House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer,the Hon. Peter Costello, MP)

General Outline

This package of Bills is the first instalment of the rewrite of the income tax law by the Tax Law Improvement Project. The package comprises:

Income Tax Assessment Bill 1996

Income Tax (Transitional Provisions) Bill 1996

Income Tax (Consequential Amendments) Bill 1996

Background

The Tax Law Improvement Project (TLIP) was established in December 1993 to restructure, renumber and rewrite in plain language Australia's income tax law. This was in response to a recommendation of the Joint Committee of Public Accounts that a task force be set up to rewrite the income tax law. The aim of the Project is to reduce compliance costs, and improve compliance, by making the law easier to use and understand.

In these Bills there are proposed a number of minor content changes to aid the rewriting. These changes will focus on reducing or eliminating unnecessary complexity and bringing the law into line with current administrative and commercial practice. The changes will generally have no direct impact on revenue outcomes.

The project intends that the new law be written and enacted progressively.

Income Tax Assessment Bill 1996

This Bill is the major part of the first instalment of the new law. It will establish the structure and framework of a new Income Tax Assessment Act, which will be built up progressively to replace the Income Tax Assessment Act 1936 as that Act is rewritten.

The new law will contain many improvements designed to make it easier for readers to read, use and apply the new law and, as a result, will lead to lower costs in complying with the law.

Better structure

The Bill sets out a carefully designed structure for the Income Tax Assessment Act. The new structure focuses on the needs of readers; helping them to find what they are looking for, quickly and efficiently.

New structure is like a pyramid

The new structure will help readers by adopting a top down (or pyramid) approach to presenting information in regular patterns that promote familiarity with the location of material.

The pyramid: Core provisions

The most important provisions of the law, which deal at a broad level with how much income tax a person must pay, will be brought together at the start of the law.

General provisions

After the core the new law will group those rules (explaining particular kinds of income, deductions and offsets) which apply to large sections of the community.

Specialist provisions

After these general provisions will follow special rules that are limited to specific groups of taxpayers, special types of tax and special tax obligations.

Collection and administrative provisions

After the specialist provisions come those sections that deal with collecting and recovering tax, and other administrative matters.

The Dictionary

Finally, readers will be able to find in a dictionary the meanings of all defined terms and main concepts used in the law.

New numbering system

There will be a new, more flexible numbering system. It will replace the existing cumbersome system which has outlived its usefulness, is confusing and is incapable of readily accommodating new material.

Plain language

All of the new law will be drafted in clear and plain language.

Readers addressed directly

For those parts of the law directed at individual taxpayers, the new law will address the reader directly, in the second person.

Guides to the new law

Important parts of the law will be introduced by Guides containing explanatory material to orient unfamiliar readers to those areas.

Design and presentation

The new law will incorporate a number of modern presentation techniques designed to introduce good communication principles and ideas.

Rewrite of parts of the existing law

The Bill will include rewrites of the following areas of the Income Tax Assessment Act 1936:

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the key provisions about income and deductions ( the core);

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deductions for current and prior year losses and company group loss transfers;

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the rules for calculating car expenses and substantiating work-related expenses;

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the special capital expenditure write-offs for the petroleum mining, general mining and quarrying industries; and

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capital allowances for buildings and other capital works.

Income Tax (Consequential Amendments) Bill 1996

This Bill will amend other Commonwealth Acts that contain references to the income tax law, to ensure that they reflect the amendments proposed by this package of Bills. It will also make amendments closing off the application of provisions in the existing law that have been rewritten in the Income Tax Assessment Bill 1996 .

Income Tax (Transitional Provisions) Bill 1996

This Bill will explain when and how the new law will commence to apply. As a general rule, the rewritten law will first apply for the 1996-97 income year.

B. Summary of Main Changes

In addition to the general improvements in structure, presentation and readability, the Bill will make a number of useful changes to the operation of the law. These are mainly changes which will facilitate a simpler and clearer expression of the law and less arduous compliance requirements.

Core

The core will:

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bring together, for the first time, the principal working rules of the income tax law. This will significantly help readers to understand quickly the overall income tax scheme. This is not possible under the present law because the structure has become buried, over the years, under the weight of added material;

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classify assessable income into 2 distinct categories that are implied, but not specified, in the existing law - ordinary income and statutory income. This will highlight differences in the way the income tax law treats these 2 income types;

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state a rule against double counting of income amounts. This is not stated in the existing law but has been read into it over the years; and

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include check lists of the operative provisions (such as those dealing with the treatment of income and deduction items). These will work like an index, taking readers to the parts of the law that will be relevant to their circumstances. The check lists will also function in the short term as an important link between the old law and the new.

General losses

The Bill will:

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bring together the rules about prior year and current year losses. This will allow much of the law to be standardised for the 2 types of loss. In particular, the tests a company needs to satisfy to deduct a loss - the same business test and the continuity of beneficial ownership test - need only be stated once;

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distinguish 'anti-avoidance' provisions from the main operative provisions, and clearly identify them as anti-avoidance provisions;

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place at the front of the law the tests that prevent a company being denied a deduction for a loss, so that readers will discover quickly whether the rest of the provisions need to be read; and

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substantially simplify the calculations that have to be made.

The Bill will also make the following specific changes to the losses provisions.

1 Certain deductions cannot contribute to carry forward losses

Change: Allow an exception to the rule that amounts deductible under specified provisions of the law cannot contribute to a carry-forward loss. In future, if an amount that is deductible under a specified provision can also be deducted under a more general provision, then the amount can contribute to a carry forward loss. This will bring the law into line with administrative practice.

Existing law: Broadly, deductions allowable under specified provisions cannot ordinarily contribute to a carry-forward loss. However, some expenses are deductible under a specified and a general provision of the law. It is established practice to allow these deductions to contribute to a loss.

2 Development allowance of a leasing company cannot contribute to carry-forward losses

Change: Standardise the rules about deductions that cannot contribute to a carry-forward loss, by including with them the rule (presently located elsewhere) that a leasing company's development allowance cannot add to a loss.

Existing law: The rule applying to leasing companies is similar to the general rule that gifts and certain other deductions cannot contribute to a loss.

3 Treatment of tax avoidance losses

Change: Certain anti-avoidance provisions against schemes entered into between May 1977 and May 1981 will be limited to schemes that give rise to primary production losses.

Existing law: These measures stop deductions for losses arising as a result of avoidance schemes. Their current scope is limited to primary production losses arising from schemes entered into between 1977 and 1981.

