it is his only business then it would be exempt business real property. If Mr Smith carries on, or is taken to carry on, more than one business, the property will only be exempt business real property if it is used in whichever of those businesses is Mr Smiths principal business.
10.52 The first example assumed that Mr Smith directly controlled more than 50% of the votes in Company AAA. The business of Company AAA would also be considered to be Mr Smiths business if Mr Smith, together with his close associates, controlled more than 50% of the votes in Company AAA, or if Mr Smiths close associates on their own controlled more than 50% of the votes in Company AAA.
10.53 For example, if Mr Smith controlled 30% of the votes in Company AAA, his wife controlled another 30% and his two sons controlled the remaining 40% then Mr Smith would still be considered to be carrying on the business of Company AAA. Any real property of Mr Smiths which is used in Company AAAs business would therefore once again be considered business real property of Mr Smith.
10.54 If Mr Smith, his wife and two sons were the sole beneficiaries of a trust and the trustee of the trust controlled more than 50% of the votes in Company AAA then Mr Smith would be considered to be carrying on the business of Company AAA. Any real property of Mr Smiths which is used in Company AAAs business would therefore once again be considered business real property of Mr Smith.
Do the amendments affect the restriction that, if a person (being a member of the fund or a member's relative) has more than one business, business real property can only be acquired from the person's principal business?
10.55 No. It should be noted that if a person is considered under the amendments to be carrying on the business of a body corporate then the business of the body corporate will now be considered to be the persons business. A person who operates two businesses - one as a sole trader and one through a company structure - will now be carrying on two businesses for the purposes of the definition of exempt business real property and the fund trustee or investment manager will be restricted to acquiring business real property from whichever of those businesses is the persons principal business.
Part 3 - Financial backing requirements for approved trustees and custodians
Summary of the amendment
10.56 The purpose of this amendment is to allow the financial backing requirements imposed on approved trustees and on custodians to be met by having an approved guarantee and net tangible assets which together sum to at least the prescribed amount (this has previously been provided for by a Temporary Modification Declaration made by the Commissioner)
10.57 The amendment applies from the date of Royal Assent.
Background to the legislation
10.58 Prior to the issuing of Temporary Modification Declaration No. 3 (TMD3) by the Acting Commissioner (TMD3 is discussed further at paragraphs 10.62 to 10.64) it was not possible to be an approved trustee without (along with meeting certain other conditions) applying to the Commissioner for approval and having:
- •
- net tangible assets of $5 million or more; or
- •
- the benefit of an approved guarantee of $5 million or more, being a guarantee in respect of the applicants duties as trustee of each relevant entity of which the trustee is, or is proposing to become, the trustee; or
- •
- agreed to comply with the written requirements given to them by the Commissioner before being approved, being requirements relating to the custody of assets of a relevant entity or relevant entities of which the applicant is or becomes the trustee.
10.59 The above requirements are provided for in section 26 of the SIS Act and in regulation 3.03 of the SIS Regulations.
10.60 Prior to the issuing of Temporary Modification Declaration No. 3 (TMD3) by the Acting Commissioner (TMD3 is discussed further at paragraphs 10.62 to 10.64), subsection 123(1) provided that it was not possible for a person to be a custodian of a superannuation entity (other than an excluded fund) without (along with meeting certain other conditions):
- •
- the person having net tangible assets of $5 million or more; or
- •
- the trustee of the entity being entitled to the benefit, in respect of the due performance of the persons duties as custodian of the entity, of an approved guarantee of $5 million or more.
10.61 The above requirements are provided for in subsection 123(1) of the SIS Act and in regulation 13.19 of the SIS Regulations.
Temporary Modification Declaration No. 3
10.62 On 24 June 1994 the Acting Commissioner made, pursuant to Part 29 of the SIS Act, Temporary Modification Declaration No. 3 (TMD3). The effect of TMD3 was to modify the requirements outlined in paragraph 10.58 above for approving trustees, and in paragraph 10.60 for being a custodian. The modification provided that an applicant could be an approved trustee, or a person could be a custodian, if (along with meeting other existing conditions) the combined value of their net tangible assets and the amount of an approved guarantee was $5 million or more. Rather than having to have net tangible assets of $5 million or an approved guarantee of $5 million.
10.63 TMD3 also made some consequential amendments to sections 28 and 29 of the SIS Act so that if an applicant had been approved as trustee on the basis of having a combination of net tangible assets and an approved guarantee to the value of at least $5 million then, if they at a later date stopped meeting this criterion, the trustee must tell the Commissioner (and the Commissioner could revoke the approval).
10.64 TMD3 ceases to have effect on 30 June 1996, as is required by subsection 333(2) of the SIS Act.
Explanation of the amendment
Is it possible to be an approved trustee by having a combination of net tangible assets and an approved guarantee which together have a value of at least $5 million?
10.65 Yes, new subparagraph 26(1)(b)(iia) , when read in conjunction with new subsection 26(1A) and amended SIS Regulation 3.03, means that an applicant for approved trustee status can be approved if they (in addition to meeting certain other conditions) have:
- •
- an approved guarantee (being a guarantee in respect of the applicants duties as trustee of each relevant entity of which the applicant is, or is proposing to become, the trustee); and
- •
- the sum of the amount of that guarantee plus the applicants net tangible assets is at least $5 million. [Items 10 and 11 of Schedule 6 and item 1 of Schedule 7]
If an applicant becomes an approved trustee, on the basis of the combined value of their net tangible assets and the amount of an approved guarantee being at least $5 million, can the approval later be revoked if the combined value falls below $5 million?
10.66 Yes. Subsection 28(1) provides the Commissioner with the power to revoke an approval. Subsection 28(2) does not limit subsection 28(1) but is amended to provide that one of the circumstances in which approval may be revoked is where the combined value of an approved guarantee and net tangible assets falls below $5 million. [Item 12 of Schedule 6 - new paragraph 28(2)(da)]
What must an approved trustee do if the combined value of an approved guarantee and net tangible assets falls below $5 million?
10.67 New paragraph 29(2)(ca) provides that if this occurs the trustee must notify the Commissioner as soon as practicable, and in any event within 30 days. [Item 13 of Schedule 6]
Is it possible to be the custodian of a superannuation entity (other than an excluded fund) by having a combination of net tangible assets and approved guarantee to a value of at least $5 million?
10.68 Yes. Section 123 is amended by inserting a new subparagraph 123(1)(b)(iii) and a new subsection 123(1A) . The effect is that amended subsection 123(1), when read in conjunction with amended SIS Regulation 13.19, now provides that a person may be a custodian of a superannuation entity (other than an excluded fund) if:
- •
- the person is a body corporate; and
- •
- the trustee of the entity is entitled to a benefit, in respect of the due performance of the body corporates duties as custodian of the entity, of an approved guarantee; and
- •
- the sum of the amount of the approved guarantee and the net tangible assets of the body corporate is at least $5 million. [Items 14, 15 and 16 of Schedule 6 and item 2 of Schedule 7]
What will happen to Temporary Modification Declaration No. 3
10.69 The amendments to the financial backing requirements for approved trustees and custodians discussed in paragraphs 10.65 to 10.68 have been previously provided for by Temporary Modification Declaration No. 3 (TMD3).
10.70 The effect of these amendments is that TMD3 is no longer necessary and accordingly it has been effectively terminated by item 17 of Schedule 6 .
Does the amending of SIS Regulations 3.03 and 3.19 in this Bill restrict the power to amend those regulations in the future?
10.71 No. [Item 3 of Schedule 7]
Part 4 - Pre 1 July 1988 funding credits
Summary of the amendment
10.72 The purpose of this amendment is to allow for the Superannuation Industry (Supervision) Regulations to provide some flexibility in determining the date by which an application for a pre 1 July 1988 funding credit must be made.
10.73 The amendment applies from the date of Royal Assent.
Background to the legislation
10.74 Subsection 342(1) of the SIS Act provides that the trustee of a fund may apply for a pre 1 July 1988 funding credit. Subsection 342(3) sets down certain requirements that must be met when applying for a pre 1 July 1988 funding credit. One of these requirements, in paragraph 342(3)(b), is that the application must be made on or before the prescribed day.
10.75 Regulation 12.08 of the SIS Regulations currently provides that the prescribed day is 31 March 1995. The wording of paragraph 342(3)(b) is such that the day prescribed in the Regulations must be a specific day, such as 31 March 1995. It could not, for example, be 31 March 1995 or a day that the Commissioner determines should be the day in relation to a particular fund. As a result there is no ability for the Commissioner to extend the day on a case by case basis where such an extension may be warranted because of particular circumstances.
Explanation of the amendment
When must an application for a pre 1 July 1988 funding credit be made?
10.76 Paragraph 342(3)(b) of the SIS Act is amended to allow the SIS Regulations to provide more flexibility in determining the date by which applications must be made. [Item 18 of Schedule 6]
10.77 SIS regulation 12.08 currently provides that the day by which applications must be made is currently 31 March 1995. he Government is proposing to amend SIS regulation 12.08 so that the day will be 31 March 1995 or a day that the Commissioner determines should be the day in relation to a particular fund. It is not envisaged that the Commissioner would use such a discretionary power to extend the date for an application unless it was clearly justified in the particular circumstances.
Part 5 - Collection of the superannuation supervisory levy
Summary of the amendments
10.78 The purpose of these amendments are:
- •
- to change the method of collection of the superannuation supervisory levy so that the levy is payable by the date specified in a written notice sent to the trustee of a superannuation entity by the Commissioner, rather than being payable at the time of lodging an annual return;
- •
- to change the manner in which the late payment penalty for the levy is calculated so that a penalty will start accruing the day after payment is due and additional penalties will arise, if the levy remains unpaid, after the end of each elapsed month (counted from the day after payment was due);
- •
- to provide the Commissioner with the power to remit the basic levy.
10.79 The amendments apply in relation to levy payable on annual returns lodged for the 1994-95 and later years of income.
Background to the legislation
10.80 The Superannuation Supervisory Levy Act 1991, in conjunction with Part IIIAA of the Superannuation Entities (Taxation) Act 1987 (SET Act), currently imposes a levy on superannuation entities who lodge an annual return under section 36 of the SIS Act.
10.81 The levy is currently due and payable at the time of lodgment of the annual return - refer section 15DB of the SET Act.
10.82 If the levy is not paid when it is due and payable (ie: on lodgment of the annual return) then a late payment penalty may arise.
10.83 The late payment penalty is calculated under section 15DC of the SET Act. Under the current arrangements, the penalty will arise if payment of the levy is not made by the beginning of the first month of the calendar year following the date payment was due. The penalty is calculated on a monthly basis and in advance (that is, on the first day of the month).
10.84 Example: Under the current arrangements, if the levy was payable on 15 March, but not paid by 1 April, then a late payment penalty would arise from 1 April and would be in respect of the month of April. A further penalty will arise if the levy is not payable by the beginning of the next following month in the calendar year (ie: a further penalty would arise from 1 May and would be in respect of the month of May). If payment of the levy was made in mid May then a penalty would be payable for April and May.
10.85 The formula for calculating the late payment penalty is set down in subsection 15DC(2).
10.86 There are a number of other administrative provisions in Part IIIAA of the SET Act. One of them (section 15DF) allows the Commissioner to remit the whole or part of a late lodgment amount or a late payment penalty. The late lodgment amount is actually part of the levy and is calculated, as is the basic levy itself, under the Superannuation Supervisory Levy Act 1991. The Commissioner does not, however, currently have the power to remit the basic levy itself, which must be remitted through the Audit Act 1901.
Explanation of the amendments
When will the superannuation supervisory levy be payable?
10.87 The superannuation supervisory levy will no longer be payable on the date of lodgment of an annual return, but rather on a day specified in a written notice sent to the trustee of a superannuation entity by the Commissioner. [Item 2 of Schedule 5 - amendment to section 15DB of the Superannuation Entities (Taxation) Act 1987 (the SET Act)]
How long will the trustee have to pay the levy once the notice is given?
10.88 The trustee will be required to pay the levy by the day specified in the notice. However, that day must be at least 21 days after the day the notice is given to the trustee. [Item 2 of Schedule 5 - amendment to section 15DB of SET Act]
What happens if the trustee does not pay the levy on time?
10.89 The trustee will become liable to pay a late payment penalty. [Item 3 of Schedule 5 - section 15DC of the SET Act]
Has the method of calculating the late payment penalty changed?