4 Deduction for losses

Change: Clarify that prior year losses must be offset:

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first, against exempt income remaining after allowing current year deductions;

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then, against any assessable income remaining after all other deductions are allowed.

This will align the law with administrative practice.

Existing law: It could be argued that:

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current year deductions, and a prior year loss, must be offset against the same net exempt income; and

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it is not clear that prior year losses are only deductible from assessable income remaining after all other deductions.

5 Income from employment fringe benefits

Change: Omit the requirement that fringe benefits, assessable for fringe benefits tax, must be offset against losses.

Existing law: To prevent effective double taxation, specified amounts do not have to be offset against losses (for example, exempted foreign source income already taxed overseas). This exception does not extend to fringe benefits even though they are assessable to fringe benefits tax.

Company Losses

1. Current year loss companies: composition of taxable income

Change: Allow current year loss companies to calculate the composition of their taxable income in the same way as other companies.

Existing law: Current year loss companies alone must make a very detailed, and largely unnecessary, calculation of the various components of their taxable income.

2. Current year losses - accounting requirements

Change: Adopt simple pro rata rules for apportioning the income and deductions of a company in a year in which its ownership or control changes and it does not carry on the same business.

Existing law: There are excessively detailed rules for calculating the income and deductions in these circumstances.

3. Tests for continuity of beneficial ownership and same business

Change: Adopt uniform continuity of beneficial ownership and same business tests for the prior year loss and current year loss rules.

Existing law: These rules contain separate, but virtually identical, tests for continuity of beneficial ownership and same business. The tests decide whether a company can deduct these particular losses and outgoings.

4. Anti-avoidance rules

Change: Collocate, and rationalise, various anti-avoidance provisions applying to prior year and current year losses.

Existing law: Various separate anti-avoidance provisions supplement the continuity of beneficial ownership test, by denying a deduction if its benefit accrues to someone other than the continuing beneficial owners of the company.

5. Time limit for the completion of loss transfer agreements

Change: Allow a company to make a loss transfer agreement at any time on or before the date on which the transferee company lodges its return.

Existing law: An agreement must be made before the return is lodged.

6 Applicability of the current year loss provisions

Change: The current year loss provisions will stop a company transferring a loss in the loss year only if the loss company is not allowed to deduct the loss.

This will align the law with administrative practice.

Existing law: The law is ambiguous. A company cannot transfer a loss in the year in which it occurs, if the current year loss provisions apply. On a strict interpretation, the current year loss provisions could deny a transfer even if the current year loss provisions did not operate to deny deductibility to the transferor.

7 Payments for loss transfers

Change: Make subvention payments unconditionally non-assessable to the payee on the same basis as they are unconditionally non-deductible to the payer. (A subvention payment is a payment for the transfer of a right to a deduction for a loss.)

Existing law: The payer cannot deduct the payment, but the payment is only precluded from being income of the payee if the payee is a shareholder in the payer.

Capital allowances

The Bill will extract ideas common to the many areas of the law that allow a deduction for capital expenditure (eg. depreciation, mining and film investment). Writing these as 'common rules' will avoid replicating them in each capital allowance provision.

The Bill also contains a table providing an overall summary of the main features of all the capital allowances available under the law.

Mining

The Bill will make major structural improvements to the mining provisions by:

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combining the present 4 divisions about deductions for mining and quarrying expenditure into one division. The consequent removal of duplicated rules will significantly reduce the length of the existing law;

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incorporating all the other provisions about mining so that the mining legislation is more easily accessed; and

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making major structural improvements to the way the mining division appears, putting the rules in the same order as the mining process, and standardising the diversely expressed provisions (but retaining essential differences).

1. Treatment of expenditure incurred before 19 July 1982

Change: Allow undeducted allowable capital expenditure, incurred before 19 July 1982, to be written off on the same basis as expenditure incurred after that date.

Existing law: Mining expenditure incurred before 19 July 1982 is written off under the diminishing value method - ie. in decreasing amounts over an undefinable number of years. More recent expenditure is written off over a maximum of 10 years, in equal annual instalments.

Revenue impact: The estimated impact of the proposal is:

Compliance Impact: The change will reduce the complexity and volume of records required to be kept.

2. Mining rights or information

Change: Allow any mine owner to write off, over 10 years, undeducted expenditure for which deduction rights are transferred under an agreement to purchase a mining right or information.

Existing law: A taxpayer can acquire deductible expenditure by purchasing a mining right or information. On a strict reading of the law, the taxpayer must:

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own the particular mine to which the right or information relates; and

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deduct the expenditure over the shorter of 10 years or the life of that mine.

In practice, the Commissioner allows the deduction to the transferee as long as it is a mine owner, even if it does not own the mine to which the right or information relates. In these cases, the expenditure is written off over 10 years.

3. Welfare facilities (contributions to government)

Change: Widen the deduction for expenditure on welfare facilities, by removing the requirement that a taxpayer must bear directly the cost of the facilities.

Existing law: A deduction is allowed for the cost of employee welfare facilities provided by an employer. The deduction does not extend to contributions made by a taxpayer to the cost of facilities provided by government.

4. Housing and welfare (catering facilities)

Change: Widen the deduction for expenditure on housing and welfare facilities, by extending the deduction for employee catering facilities to facilities that are operated for profit.

Existing law: Expenditure on employee welfare facilities is not deductible if they are run for profit.

5. Housing and welfare facilities (contractors' employees)

Change: Allow a deduction for expenditure on housing and welfare facilities for the employees of a contractor to a taxpayer.

Existing law: Taken strictly, mining employers can deduct expenditure only on welfare and housing facilities for their own employees and dependants. The Commissioner, however, recognises deductions for facilities for employees of contractors.

6. Rehabilitating mine sites

Change: Widen the deduction for expenditure on the rehabilitation of a mining site, to include the cost of constructing levees and dams as part of the rehabilitation process.

Existing law: A deduction is allowed for expenditure incurred in rehabilitating sites of mining operations. However, a deduction is not allowed for the cost of building, or rebuilding, any structure (including levees and dams) during the rehabilitation process.

7. Balancing adjustments and joint ventures

Change: Limit balancing adjustments, on the change of an interest in a joint venture, to the party disposing of the interest.

Existing law: If an undivided fractional interest in property is disposed of, the balancing charge provisions operate as if there has been a sale of the property by all the original owners to all the new owners. There has been some doubt about the application of this to joint ventures. Administrative practice is to apply the provisions only to the party disposing of the interest.

8. Feasibility studies

Change: Allow deductions for feasibility studies undertaken to determine whether mining should proceed.