10.90 Yes, the late payment penalty will now start accruing from the day after the levy payment was due and will be calculated on the basis of each elapsed calendar month (as defined in the Acts Interpretation Act 1901) from the day after payment was due. [Items 3 and 4 of Schedule 5 - section 15DC of the SET Act]
10.91 Example: If a written notice was sent under section 15DB requesting payment by 15 March and payment was not made by that date then a late payment penalty would arise from 16 March, and would be in respect of the month of 16 March to 15 April. If payment was not made by 16 April then a further late payment penalty would be payable in respect of the month of 16 April to 15 May.
10.92 If payment of the levy is made within 15 days of the due date the late payment penalty will not arise. [Item 3 of Schedule 5 - section 15DC of the SET Act]
10.93 In addition, paragraph 15DC(2)(a) has been amended with the effect of deleting existing 15DC(2)(a)(ii) which was superfluous. [Item 5 of Schedule 5]
Why are subsections 15DC(3) and (4) amended?
10.94 The amendments to these subsections are purely technical and consequential on the changes to subsection 15DC(1). [Items 6 and 7 of Schedule 5]
Can the Commissioner now remit payment of the whole levy?
10.95 Yes, paragraph 15DF(a) is amended so that the Commissioner can now remit the whole or part of the levy (previously the Commissioner could only remit that part of the levy which represented the late lodgment amount). [Item 8 of Schedule 5]
10.96 The definition of late lodgment amount is no longer needed as a result of the amendment to paragraph 15DF(a) and is deleted. [Item 1 of Schedule 5]
Do the amendments apply for levy payable in respect of all annual returns lodged under the SIS Act or the SET Act (previously the Occupational Superannuation Standards Act 1987)?
10.97 The amendments made by Schedule 5 apply in relation to levy payable on lodgment of an annual return under the SIS Act for the 1994/95 or later years of income. The amendments therefore apply even if such a return is lodged before Schedule 5 commences. The amendments do not apply to returns lodged for earlier years of income under the SET Act. [Item 9 of Schedule 5]
If a 1994/95 annual return is lodged prior to commencement of Schedule 5 is it possible to incur two late payment penalties in respect of the same lodgment?
10.98 Item 10 of Schedule 5 provides that if such a return is lodged before commencement then any liability to pay a late payment penalty under the SET Act (as it existed prior to the amendments made by this Bill) and which has arisen prior to commencement is remitted. If an amount has been paid in respect of that liability the Commissioner is required to refund that amount.
10.99 While such a liability is remitted, this does not prevent a late payment penalty arising, in respect of non payment of levy for that return, if payment is not made by the time required by a written notice sent to the trustee under the amended section 15DB. [Item 10 of Schedule 5]
10.100 Example: A trustee lodges an annual return for the 1994/95 year of income on 31 March 1995, but does not pay the levy on lodgment. Accordingly, a late payment penalty would arise under section 15DC of the SET Act (as it exists prior to the amendments made by this Bill taking effect). The liability to pay that late payment penalty is remitted by item 10 of Schedule 3. The Commissioner issues a written notice to the trustee on 1 July 1995 (assuming that is after the commencement of Schedule 3) requesting payment of the levy by 31 July 1995. If the levy is not paid by that date then a late payment penalty can arise under section 15DC of the SET Act (as amended by this Bill).
CHAPTER 11 - Late lodgment penalty
Overview
11.1 The amendments in Schedule 8 of the Bill introduce a new regime of penalties for late lodgment of income tax returns. A flat rate penalty is to apply to all relevant entities and instalment taxpayers that fail to furnish returns by the final day for lodgment. All other taxpayers who are late in lodging a return will be liable for both additional tax and interest penalties, if an amount of tax is payable following the assessment.
Summary of amendments
11.2 The amendments will enable a penalty to be imposed on all relevant entities and instalment taxpayers (such as companies and superannuation funds) where they are late in lodging an income tax return. This will include cases where the taxpayer does not derive any taxable income.
11.3 For taxpayers other than relevant entities and instalment taxpayers, the amendments will enable the imposition of penalty which recognises that late lodgment of an income tax return delays the payment of tax. This is achieved by making taxpayers who are late in furnishing a return liable for additional tax and interest in the same manner as late payment penalties.
11.4 The amendments will apply to income tax returns for the 1994-95 and later years of income where the final date for lodgment occurs more than 60 days after the date of Royal Assent. [Items 4 and 7]
Background to the legislation
11.5 In August 1991 the Government released an information paper titled 'Improvements to Self Assessment - Priority Tasks' which outlined a number of proposals designed to improve the self assessment system of taxation. Most of these proposals were enacted by the Taxation Laws Amendment (Self Assessment) Act 1992 (the Self Assessment Act). The amendments in Schedule 8 of this Bill which introduce the new late lodgment regime were also foreshadowed in the information paper. They have been developed after extensive consultation with professional bodies and taxpayer representatives.
11.6 The collection of the revenue is contingent on both the timely lodgment of returns and the timely payment of tax. Therefore, where the delay in the payment of tax is due to the late lodgment of a return, the penalty for late lodgment of a return should have a component that reflects the time value of money as well as a culpability component that reflects the failure to comply with the legal requirement to lodge a return. This would make the penalties for late lodgment of returns complementary to the penalties for late payment of tax.
11.7 The Self Assessment Act inserted new late payment penalties into the Income Tax Assessment Act 1936 (the Act). Section 207A makes a person liable to pay interest where any tax remained unpaid after the time it became due and payable. This interest is designed to compensate the revenue for not having use of the funds during the period in which the tax remained unpaid. The interest is in addition to section 207 additional tax which is a penalty designed to sanction taxpayers for their culpable behaviour of not paying tax on time.
11.8 These late payment penalty provisions have different rules for taxpayers on full self assessment, that is relevant entities or instalment taxpayers, and other taxpayers. Relevant entities and instalment taxpayers are defined in Divisions 1B and 1C of Part VI of the Act to include a company, a superannuation fund, an approved deposit fund, a pooled superannuation fund, a trustee of a corporate unit trust and a trustee of a public trading trust.
11.9 The income tax of taxpayers other than relevant entities and instalment taxpayers (hereafter referred to as ordinary taxpayers) is due and payable on the date specified in the notice of assessment or, if no date is specified, 30 days after service of the notice. Ordinary taxpayers who do not pay their tax when it is due and payable are liable under section 207 for additional tax on the unpaid amount at the rate of 8% per annum. In addition they are also liable under section 207A to penalty interest on the unpaid amount at the rate provided for by section 214A. The proposed new penalty for late lodgment of returns by ordinary taxpayers will complement these rates.