Existing law: The law is silent on the deductibility of such feasibility studies, but it is the Commissioner's practice to allow the deductions.

Deductions for Capital Works (buildings etc.)

The Bill will enhance the structure and content of the rules about writing-off buildings and other capital works by merging the two existing divisions which deal separately (but in similar terms) with different types of buildings. This will enable the text to be halved and will make the law clearer.

The Bill will make the following specific changes.

1. Tests for eligibility

Change: Widen eligibility for the building write-off concession,by removing the requirement that a building's first intended use must have been for specified purposes.

Existing law: To be eligible for capital write-off, a building must satisfy two use tests. First, the building must be currently used for eligible purposes. Second, the original owner of the building must also have intended to use it for eligible purposes.

2. Display homes

Change: Extend the building write-off concession to buildings used as display homes.

Existing law: The concession does not apply to buildings that commenced as display homes.

Revenue Impact: A revenue cost of $2 million each year, starting in 1997-98.

C. Finding Tables

This Explanatory Memorandum contains finding tables which cross-reference the existing and rewritten provisions to make it easier to find your way from the existing law to the new law, and vice versa.

D. Revenue Impact

The new law will be mainly revenue neutral. Most measures will have no direct impact on revenue outcomes. Some proposals will result in insignificant, but hard to quantify, revenue costs.

Only 2 proposed changes can be quantified.

The proposal to allow an accelerated write-off for mining expenditure incurred before July 1982 will initially be revenue positive ($10m and $5m in the first 2 full years), but will become a cost to revenue over time (proposal 1, page 10).

The proposal to allow display homes to be written off under the special concessions for buildings will have an annual cost of $2m (proposal 2, page 12).

E. Compliance Impact

The Bill should achieve a noticeable reduction in compliance costs for those using the parts of the income law it deals with. That reduction will not occur because of any single significant change but from the accumulation and combined impact of many small improvements.

The law will be shorter, clearer and simpler. Together, through provision after provision, these things will produce a significant effect.

There will also be some particular measures aimed at reducing compliance costs:

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unnecessary requirements of the existing law will be removed;

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the number of complex calculations will be cut back;

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rules that have essentially the same effect will be standardised;

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record keeping obligations will be reduced; and

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the law will be brought into line with practical administrative positions.

F. Date of Effect

All measures in the package of Bills will apply from (and including) the 1996-97 income year. For some measures, special transitional arrangements will apply. These are explained in the notes describing those measures.

Chapter 1 - About the Tax Law Improvement Project and progressive delivery of the new law

This chapter provides background information on the Tax Law Improvement Project and explains that the Income Tax Assessment Bill 1996 is the first instalment in the rewrite of the Income Tax Assessment Act 1936.

Overview of this chapter

This chapter discusses in general terms:

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the role of the Tax Law Improvement Project

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problems with the structure and expression of the existing law

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how the new law will deal with those problems

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how the new law will be introduced progressively.

About the Tax Law Improvement Project

In November 1993, the Joint Committee of Public Accounts published a report recommending the setting up of a broadly based Task Force to rewrite the income tax law. In the following month, the Tax Law Improvement Project was established.

This is a project to restructure, renumber and rewrite in plain language Australia's income tax law. It aims to improve taxpayer compliance, and reduce compliance costs, by making the law easier to use and understand.

Opportunities are being taken to make minor content changes to aid the rewriting. These can reduce or eliminate unnecessary complexity in the law, and bring the law closer into line with administrative and commercial practice.

Problems with the existing law

For many years, the income tax law has been criticised as being too difficult to read and understand. When the Income Tax Assessment Act 1936 was introduced, it was under 100 pages long. Now, it is some forty times longer. Sixty years of constant change has produced a body of law that no longer meets the needs of its users in terms of being convenient and reader friendly.

Structure

Originally, the structure of the existing law was a logical arrangement of the sections. Adding so much more law over the years has made it difficult for readers to find their way around the Act. The Act no longer has a readily discernible structure.

The Income Tax Assessment Bill 1996 proposes a new structure, one which will reintroduce a logical arrangement of material. As a result, the law will be easier to follow and use. As well, the new structure should be flexible enough to continue to meet its readers' needs even when the law is substantially amended in the future.

The proposed new structure is discussed in greater detail in Chapter 3.

Numbering

The sheer volume of amendments to the existing law has overloaded the numbering system, so that the Income Tax Assessment Act 1936 included section numbers such as 159GZZZZH. Numbers like this confuse and disorient taxpayers and their professional advisers.

Numbering problems also arise from limitations in the existing structure of the law. Most new law affecting liability to tax is inserted within a narrow band that is already crammed.

Renumbering the law using the existing numbering system would not of itself provide sufficient flexibility to avoid the same problem arising again. Consequently, the Bill adopts a new numbering system that has been designed to accommodate future expansion.

The proposed new numbering system is explained in Chapter 3.

Language

The expression of the income tax law has become a patchwork of different styles. It cannot be easily read and understood. Many professional advisers have come to rely on explanatory materials prepared by government or commercial organisations, and largely ignore the statutory expression.

There is an unnecessary cost if wasteful amounts of time must be spent just understanding what the law says. Anything that reduces this effort should help to reduce compliance costs.

If the law can be more easily understood by a wider range of people, then compliance with the law should also improve.

The new law will be drafted using plain and clear language, even when dealing with the most difficult concepts.

The language of the new law has been designed for the widest professional audience. The law should be capable of being understood by all who need to read it, not just by the courts and the most expert professional advisers. The rewritten law should open itself up to all professional tax practitioners.

There are very few individual taxpayers who read, or need to read, the income tax law. The new law does not have to be written so that it can be understood by all taxpayers. It is impractical to do so. However, it is appropriate that special care be given to those provisions which most directly affect the millions of individual taxpayers. These provisions must at the very least be capable of being communicated by those whose job it is to advise individual taxpayers about their rights and obligations.

In order to make that task easier, where the new law applies to individual taxpayers it will address the reader directly. For example, you must lodge a tax return rather than a taxpayer must lodge a return . This approach was used in the Tax Law Improvement (Substantiation) Act 1995. Two important benefits flow from this change.

Using a style familiar to most people will make the law less intimidating, more directly engaging and ultimately, accessible by a wider audience. It captures the reader's attention more immediately, focusing attention on what they need to do to comply with the law. This helps people make personal sense of the law.

It will also help those who need to explain the law, and will reduce the potential for errors. Direct address simplifies the text. It supports proven methods of improving a reader's ability to understand documents (eg. by using active rather than passive tense and using action verbs). Tax advisers and educators should be able to use the words of the law directly when explaining people's rights and obligations.