11.10 With relevant entities and instalment taxpayers, income tax generally becomes due and payable on the later of the following days:
- •
- the day on which a relevant entity is required to make a final payment of tax under section 221AZD or an instalment taxpayer is required to pay its final instalment under section 221AZK; or
- •
- the day on which the return is furnished.
The final payment of tax and the final instalment are amounts that are due under the relevant entity and instalment taxpayer collection system provisions. They are not amounts of income tax but are advance payments of tax collected during the year and credited by the Commissioner on assessment against income tax payable.
11.11 Income tax is not due and payable unless there has been an assessment. Under full self assessment the Commissioner is deemed to have made an assessment on the day a relevant entity or instalment taxpayer lodges a return. Where a return is lodged after the day that the person is required to make a final payment of tax or pay the final instalment, the late lodgment will delay the income tax that is payable under the assessment.
11.12 The Self Assessment Act made amendments to the late payment penalty provisions to deal with this problem. Relevant entities and instalment taxpayers are liable to additional tax under section 207 and interest under section 207A on any tax that remains unpaid after the day on which they are required to make a final payment of tax or final instalment. As explained below this day is also the day the Commissioner requires a relevant entity or instalment taxpayer to lodge an income tax return. The rates of additional tax and interest are the same as those that apply to ordinary taxpayers (paragraph 11.9).
11.13 Subsection 161(1) of the Act requires all taxpayers to furnish a return within the period specified in a notice, which the Commissioner must cause to be published in the Gazette, or within such further period as the Commissioner allows. The day by which a return must be lodged is a discretionary decision of the Commissioner. The Commissioner's policy in respect of lodgment of returns is as follows:
- •
- relevant entities are generally required to lodge a return by the day on which the final payment of tax is due under section 221AZD;
- •
- instalment taxpayers are generally required to lodge a return by the day on which the final instalment is due under section 221AZK; and
- •
- ordinary taxpayers are generally required to lodge their returns by 31 October unless the Commissioner has granted an extension of time for lodgment, eg extensions under the tax agent lodgment program.
11.14 An income tax return may also be required by the Commissioner to be furnished within a time and in the manner required by him or her in accordance with sections 162 and 163.
Penalty under subsection 222(1) for failure to furnish a return
11.15 Where a taxpayer does not lodge a return within the period specified in the notice under section 161, or by the time under sections 162 and 163, subsection 222(1) operates to make a taxpayer liable to pay, by way of penalty, additional tax equal to double the amount of tax payable for the year of income. The Commissioner has a discretion under subsection 227(3) to remit the whole or any part of the additional tax payable. The Commissioner's general policy on late lodgment penalties is to remit the penalty to 20% of the lesser of the amount of tax payable or the balance of the amount payable after taking into account any credits or other payments.
11.16 Lodgment of the return does not occur unless the following criteria are satisfied:
- •
- it is in the form provided by the Commissioner;
- •
- it is furnished in the prescribed manner;
- •
- it is signed by the person; and
- •
- it contains information relating to the income and profits or gains of a capital nature derived by the person and any deductions or losses, being losses of a capital nature claimed by the person.
11.17 Subsection 222(1) has a much wider application than imposing a penalty for late lodgment of an income tax return. It applies to any situation where a taxpayer refuses or fails to furnish a return, or any other information relating to the affairs of the taxpayer, when and as required by the Commissioner. However, a liability under subsection 222(1) can only arise where there is an amount of tax payable by the taxpayer in respect of the year of income. Where there is no assessment, ie where the taxpayer derived a loss or had income for the year that did not exceed the minimum taxable amount, the person is not liable to pay late lodgment penalty.
11.18 As explained in paragraphs 11.12 and 11.13 above, with relevant entities and instalment taxpayers, late payment penalties accrue from the due date of the final payment which is also the due day for lodging a return. This is similar to the late lodgment penalties for ordinary taxpayers proposed by these amendments. However, as the penalties do not apply where a taxpayer incurs a loss for the year, there is no sanction that can be applied in these cases when a return is not lodged on time. As lodgment of returns by relevant entities and instalment taxpayers is particularly necessary for data collection and compliance purposes, the amendments propose a flat rate penalty that will apply to all relevant entities and instalment taxpayers.
Explanation of the amendments
Late lodgment penalty for relevant entities and instalment taxpayers
11.19 The new flat rate penalty for late lodgment of income tax returns by relevant entities and instalment taxpayers is inserted by the new section 163A . A relevant entity and an instalment taxpayer have the same meanings as in Divisions 1B and 1C of Part VI of the Act [new subsection 163A(9)] . The late lodgment penalty is to be in addition to any late payment penalties which a taxpayer may be liable for under sections 207 and 207A.
11.20 The late lodgment penalty will only apply where a person is required by the Commissioner to furnish a return [new paragraph 163A(1)(a)] . The penalty will be imposed whenever a return is lodged after the final day for furnishing a return. In most cases, this will be where the return is not furnished within the period specified in the notice under section 161 or any further period allowed by the Commissioner. It may also be where the return is not furnished by the time required by the Commissioner under sections 162 and 163 [new paragraph 163A(1)(b)] .
11.21 If a relevant entity or an instalment taxpayer fails to furnish a return by the final day for lodgment they will be liable for a penalty at a rate of $25 per week, or part of a week, for the period that a return is late. Where a return is lodged between one and seven days late, the penalty will be $25. In cases where a relevant entity or instalment taxpayer is required to furnish a return but the return is never lodged, the person is still liable for the penalty. [New subsection 163A(1)]
11.22 The maximum penalty that a relevant entity or instalment taxpayer may be liable for is $500. This means that where the return remains outstanding for more than 20 weeks the taxpayer will only be liable for a penalty of $500. [New subsection 163A(2)]
11.23 The Commissioner must serve a notice of the penalty on the relevant entity or instalment taxpayer. The notice must specify the following details:
- •
- that the penalty is for late lodgment of a return under section 163A;
- •
- the person who is liable for the penalty;
- •
- the amount of the penalty; and
- •
- the day on which the penalty is due and payable (which must be at least 30 days after the day on which the notice is served on the taxpayer). [New subsection 163A(3)]
The notice of late lodgment penalty under section 163A can be incorporated in any other notice of assessment that is issued to the relevant entity or instalment taxpayer [new subsection 163A(4)] . However, this does not include a return which is deemed under paragraph 166A(1)(b) to be a notice of deemed assessment.
11.24 The Commissioner has the discretion to remit the late lodgment penalty, in whole or in part [new subsection 163A(5)] . Where the Commissioner decides to not remit the penalty, or only part of the penalty, the Commissioner is obliged to serve a notice of that remission decision on the person. Where the Commissioner considers the matter prior to issuing a notice of late lodgment penalty the remission decision may be incorporated in the notice of penalty. Where the Commissioner considers the matter after having issued a notice of late lodgment penalty he must serve a notice of the remission decision on the taxpayer [new subsection 163A(6)] . A request by the taxpayer for the Commissioner to remit the penalty does not defer the due date for payment specified in the notice of penalty.
11.25 A person who is dissatisfied with a notice of penalty under subsection 163A(3) or a decision of the Commissioner not to remit the penalty under subsection 163A(5) may object against the notice or the decision in accordance with Part IVC of the Taxation Administration Act 1953. This includes a decision by the Commissioner to not remit any of the late lodgment penalty [new subsection 163A(7)] . Where the person is dissatisfied with the Commissioner's objection decision they may, under section 14ZZ of that Act, either apply to the Administrative Appeals Tribunal for a review of the decision or appeal to the Federal Court against the decision.
Late lodgment penalties for ordinary taxpayers
11.26 Where an ordinary taxpayer, that is a person other than a relevant entity or instalment taxpayer, lodges a return after the final day for furnishing a return the taxpayer will be liable to pay additional tax under the new section 163B and interest under the new section 163C .
11.27 As with relevant entities and instalment taxpayers, these new provisions will only apply where a person is required by the Commissioner to furnish a return. [New paragraph 163B(1)(a)]
11.28 The additional tax and the interest will be imposed on ordinary taxpayers whenever a return is lodged after the final day for furnishing a return. In most cases, this will be where the return is not furnished within the period specified in the notice under section 161 or any further period allowed by the Commissioner. It may also be where the return is not furnished by the time required by the Commissioner under sections 162 and 163. [New paragraph 163B(1)(b)]
11.29 Where the taxpayer is late in furnishing a return the penalties can only apply if the Commissioner has made an assessment of the taxable income, or net income, and tax payable thereon. [New paragraph 163B(1)(c)]
11.30 Under the new subsection 163B(1) the taxpayer will be liable for additional tax at the rate of 8% per annum. Where a taxpayer becomes liable to the additional tax they are also liable for interest [new subsection 163C(1)] . The liability to the interest penalty arises irrespective of whether the Commissioner has remitted the additional tax. The interest is calculated at the rate provided for under section 214A of the Act.
11.31 Additional tax and interest are calculated on the lesser of:
- •
- the income tax payable on assessment; or
- •
- a person's net tax payable.
The amount of income tax payable on assessment is the amount of tax payable on taxable income or, in the case of trustees, the amount of tax payable on net income, as defined in section 6(1). Tax payable is the amount after allowing any rebates or a deduction under subsection 100(2) allowable to the person in making the assessment. Any crediting or applying of amounts under the various tax collection systems, or advance tax payments made by a taxpayer on account of income tax, do not form part of the assessment process so are excluded from calculating the amount of income tax payable on assessment. [New paragraph 163B(2(a)]
11.32 A person's net tax payable is defined in new subsection 163B(3) . Generally, in simple terms, it is the amount shown on the bottom of a notice of assessment as the balance payable by the taxpayer. The amount is defined in the amendments by use of the formula:
(Tax liabilities)
less
(Crediting amounts and payments on account)
11.33 'Tax liabilities' is the sum of any assessed tax, additional tax and interest payable under section 102AAM, and any HEC assessment debt under the Higher Education Funding Act 1988 and any financial support assessment debt under the Student Assistance Act 1973. As explained in the paragraph 11.31 above, tax payable does not include any credit available to the taxpayer under the collection systems or advance payments.
11.34 'Crediting amounts and payments on account' means the sum of any income tax crediting amount and any payment made by the taxpayer on account of an amount defined as 'tax liabilities'. Income tax crediting amounts are amounts collected under the various collection systems that can be credited or applied against tax payable of a person for a year of income, eg foreign tax credits under section 160AN and provisional tax credits under section 221YE. [New subsection 163B(10)]
11.35 Additional tax and interest is payable for the period beginning on the day after the final day for lodging a return and ends on the earlier of either the day the return is furnished or the day the assessment of tax payable is made. This means that where a taxpayer fails to furnish a return the Commissioner can make a default assessment and impose late lodgment penalty, calculated up to the date the assessment is made. [New subsection 163B(4)]
11.36 The Commissioner must issue a notice of assessment of additional tax [new subsection 163B(5)] . The definition of assessment in sub section 6(1) is amended to incorporate an assessment of this additional tax. This will allow a taxpayer to object against the assessment under section 175A. [Item 1]
11.37 An amendment is being made to subsection 14ZS(2) of the Taxation Administration Act 1953 to exclude objection decisions in respect of assessments of additional tax under the new section 163C from the definition of ineligible income tax remission decisions. This will enable a taxpayer who is dissatisfied with the objection decision to apply to the Administrative Appeals Tribunal for a review of the decision or appeal to the Federal Court against the decision. [Items 5 and 6]
11.38 A notice of assessment of additional tax can be incorporated in any other notice of assessment. [New subsection 163B(6)]
11.39 The Commissioner may remit the additional tax in whole or in part [new subsection 163B(7)] . The minimum amount of additional tax is $20. That means that where the additional tax is less than $20 the taxpayer will be liable for a penalty of $20. [New subsection 163B(9)]
11.40 The Commissioner must give a taxpayer who is liable for interest a notice in writing specifying the following:
- •
- that the interest is for late lodgment of a return under section 163C;
- •
- the person who is liable for the interest;
- •
- the amount of the interest; and
- •
- the day on which the interest is due and payable (which must be at least 30 days after the day on which the notice is served on the taxpayer). [New subsection 163C(2)]
The notice of interest may be incorporated in any other notice of assessment in respect of the person. [New subsection 163C(2)]
11.41 The are no rights of objection, review and appeal under Part IVC of the Taxation Administration Act 1953 against a notice of interest.