Layout

The way in which the present law is presented can be as important to comprehension as its text and structure. The Bill makes important advances in this area. The use of extra white space, both in the margins and before each paragraph, and the addition of running headings to facilitate reader orientation, are among the more obvious improvements made by the Bill.

Progressive enactment of the new law

The income tax law is considered too large to rewrite and enact in a single stage. The Income Tax Assessment Bill 1996 is founded on the basis that the old law will be rewritten and replaced progressively.

How it will happen

It is proposed to enact the rewritten law in annual instalments. The first instalment comprises the Bills in this package, in particular the Income Tax Assessment Bill 1996. It is to apply first for the 1996-97 income year.

From the commencement of this package of Bills until the completion of the rewrite, the income tax assessment law will be spread over two Assessment Acts - the Income Tax Assessment Act 1936 and the proposed Income Tax Assessment Act 1996.

As each instalment of the rewritten law starts to apply, the corresponding provisions in the 1936 Act will cease. The proposed new Act will grow progressively and the operative provisions in the 1936 Act will correspondingly shrink. When the final instalment of the rewritten law starts to apply, the 1936 Act will have no ongoing operation.

The transition period: using the 2 Acts

During the transition period, the two Assessment Acts will work together. You will refer to them to determine your taxable income and your income tax liability (taking into account the tax rates set out in the Income Tax (Rates) Act 1986).

To reflect this, the term 'this Act' will be defined in both Acts to mean the 1936 Act, the proposed 1996 Act and the objection, review and appeal provisions of the Taxation Administration Act 1953 (so far as they relate to the other 2 Acts).

Readers of the income tax law will be able to start at the beginning of the proposed 1996 Act. Signposts will direct them into the New Act, or to the 1936 Act, where appropriate. For example, checklists of operative provisions about assessable income, exempt income and deductions will guide readers to provisions in both the 1936 Act and the proposed 1996 Act. Similarly, many operative provisions in the Income Tax Assessment Bill 1996 signpost readers to relevant provisions in the 1936 Act.

When a provision in the 1936 Act ceases to apply because it has been rewritten, the Income Tax (Consequential Amendments) Bill 1996 will insert a note after the old provision signposting readers to the corresponding provision in the new law.

Definitions in the Dictionary to the Income Tax Assessment Bill 1996 apply only to that Bill, and not to the Income Tax Assessment Act 1936, unless the 1936 Act expressly says otherwise [clause 995-(2)]. Conversely, definitions in the 1936 Act will not apply to the 1996 Bill, unless expressly adopted. (Chapter 11 of this Explanatory Memorandum explains how this Bill proposes to deal with defined terms.)

Chapter 2 - Proposed Structure of the new Income Tax Assessment Act

This chapter explains the new structure in the Income Tax Assessment Bill 1996.

Overview of this chapter

This chapter discusses the structure of the proposed new Income Tax Assessment Act.

Aim of the new structure

The new structure will make the law easier to follow and use. Readers will find it easier to:

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understand what the law requires;

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identify the general principles of the law; and

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follow a path to the provisions they need to read.

The new structure will be flexible enough not to be distorted by the future addition of substantial amounts of new law.

New approach: the pyramid

The pyramid shape helps explain the proposed conceptual structure of the income tax law. It illustrates the way the law will be organised, moving from the central or core concepts at the top of the pyramid to the more specialised topics near the base.

The reader can enter the Act at the beginning, the top of the pyramid, and read the basic concepts of income tax law.

The top layer - the core

The most basic statement of how much income tax a person must pay can be put as an equation:

IT = (AI - D) * TR - O


That is, income tax equals ( assessable income minus deductions) multiplied by the tax rate(s), minus offsets.

All the rest is detail. The law details what is assessable income, what is deductible, and what are offsets. Sometimes that detail applies to all or most taxpayers, sometimes only to specialist groups or in particular circumstances.

In the new law, all the concepts relating to that core equation at its most basic level will be in the top layer of the pyramid. They will be known as the core provisions of the Act.

What the core will do - top level

The core provisions will operate at different levels of detail. At a conceptual level, it will lead you to:

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what the Income Tax Assessment Act is about, and how to use it;

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who must pay income tax, and when and how they have to pay it;

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how to work out how much income tax a person must pay;

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what happens if a person's income tax is more, or less, than the instalments they have to pay;

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what other obligations a taxpayer has besides paying income tax; and

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how a dispute is resolved between a taxpayer and the Commissioner of Taxation.

What the core will do - lower level

At a more direct level, the core will explain:

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how to work out taxable income;

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the relationship between assessable income and exempt income;

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how assessable income consists of ordinary income and statutory income, how these concepts depend on whether a taxpayer is an Australian resident or not, and on the source of the income;

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what makes an amount exempt income;

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about deductions - both general deductions and specific ones;

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what a taxpayer can deduct under the general deduction provision; and

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that there are lists of all the provisions that affect income, exempt income and deductions.

The core provisions will contain the general income and general deduction provisions, which determine whether amounts are assessable income or allowable deductions in the majority of cases.

The core (and the new law generally) will retain concepts that have been developed by an extensive body of court decisions over time. These include the ordinary concepts of income, and the meaning of such key notions as when income is derived and when an expense is incurred.

There will be no general explanation or statement of the purpose of the Act but the new provisions will provide a conceptual and practical framework for the way the Act works.

The top layer - the lists

The lists are checklists of, and signposts to, the provisions that specifically affect what is income, exempt income, deductions and offsets. They will help readers quickly find their way to the operative provisions they need. These provisions may be in either the second layer of the pyramid - the general provisions - or the third layer - the specialist provisions.

The second layer - the general provisions

The general provisions are provisions that apply to a wide group of taxpayers and some that don't fit into any specialist grouping. They will specify how the law deals with particular kinds of income, deductions and offsets. For example, they will include the rules about depreciation and trading stock (when these are rewritten) because they affect most businesses.

The third layer - the specialist provisions

The specialist groupings will bring together provisions that relate to specific groups of taxpayers or special tax obligations. For example, they will eventually include these topics:

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capital gains tax;

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corporate taxpayers and corporate distributions;

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partnerships and partnership distributions;

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trusts and trust distributions;

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co-operative and mutual societies;

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financial transactions;

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superannuation;

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life insurance;

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rules for particular industries and occupations (such as general mining, quarrying and petroleum mining, Australian films, primary production, and research and development);

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international aspects of income taxation;

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attribution of income; and

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anti-avoidance provisions.

Other specialist topics may be added to this list.

Collection and recovery provisions

The collection and recovery provisions will cover such topics as:

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the various income tax instalment systems (such as pay-as-you-earn, the prescribed payments and reportable payments systems, provisional tax and company tax instalments);

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withholding tax liability and collection;

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returns and assessments;

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Medicare levy and HECS collection; and

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how unpaid tax is recovered.

The collection and recovery provisions do not directly affect liability to tax. However, they are important aspects of the tax system that can apply to any taxpayer.

They will appear in the Act after the third layer, that is, after the specialist provisions.

Administration provisions

The administration provisions will come next. These include such topics as:

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general administration

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tax file numbers

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tax agents

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prosecutions and offences

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penalties

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record keeping and other obligations.

Like the collection and recovery provisions, the administration provisions do not directly affect liability to tax.

Definitions - the Dictionary

In the new Act, all defined terms will be listed in the Dictionary in clause 995-1. However, not all definitions will be located there, many definitions ( just-in-time definitions) will be located where they can best help to understand the material.

All defined terms (except some frequently used basic terms - see clause 2-15) will be identified by an asterisk appearing at the start of the term. However, defined terms will only be asterisked the first time they occur in each subsection. Any subsequent occurrences in that subsection will not generally be asterisked. The footnote that goes with the asterisk will appear at the bottom of each page and will refer you to the Dictionary starting at clause 995-1.

Definitions in the Bill will only apply to the Bill and not to the 1936 Act unless the 1936 Act expressly adopts them.

A defined term will be used in one sense only throughout the new law. If a different meaning is intended, another term will be used. This has prompted some standardising of terms.

Sections, Divisions, Parts and Chapters

While the conceptual structure of the new law can be explained in terms of a pyramid, all the material in it will be presented in a normal publishing format. This will allow for a convenient presentation and grouping of information for use in written or screen based form.

The existing tax law breaks material down into sections, which are the basic unit of information. Each section deals with one main idea only. Related sections are then grouped into Divisions. In turn, related Divisions are grouped together as Parts.

The new law will maintain sections, Divisions and Parts. However, to better support the structure, it will introduce a higher level of grouping of material at the chapter level. There will be six chapters in the new law:

Chap 1:

Introduction and core provisions

Chap 2:

Further liability rules of general application

Chap 3:

Specialist rules affecting liability for income tax

Chap 4:

Collection and recovery of income tax

Chap 5:

Administration

Chap 6:

The Dictionary.

Orientation material

Plain language alone will not make the law sufficiently accessible and understandable to readers. The new Act will use additional features to help communicate its messages and requirements.

Special orientation material will help give readers (particularly new readers) an overview of important parts of the new law and direct them to their location. The material will help readers identify, accurately and quickly, provisions relevant to them. More experienced readers can by-pass introductory material.

This material will complement the operative provisions of the law, but will have a very limited legal status.

Orientation material falls into 2 main categories: Guides and Signposts.

Guides

Guides consist of sections under a heading which makes clear that those sections are there to guide readers about what is contained in the following Subdivision, Division etc. This helps readers to decide whether that part of the law is relevant to them.

Theme statements

Theme statements will be brief statements expressing the essence of the provisions that follow them. Theme statements will be easily found, as they will be boxed and appear under headings such as What this Division is about.

Theme statements are intended to be meaningful without requiring reference to the text of the law. Considered in isolation, they will make sense, but the law will not rely on them for their operation.

They will be accurate statements, but it will not be their function to explain the law fully. Nor will they include material which is repeated in the ensuing text. Their purpose is to put readers in the picture sufficiently for them to decide whether to read on.

Theme statements will be useful in other ways:

•

they will be stepping stones which readers can use to build up an overall picture of the law;

•

they will help reveal the structure of an area of law; and

•

they will help show the relationship between the purpose or object of the law and its operative provisions.

Other material in Guides

Guides may, but will not always, include the following features:

•

purpose or object statements, particularly if there is one in the existing law;

•

a table of contents, comprising descriptive section headings;

•

flow charts and other diagrams; and

•

additional narrative text, to help bridge any cognitive gap between a theme statement and any significant concepts and operative provisions.

Many areas of the law will not need all these features. The extent of each guide will reflect factors such as the degree of difficulty of the area and how widely it applies.

Legal status of Guides

Guides will be part of the Act, but are separated from the operative provisions. In interpreting an operative provision, a Guide may be considered only:

•

in determining its underlying purpose or object;

•

to confirm that the provision's meaning is the ordinary meaning conveyed by its text, taking into account its context in the Act and the purpose or object underlying the provision;

•

in determining the provision's meaning if it is ambiguous or obscure; or

•

in determining the provision's meaning if the ordinary meaning conveyed by its text, taking into account its context in the Act and the underlying purpose or object underlying the provision, would lead to a result that is manifestly absurd or unreasonable.

As part of the Act, Guides can be amended by the legislature. If they were not part of the Act, they would in certain circumstances still be referred to in interpreting the operative provisions to which they relate. Under section 15AB of the Acts Interpretation Act 1901, consideration may be given to certain kinds of extrinsic material that is capable of helping to ascertain the meaning of a provision. However, if the Guides were not part of the Act, the Parliament could not readily amend them.

Signposts

The Bill is organised in layers to reflect the principle of moving from the general to the particular. There are signposts to help the reader move from one area of the law to relevant provisions at other levels. The signposts help the reader to navigate through the rules.

Signposts will be part of the Act. For example:

4-1 Who must pay income tax

Income tax is payable by each individual and company, and by some other entities.

A more specialised kind of signposting is the various checklists described in Chapter 4 of this Explanatory Memorandum.

Chapter 3 - The new numbering system

This chapter explains the new numbering system adopted in the Income Tax Assessment Bill 1996, and how that system will overcome problems with the present numbering system.

Overview of this chapter

This chapter discusses the new numbering system proposed for the new Income Tax Assessment Act.

Problems with the old numbering system

Amendments of the existing law have overloaded its numbering system, so that the Income Tax Assessment Act 1936 included section numbers such as 159GZZZZH. Numbers like this confuse and disorient readers, and waste their time in locating material.

These awkward results happen because of limitations caused by the existing structure of the law. Most new law affecting liability to income tax used to be inserted between sections 158 and 161 of the Income Tax Assessment Act 1936. More recently, new law has just been added to the end of the Act.

If the law was renumbered using the existing numbering system this would not provide sufficient flexibility to avoid the same numbering problem arising again over time. Consequently, the Bill adopts a new numbering system that has been carefully designed to minimise the possibility that the old problems will recur.