Amendment of existing penalty provision
11.42 Subsection 222(1) is amended to exclude any refusal or failure to lodge a return under sections 161, 162 and 163. Penalties for failing to lodge a return under those provisions are covered by the amendments in the new sections 163A, 163B and 163C. [Item 3]
Interest on early payments of late lodgment penalties
11.43 The Taxation (Interest on Overpayments and Early Payments) Act 1983 is amended to make the following payments eligible for early payment interest:
- •
- penalty under the new section 163A ;
- •
- additional tax under the new section 163B ; and
- •
- interest under the new section 163C .
As with other eligible payments, interest on early payments will be payable to a person where an amount is paid more than 14 days before the day it became due and payable. [Item 8]
11.44 The amendments to the Taxation (Interest on Overpayments and Early Payments) Act 1983 will apply to payments of late lodgment penalties in respect of returns for the 1994-95 year and later years of income where the final day for lodgment of the return occurs more than 60 days after the date of Royal Assent. [Item 9]
CHAPTER 12 - Sales tax - exemption for UHF transmitters
Overview
12.1 Schedule 9 of the Bill will provide that certain UHF television transmitters will be exempt from sales tax, if they are for use in transmitting commercial television programs and acquired under the equalisation program. The exemption, and a related credit ground, will apply to transmitters installed, or to be installed, on or after 1 January 1994 and before 1 January 1996.
Summary of the amendments
12.2 To extend the operation of an earlier sales tax exemption for UHF television transmitters, to cover certain UHF transmitters used in the equalisation program which are installed, or to be installed, in the period 1 January 1994 to 31 December 1995.
12.3 The amendments will take effect from the date the Bill receives Royal Assent. Credits will apply to dealings on or after 1 September 1993 and before the date of Royal Assent. [Clause 2 and item 6]
Background to the legislation
12.4 Certain UHF television transmitters used in commercial television broadcasting were previously exempt from sales tax under Item 105 of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935. The exemption applied to transmitters which were to be used to further specified commercial broadcasting policies, and which were used or installed ready for use after 30 April 1987 and before 1 January 1994. When the exemption was first introduced, the cut-off date was I January 1993. It has already been extended once, to 31 December 1993. Item 105 was incorporated into the current sales tax law by section 11 of the Sales Tax Amendment (Transitional) Act 1992.
12.5 One of the broadcasting policies covered by the earlier exemption was the equalisation program, which is designed to provide television services in regional areas comparable to those in capital cities. The reason why the exemption contained a sunset clause was because it was intended, among other things, to be an incentive for licensees to speed up implementation of the equalisation program.
12.6 However, the equalisation program is not yet completed in Tasmania, where licensees had experienced delays in installing their transmitters, which were partly caused by bad weather. Although the original aim of the exemption was to encourage faster implementation, it was decided that it was inequitable to deny licensees in Tasmania the benefit of the incentive which had been available to eastern mainland licensees.
Explanation of the amendments
12.7 Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 identifies goods which are exempt from sales tax. A new exemption Item 168A will be inserted into Schedule 1 to cover "exempt UHF television transmitters". [Items 2, 3, 4 and 5]
12.8 An "exempt UHF television transmitter" will be one which satisfies the following conditions:
- •
- the transmitter will be for use in transmitting a commercial broadcasting service (within the meaning of the Broadcasting Services Act 1992), by means of radio emissions on frequencies in the range of 520 to 820 megahertz; [new subsection 3C(4)]
- •
- the Secretary to the Department of Communications and the Arts, or a person authorised by the Secretary, has certified that the transmitter has been installed, or is to be installed:
- •
- on or after 1 January 1994 and before 1 January 1996;
- •
- for the purpose of a commercial television broadcasting service;
- •
- for use in the equalisation program, that is the implementation plan referred to in Part IIIC of the Broadcasting Act 1942 or section 16 of the Broadcasting Services (Transitional Provisions and Consequential Amendments) Act 1992; [new subsections 3C(1) and (2)] and
- •
- the transmitter is not a replacement for an existing UHF transmitter [new subsection 3C(3)] .
12.9 The exemption only applies to the transmitter itself. It does not cover goods such as transmission towers, masts, antennae and electric lines which are ancillary to, or used in association with, the transmitter itself. [New subsection 3C(4)]
12.10 The terms of this exemption will be very similar to the terms of the earlier exemption, except that it will be restricted to transmitters for use in the equalisation program.
12.11 A person will not be able to claim the exemption unless the person has previously obtained the relevant certificate from the Department of Communications and the Arts. Applications for the certificate should be addressed in the first instance to the Secretary of the Department of Communications and the Arts, GPO Box 2154, Canberra ACT 2601.
12.12 A transitional credit ground, TCR1, will be inserted into "Table 3A: Transitional credit grounds" in the Sales Tax Assessment Act 1992, to cover certain dealings with UHF transmitters, which have taken place before the new exemption comes into effect. [Items 9 and 11]
12.13 The credit ground will be available for "transitional exempt UHF television transmitter dealings", which will be dealings (usually entry of the transmitter into Australia, or a sale of a transmitter):
- •
- occurring on or after 1 September 1993 and before the date that the new exemption comes into effect. The date of 1 September 1993 is intended to cover licensees who purchased or imported transmitters in late 1993, but were not entitled to exemption under the old UHF exemption because the equipment could not be installed by the previous cut-off date of 1 January 1994 [paragraph (a) of subitem 7(1)] ; and
- •
- where the Secretary to the Department of Communications and the Arts, or a person authorised by the Secretary, has certified that, at the time of the dealing, the transmitter was to be installed:
- •
- on or after 1 January 1994 and before 1 January 1996;
- •
- for the purpose of a commercial television broadcasting service; and
- •
- for use in the equalisation program, that is the implementation plan referred to in Part IIIC of the Broadcasting Act 1942 or section 16 of the Broadcasting Services (Transitional Provisions and Consequential Amendments) Act 1992; and [paragraph (b) of subitem 7(1)] ; and
- •
- the transmitter was not a replacement transmitter [subitem 7(3)] .