Aims of the new numbering system

The new numbering system sets out to meet the following ideals:

•

Each unit of law should have a unique number to identify it.

•

For any two numbers in the system, it should be immediately apparent which one is higher.

•

Numbers should be easy to read.

•

Numbers should be able to be said aloud without being ambiguous.

•

The system should flow naturally and be predictable.

•

Each number should identify the area of law to which it belongs.

•

It should cope well if a large amount of new material is inserted later.

Main features of the new numbering system

Section numbers will have two components

Section numbers will have two components, separated by a dash. The first component will be the number of the Division in which the section is located. The second component will be the number of the section within the Division.

Example:

Section 601-22 shows that it is a section of Division 601.

Each Division will number its sections, starting from one.

Example:

The first section of Division 600 will be section 600-1.

The first section of Division 601 will be section 601-1.

Section numbers will be separated with gaps. Except for the first section in a Division, section numbers will run in multiples of 5, to allow new sections to be inserted without using alpha characters.

Example:

43-1, 43-5, 43-10.

Part and Division numbers will run in sequence, with gaps

Unlike section numbers, Part and Division numbers will run in sequence through the new law. They will not start again, at one, with the start of each new Part (or chapter).

After the last Division in a Part, or the last Part in a Chapter, the new law will usually leave a gap (of five numbers) in the sequence of Division and Part numbers. By keeping numbers in reserve, when new Divisions and Parts are inserted they will not interrupt the flow by extensively using combinations of numbers and alpha characters as the present law does.

Part numbers will identify chapter numbers

Part numbers will identify the Chapters in which the Parts are located.

Example:

Part 5-10 means Part 10 of Chapter 5.

Clearer cross references

In the new law, cross references to other provisions of the law will usually specify the heading or title of the provision, as well as its number.

Example:

See section 10-5 (List of provisions about assessable income).

Details of the new numbering system

Chapters will have a single component number.

Example:

Chapter 5.

Parts will be numbered in components separated by a dash. The first number will refer to the Chapter, the second will refer to the Part.

Example:

Part 5-10 shows that it is Part 10 within Chapter 5.

Divisions will have a single component number.

Example:

Division 600.

Subdivisions will be numbered in components separated by a dash. The first component is the number of the Division. The second component is a capital letter, identifying the Subdivision, in the sequence A, B, C, etc.

Example:

Subdivision 5-A is Subdivision A of Division 5.

Sections will have two components, separated by a dash. The first component will be the number of the Division in which the section is located. The second component will be the number of the section.

Example:

Section 601-2 is the second section in Division 601.

There will be no change to the way subsections, paragraphs and sub-paragraphs are numbered. However:

•

there will be fewer subsections in a section;

•

paragraphs will be less frequently divided into subparagraphs; and

•

sub-subparagraphs will not be used.

How the numbering system will cope with new material

The Bill leaves gaps in the sequence of both Division and section numbers. That will allow space for parts of the law that will be rewritten in later stages as the new Act is built up progressively.

Gaps will also be left, deliberately, to cope with the insertion of extra material in the future without having to clutter the law with Division and section numbers that also include multiple letters (like section 160ARXA).

Gaps will not guarantee against eventually needing recourse to section and Division numbers that include letters, but they will significantly postpone this eventuality and the possible incidence of it.

The following examples illustrate how new material could be inserted in the law if required:

Chapter 4 - Core Provisions

This chapter explains the core provisions of the Income Tax Assessment Bill 1996.

Overview of this chapter

This chapter discusses Chapter 1 of the Income Tax Assessment Bill 1996 - Introduction and Core Provisions.

Chapter 1 is a major innovation in the way income tax law is presented. It sets a logical starting point in understanding the law, especially for those coming to it for the first time. It has three primary features which are not found in the existing law.

•

A guide to this Act (Part 1-2) will give readers (particularly first time readers) a helpful overview of the law, and how to come to grips with it.

•

The core provisions (Part 1-3) will bring together, in one place, the main rules about how to work out your income tax position.

•

Checklists (Part 1-4) will help fill in the detail of what is covered by general concepts used in the core provisions and are a valuable new point of reference.

A. Explanation of introduction and core provisions

Introduction: Effect of changes in wording [Part 1-1]

The Income Tax Assessment Act 1936 is complemented by a large body of judicial precedent and Commissioner rulings that have evolved over almost 60 years, since the Act was introduced. It is important that the value of this material not be lost, especially as most provisions are being rewritten without any intention of changing their effect.

This issue has already been addressed, at a general level for all Commonwealth legislation, by the introduction of section 15AC of the Acts Interpretation Act 1901. That section provides that, if:

•

legislation is rewritten; and

•

the rewritten law appears to express the same ideas as in the old law; and

•

the rewriting of the law is done to use a simpler or clearer style;

then the meaning is not to be taken to have changed merely because different words are used in the new law.

The Bill contains a provision to the same effect as section 15AC. The reason for including it in the Bill when it is already in the Acts Interpretation Act 1901 is to draw it directly to the reader's attention and give emphasis to the essential nature of the rewrite objectives.

Public and private rulings

The note at the end of clause 1-3 mentions provisions that would be introduced into the Taxation Administration Act 1953 by this package of Bills. Proposed sections 14ZAAM and 14ZAXA of the Taxation Administration Act 1953 (discussed in Chapter 12 of this Explanatory Memorandum) will preserve the operation of public and private rulings on the old law to the extent that the new law expresses the same ideas.

A guide to this Act [Part 1-2]

The introductory Guide aims to help readers in 2 ways:

•

Division 2 will tell you how to use the new Act, which has a number of distinctive features not found in existing tax laws; and

•

Division 3 will tell you what the Act is about.

How to use this Act [Division 2]

The Guide will tell you:

•

how to find your way around the Act, using the navigation tools and other techniques being supplied to assist readers;

•

how the Act is arranged in a logical structure that resembles conceptually a pyramid;

•

how to identify defined concepts and terms, and find the definitions;

•

how to follow the new numbering system; and

•

what legal status explanatory features will have.

Most significant areas of the new law will have their own guides to orient readers before they reach the operative provisions. Guides are not operative provisions and will have a strictly limited legal status. That status is formally set out in Chapter 6 of the Bill - The Dictionary.

What this Act is about [Division 3]

Here you will get a general overview of what the income tax law is about.

It will explain that income tax law deals not just with income tax, but also with other taxes (such as the Medicare levy and the various withholding taxes eg. on interest and on dividends).

The introductory Guide poses 7 key questions that most taxpayers will need answers to, and tells you where to find those answers.

The core provisions [Part 1-3]

Introduction

This is the heart of the Income Tax Assessment Bill 1996. First time readers and others needing to become familiar with it would enter the law at this point. The Core will give them a bird's eye view of what the income tax law requires - it tells them whether they may have to pay income tax and, if so, how to work out how much. It will then signpost them to more detailed parts of the law that deal with what their circumstances require.

Who must pay income tax? [clause 4-1]

It is made clear that every individual and company with a taxable income for an income year potentially is liable to pay income tax on that income. The amount of tax could prove to be nil (eg. your taxable income could be below the tax-free threshold or your offsets (rebates) could exceed the tax payable on your taxable income).

Some other entities may also be liable to pay tax. The new law will specifically list, in one place, all of those entities [clause 9-1] . The existing law does not do this.

How much income tax must you pay? [clause 4-10]

The rewritten law will include an explicit statement of the general formula for determining the amount of income tax that must be paid (if any). Under the existing law, the elements of the formula are scattered throughout the Act.

A preliminary step is to determine the period for which tax may be payable.

The period

Income tax is payable on an annual basis, for the year ending on 30 June (the financial year). Tax is generally worked out by reference to the amount of taxable income in a particular period, called the income year. The financial year and the income year will usually be the same. This is the case with most individual taxpayers. However, the income year and the financial year can be different periods.

For companies, the income year is the year before their financial year (for example, tax would be payable for the 1996-97 financial year based on the taxable income of, and rates applying to, the 1995-96 financial year).

The Commissioner can allow companies and other taxpayers to adopt an income year ending on a day other than 30 June, referred to as a substituted accounting period. Substituted accounting periods are sometimes adopted to align a subsidiary company's assessment period with the accounting period of its parent (perhaps an overseas company).

The formula

Your income tax is generally calculated by applying the tax rates to taxable income. From that basic income tax liability tax offsets are deducted. The result is the income tax to be paid for the financial year:

Income tax = Taxable income x rates - Tax offsets


Rates

The rates at which tax is payable are set out in the Income Tax Rates Act 1986. More than one rate may have to be applied to taxable income.

For individuals who are Australian residents, there is a progressive rate system:

•

for income up to a certain limit there is no rate of tax (the income is tax free); and

•

for income above the limit, progressive rates apply across particular income bands.

For companies, income tax is imposed at a flat rate.

Other entities are subject to tax at different rates again (eg. trustees of superannuation funds) and there are special rates that apply to particular kinds of income (eg. assessable income that is diverted under certain tax avoidance arrangements).

Offsets

Offsets is a new term combining what are known as rebates and credits in the existing law. Rebates and credits both have the effect of reducing basic income tax liability.

An offset reduces a basic income tax liability. It is distinguishable from a deduction in that it reduces tax directly (rather than reducing taxable income).

If offsets exceed the basic income tax liability, there is generally no entitlement to a refund. Some offsets can be carried over to later years to reduce a tax liability in those years.

Taxable Income [Clause 4-15]

Income tax is generally calculated on taxable income. In most cases, taxable income is simply the difference between total assessable income and total deductions:

Taxable income = Assessable income - Deductions


If total deductions exceed total assessable income:

•

there is no taxable income; and

•

there may be a tax loss that can be deducted in a later year.

Exceptions

There are several cases where taxable income is worked out in a different way. The Bill will, for the first time, list these cases in the one place [subclause 4-15(2)].

For example, a company whose ownership changes during the income year may have to calculate its taxable income in a different way [subdivision 165-B, discussed in Chapter 7 of this Explanatory Memorandum] .

Assessable income and exempt income [Division 6]

Assessable income is one of the main components in calculating taxable income. Exempt income is not assessable income. The following diagram shows how to work out whether an amount is assessable income, exempt income or neither.

Diagram showing how to work out assessable income and exempt income

Ordinary income

The diagram starts by asking whether an amount is ordinary income.

Ordinary income is a succinct label for income according to ordinary concepts, which is a major concept in the present law. The courts have developed principles for determining what is ordinary income. However, there is no complete set of rules for determining that question.

Some amounts are clearly ordinary income (for example, salary, wages and interest). Often, whether an amount is ordinary income has to be determined by applying the court-developed principles to the facts of a particular case. (That will remain the position.)

The law contains provisions that modify how some ordinary income is treated. They might affect when it is assessed, how much is assessed or even to whom it is assessed. However, those provisions do not alter the fact that those amounts are ordinary income.

What is statutory income?

If an amount is not ordinary income, it may be statutory income. Statutory income is an amount the law specifically includes in assessable income (for example, section 160ZO of the Income Tax Assessment Act 1936 includes net capital gains in assessable income).

If an amount is included by such a provision, and is not ordinary income, the amount is statutory income [subclause 6-10(2)] .

To make it easier for readers to work out if a particular amount is statutory income, the new law will list the specific provisions that include an amount in assessable income [clause 10-5] . Initially, the items in the list will refer mainly to provisions in the Income Tax Assessment Act 1936. The references will change progressively to references to the new Act as the existing Act is rewritten.

The list will also contain provisions that vary:

•

when an amount of ordinary or statutory income is assessable;

•

to whom an amount of ordinary or statutory income is assessable; and

•

how much of an amount of ordinary or statutory income is assessable.

If an amount is neither ordinary income nor statutory income, it cannot be assessable income or exempt income.

The existing Act does not expressly distinguish the concepts of ordinary income and statutory income, although they are implicit in the Act. The main reason for the Bill making this distinction is that the rules about what statutory income is exempt, and what ordinary income is exempt, are different. It will also provide convenient labels where only one kind of income is relevant to particular provisions of the law.

The Bill does not use the term 'income' because of confusion surrounding its meaning in different provisions of the present law. Therefore, 'income' will appear as part of compound expressions eg. income tax and ordinary income.

Residence and source

The existing law is applied so that both ordinary income and statutory income are only assessable income if they have a sufficient link to Australia. The rules are:

•

for a resident of Australia, all ordinary and statutory income is assessable (including amounts from sources outside Australia), unless it is exempt; and

•

for a non-resident, all ordinary and statutory income from Australian sources is assessable, unless it is exempt.

This is less clearly expressed in the terms of the existing Act.

Most ordinary and statutory income from foreign sources is not assessable to foreign residents. However, there are limited cases where an amount is assessed on a specifically expressed basis (eg. the capital gains and losses provisions bring to account gains and losses on the disposal of a 'taxable Australian asset' rather than on Australian-sourced capital gains and losses).