12.14 The goods covered by the credit ground will be the same UHF television transmitters which would have qualified for the new exemption, if the dealing had taken place after the exemption came into effect. [Subitem 7(4)]
12.15 Applications for credits should be lodged with the Commissioner of Taxation, accompanied by the certificate from the Department of Communications and the Arts, on or after the day that the Bill receives the Royal Assent. A credit will not be allowed if the claimant has recouped the amount of the tax from another person, and not refunded that amount to the other person.
CHAPTER 13 - Sales tax - new credit ground for unregistered exemption users
Overview
13.1 Items 8 and 10 of Schedule 9 of the Bill propose to amend paragraph 15(4)(d) and Table 3 of Schedule 1, respectively, of the Sales Tax Assessment Act 1992 (STAA). The amendments will insert a new credit ground for unregistered persons where they have borne tax on an assessable dealing even though they were entitled to quote an exemption declaration.
Summary of the amendments
13.2 To enable persons who are unregistered exemption users access to a credit ground so they can claim refunds of sales tax where they have borne tax on an assessable dealing even though they were entitled to quote an exemption declaration and therefore receive the goods free of tax.
13.3 The new credit ground will apply to assessable dealings occurring after the Bill receives Royal Assent. [Clause 2]
Background to the legislation
13.4 Under the existing sales tax law an assessable dealing is taxable unless an exemption applies. An exemption applies when a quotation is made or the goods in question are always exempt goods. Subsection 86(2) of the STAA requires that a quote for a dealing be made at or before the time of the dealing for it to be effective.
13.5 If a registered or unregistered person does not quote for a taxable dealing, then the dealing is taxable. A credit ground (CR2) exists to enable a registered person to obtain a credit of tax paid on a dealing for which they had borne tax even though they were entitled to quote a registration number. A similar credit ground was not provided for unregistered persons as it was considered desirable that such persons establish their entitlement to sales tax exemption at the time the sale took place. It was thought that this would assist in the efficient administration of the streamlined sales tax legislation (SST).
13.6 The public education programs conducted since the SST was introduced in January 1993 have provided the large majority of unregistered persons with the understanding that they must quote an exemption declaration at the time of the assessable dealing. However the lack of a credit ground still affects bodies such as schools, hospitals, government departments and local councils that forget to quote. It is now considered that the law should be amended to give such bodies access to a credit ground where they were entitled to quote but have still borne tax on an assessable dealing.
Explanation of the amendments
13.7 There are two amendments to the STAA necessary to implement the new credit ground. The first is an amendment to insert new credit ground CR2A in Table 3 of Schedule 1 of the STAA [item 10] . The second is an amendment to section 15 to ensure that if unregistered users receive a credit under the new credit ground, they are considered to have obtained the goods under quote [item 8] . This ensures that if the goods are then sold by the unregistered user the sale might still be an assessable dealing under AD2b or AD3c of Table 1 of Schedule 1 of the STAA, and therefore still subject to sales tax.
13.8 There are two situations covered by this credit ground. The first is where the claimant was entitled to quote on the dealing but did not quote. The second is where the claimant was entitled to quote but the quote was not accepted by the person to whom the quote was given.
13.9 New credit ground CR2A specifies that a claimant will be entitled to a credit provided that:
- •
- the claimant was entitled to quote an exemption declaration;
- •
- the claimant has borne tax;
- •
- the claimant has not sold the goods; and
- •
- if the claimant has applied the goods to their own use by the time the credit is claimed then the application to own use (AOU) would not have been taxable if the AOU had been an assessable dealing. This test is a notional one as the goods will have been tax-paid. It ensures that, assuming the AOU was an assessable dealing, then it would have been covered by an exemption item.
13.10 A hospital that is carried on by a non-profit body purchases cleaning equipment for its own use and not for resale. The hospital is entitled to quote an exemption declaration because the goods are exempt from sales tax under paragraph 140(b) of Schedule 1 of the Sales Tax (Exemptions and Classifications) Act 1992. Assuming the hospital forgot to quote, the result would be that it will have purchased the cleaning goods at a price that included sales tax.
13.11 The proposed credit ground would then entitle the hospital to a credit of the tax borne on the cleaning equipment since it has satisfied the tests outlined in the new credit ground. That is, the hospital has borne tax on a dealing for which it was entitled to quote, it has not sold the goods, and if the hospital had already used the cleaning equipment, that application to own use would have been covered by exemption item 140 if the AOU had been an assessable dealing.
CHAPTER 14 - Minor amendments
Overview
14.1 Schedule 10 of the Bill makes several minor amendments to the taxation laws.
Explanation of the amendments
14.2 This amendment corrects an error in section 93K(4)(c) of the Development Allowance Authority Act 1992 by substituting the word another with the word any. [Item 1]
14.3 The amendment is effective from 16 December 1994 (the date the original amendment to the Development Allowance Authority Act 1992 took effect).
14.4 This amendment omits the definition of proper franking tax from subsection 160ARXA(1) of the Income Tax Assessment Act 1936. The provision which previously referred to proper franking tax (ie. the former definition of franking tax shortfall in subsection 160ARXA(1)) has been replaced with a new provision which no longer makes such a reference. The definition therefore serves no purpose and can be omitted. [Item 2]
14.5 The amendment is effective from 13 October 1994 (the date from which the definition was last amended).
Interest on early and over payments
14.6 This amendment substitutes the words Tax Act for the inappropriate reference Income Tax Assessment Act 1936 in paragraph 3(1)(baa) of the Taxation (Interest on Overpayments and Early Payments) Act 1983. [Item 3]
14.7 The amendment is effective from the date the Bill receives the Royal Assent.
14.8 The Bill amends the Taxation (Interest on Overpayments and Early Payments) Act 1983 to allow two payments to be eligible for early payment interest:
- •
- Subparagraph 8A(1)(a)(v) is amended to include interest under section 170AA as an amount that is eligible for early payment interest. A taxpayer is liable to interest under section 170AA where there has been an amendment of an assessment increasing the income tax payable by the taxpayer [item 4]
- •
- Paragraph 8A(1)(b) is amended to include a payment of income tax under an amended assessment in respect of a relevant entity or an instalment taxpayer as an amount that is eligible for early inadvertently overlooked when the interest on early payment provisions were introduced in 1994 [item 5] .
14.9 These amendments apply to payments of interest under section 170AA or income tax under an amended assessment in respect of the 1993-94 year of income where the payment is made on or after 1 July 1994. This allows these payments to be treated in the same manner as other payments to which the interest on early payment provisions apply. [Item 6]
14.10 In Taxation Laws Amendment Act (No.3) 1994 the date of commencement for the partner allowance was inadvertently set at 29 September 1994 (the commencement date for the home child care allowance) instead of 20 September 1994 (the commencement date for the partner allowance in the Social Security Act 1991) . This Bill amends the commencement date for the tax provisions for the partner allowance to 20 September 1994. [Item 7]
14.11 This amendment substitutes the word 'sections' for the incorrect reference to 'section' in paragraph 130(a) of the Taxation Laws Amendment Act (No. 3) 1994. [Item 8]
14.12 The amendment is effective from 28 November 1994 (the date of Royal Assent of Taxation Laws Amendment Act (No. 3) 1994).
Index Table
| New section | ||
|---|---|---|
| Schedule 1 - Amendments relating to State/Territory bodies | ||
| 24AK | Key principle | 1.13 |
| 24AL | Diagram - guide to work out if body is exempt under this Division | 1.15 |
| 24AM | Certain STBs exempt from tax | 1.13 ,1.30, 1.32, 1.37, 1.39, 1.42-43, 1.45-46 |
| 24AN | Certain STBs not exempt from tax under this Division | 1.13 |
| 24AO | First way in which a body can be an STB | 1.17, 1.20, 1.22 |
| 24AP | Second way in which a body can be an STB | 1.17, 1.20 ,1.22 |
| 24AQ | Third way in which a body can be an STB | 1.17-18, 1.20-21 |
| 24AR | Fourth way in which a body can be an STB | 1.17, 1.20-21 |
| 24AS | Fifth way in which a body can be an STB | 1.17-18, 1.20-21 |
| 24AT | What do excluded STB, government entity and Territory mean? | 1.20,1.23,1.27 |
| 24AU | Governor, Minister and Department Head taken to be a government entity | 1.21-22 |
| 24AV | Regulations prescribing excluded STBs | 1.24-26 |
| 24AW | Body ceasing to be an STB | 1.50, 1.52, 1.54-56 |
| 24AX | Special provisions relating to capital gains and losses | 1.58 |
| 24AY | Losses from STB years not carried forward | 1.49 |
| 24AYA | Effect of unfunded superannuation liabilities | 1.59-61 |
| 24AZ | Meaning of relevant period | 1.53, 1.68 |
| Schedule 2 - Employee share schemes | ||
| 139 | The key principle | * |
| 139A | Overview of Division | * |
| 139B | Discount to be included in assessable income | 2.7, 2.21, 2.24 |
| 139BA | Reduction of amounts included - elections | 2.7, 2.37 |
| 139C | Employee share schemes | 2.7, 2.22-23 |
| 139CA | Cessation time - shares | 2.7, 2.24 |
| 139CB | Cessation time - rights | 2.7, 2.24 |
| 139CC | Calculation of discount | 2.7, 2.33 |
| 139CD | Meaning of qualifying shares and qualifying rights | 2.7, 2.30 |
| 139CE | Exemption conditions | 2.7, 2.38 |
| 139D | Discount assessable to associate if share acquired by taxpayer in respect of associate's employment | 2.7, 2.26 |
| 139DA | Acquisition of legal interest in shares or rights - certain discounts not assessable | 2.7 |
| 139DB | No deduction until share or right acquired | 2.7, 2.46 |
| 139DC | Deduction for provider of certain qualifying shares or rights | 2.7, 2.47 |
| 139DD | No benefit where rights lost | 2.7, 2.45 |
| 139DE | Amount not assessable under section 21A or paragraph 26(e) | 2.7 |
| 139DF | Anti-avoidance - certain shares and rights not qualifying shares and qualifying rights | 2.7, 2.31 |
| 139E | Taxpayer may make election | 2.7, 2.35-36 |
| 139F | Meaning of market value of a share or right | 2.7, 2.34 |
| 139FA | Listed shares or rights - market value | 2.7, 2.40 |
| 139FB | Unlisted shares - market value | 2.7, 2.40 |
| 139FC | Unlisted rights - market value | 2.7, 2.40 |
| 139FD | Conditions and restrictions to be disregarded | 2.7, 2.40 |
| 139FE | Value of right nil or can not be determined | 2.7, 2.40 |
| 139FF | Value of legal and beneficial interests | 2.7, 2.40 |
| 139FG | Meaning qualified person | 2.7 |
| 139FH | Meaning of published price where multiple quotation | 2.7 |
| 139FI | Provision of information about market value | 2.7, 2.41 |
| 139FJ | Outline of remainder of subdivision | 2.7, 2.40, 2.43 |
| 139FK | Step 1 - calculate the calculation percentage | 2.7, 2.40, 2.43 |
| 139FL | Step 2 - how to use calculation percentage | 2.7, 2.40, 2.43 |
| 139FM | Table 1 and instructions | 2.7, 2.40, 2.43 |
| 139FN | Table 1 and instructions | 2.7, 240, 2.43 |
| 139G | Meaning of acquiring or providing a share or right | 2.7, 2.29 |
| 139GA | Meaning of employee and employer | 2.39 |
| 139GB | Meaning of permanent employee | 2.39 |
| 139GC | Meaning of holding company | 2.25 |
| 139GCA | Meaning of approved stock exchange | 2.40 |
| 139GD | Meaning of associate | 2.28 |
| 139GE | Meaning of conducting a scheme on a non-discriminatory basis | 2.7, 2.39 |
| 139GF | Meaning of provision of financial assistance | 2.39 |
| 139GG | Index of definitions | * |
| 160ZYJB | Shares or rights under employee share scheme | 2.7, 2.50 |
| 160ZYJC | or rights under employee share scheme - associates | 2.7, 2.51 |
| 160ZYJD | share trusts | 2.7, 2.52 |
| 160ZYJE | have same meaning as in Division 13A of Part III | 2.7 |
| Schedule 3 - Various amendments of the Income Tax Assessment Act 1936 | ||
| 160ZZPI | 5.15, 5.31, 5.35-36, 5.39 | |
| 160ZZPIA | 5.3, 5.16, 5.20-21, 5.23-25, 5.28-29 | |
| Schedule 8 - Late lodgment penalty | ||
| 163A | 11.19-25 | |
| 163B | 11.26-32 | |
| 163C | 11.26, 11.30, 11.40 | |