Exemptions and exclusions

The diagram also indicates that, just because a provision includes an amount in assessable income, it doesn't necessarily mean that the amount will be assessable:

•

Another provision might exempt it. For example, a dividend paid out of foreign-sourced profits might be statutory income but it is made exempt for some people. Exempt income is discussed in more detail below.

•

There are a few provisions that expressly exclude an amount both from assessable income and exempt income (eg. sub-clause 170-25(1) which concerns payments received for the transfer of a tax loss).

Income that is not received [Subclauses 6-5(4) and 6-10(3)]

A generally accepted principle of tax accounting is that an amount accountable on a receipts basis can be your income, even if it has not been actually received, as soon as it is applied or dealt with in any way on your behalf or as you direct. In other words, an amount is treated as received as soon as the taxpayer gets benefit from it. This rule applies to both statutory income and ordinary income for amounts accounted for on a receipts basis. It is not limited to cases where a particular provision uses the word 'received' (eg. it can apply where a provision uses the word 'derived' and the amount in question is properly accounted for on a receipts basis).

The Bill will explicitly state this principle, confirming what is generally accepted as one of the ordinary principles of tax accounting. Subclauses 6-5(4) and 6-10(3) will only have the effect of treating amounts as ordinary or statutory income when they are dealt with on your behalf or as you direct if they have all the attributes of ordinary or statutory income respectively, except that they have not been received.

Although subclause 6-5(4) is worded differently from subclause 6-10(3), the two provisions operate in the same way. Subclause 6-5(4) uses the word derived to describe when an amount with an income character comes home to you and thus becomes ordinary income. Subclause 6-10(3) does not use derived because the various timing tests for statutory income are generally different.

Example: On your instructions, your employer pays part of your wages to a health fund to meet your liability to pay health insurance contributions to the fund. You are taken to have received the amount when your employer paid it to the fund and, therefore, to have derived it as ordinary income then.

The Bill doesn't exclude any constructive receipt principle which extends beyond the rule set out in the subclauses.

There is a view that the comparable present provision, section 19 of the Income Tax Assessment Act 1936, has no operation because of defective drafting. This view interprets the provision as deeming something to be derived as income only if it is already income. But to be income, an amount must already have been derived. The new provisions will apply to any amount that would be ordinary or statutory income except that the taxpayer has not received it.

Relationships among provisions about assessable income [Clause 6-25]

An amount of income may be included in assessable income by more than one provision of the law.

Under the existing Act, there are no express rules about what happens in such cases, although there is a presumption against double taxation.

The new law will specifically state the rules for when this happens.

If an amount falls within 2 or more provisions, it can only be assessable once. In such a case, the amount would be assessable under the most appropriate provision. You would determine the most appropriate provision taking into account, where relevant, the rule about the effect of specific assessable income provisions on ordinary income (see discussion about subclause 6-25(2) below).

If an amount is both ordinary income, and included in your assessable income by a specific provision, the specific provision will apply rather than the court-developed rules about ordinary income. However, this will not be the case if a contrary intention is apparent [subclause 6-25(2)].

An example of a contrary intention is in the calculation of a capital gain, in a case where the disposal of an asset would also produce ordinary income assessable under clause 6-5. In that case, section 160ZA of the Income Tax Assessment Act 1936 provides that the rules about ordinary income prevail, so that a capital gain is reduced by the amount that is assessable under the ordinary rules. Thus, the capital gains provisions only have a residual operation.

What amounts are exempt income? [clause 6-20]

The rewritten law reflects the existing law in identifying what income is exempt. That is, an amount will be exempt income if:

•

it is ordinary or statutory income and a provision in the Bill expressly makes it exempt; or

•

it is ordinary income and a provision in the Bill excludes it (expressly or by implication) from being assessable income.

Under the existing law, it is not clear whether an exemption provision can apply to statutory income as well as ordinary income. The Bill makes it clear that an exemption provision applies to both, in accordance with the way the law is presently administered.

Also under the existing law, if an amount of ordinary income is excluded from being assessable income, it is exempt income. It is silent as to the position with statutory income. The Bill makes it clear that, if an amount of statutory income is excluded (expressly or by implication) from being assessable income, it is not exempt income. The result will be the same whether an amount is included as assessable income and then excluded or is never made statutory income at all.

An example where ordinary income is expressly excluded from assessable income is section 110CA of the Income Tax Assessment Act 1936. This section states that the assessable income of a life assurance company does not include income attributable to the investment of premiums in respect of life assurance policies received from constitutionally protected funds.

An example where an amount of ordinary income is excluded from assessable income by implication is section 27C of the Income Tax Assessment Act 1936. Here only 5% of the pre-July 1983 component and 5% of the concessional component of an eligible termination payment are included in assessable income. The remaining 95% of the payment is excluded by implication from being assessable income.

Consequences of an amount being exempt income

There are several important consequences of an amount being exempt income:

•

It is not assessable income and is, therefore, tax free [subclause 6-15(2)] ;

•

It may reduce the deduction allowable for a tax loss [clause 36-10] ;

•

A loss or outgoing incurred in deriving the income is not allowable as a general deduction [subclause 8-1(2)] ;

•

The disposal of an asset used only to produce exempt income does not produce a capital gain or loss [sections 160Z(6) and 160Z(9)(c) of the Income Tax Assessment Act 1936] ;

•

The disposal of an asset owned by a taxpayer, whose total income is exempt, does not produce a capital gain or loss [sections 160Z(8) and 160Z(9)(a) of the Income Tax Assessment Act 1936] ;

•

Exempt income is taken into account in working out the income tax payable on income from an approved overseas project [section 23AF of the Income Tax Assessment Act 1936] or on income earned in overseas employment [section 23AG of the Income Tax Assessment Act 1936] .

Not all of the listed consequences apply to every amount of exempt income. For example, most fringe benefits are exempt income [subsection 23L(1) of the Income Tax Assessment Act 1936] but do not reduce a deduction for a tax loss [subclause 36-20(3)] .

Relationship between assessable income and exempt income

Assessable income and exempt income are mutually exclusive [clause 6-15].

Some provisions make ordinary or statutory income neither assessable income nor exempt income [see, for example, section 121EG of the Income Tax Assessment Act 1936 which deals with 'offshore banking units'] .

In the absence of such an express provision, ordinary and statutory income will either be assessable income or exempt income.

Deductions

To work out the amount of your taxable income, you reduce your assessable income by your deductions.

These are all of the amounts that:

•

the general deduction provision [clause 8-1] allows you to deduct; or

•

a specific deduction provision allows you to deduct;

and that no other specific provision prevents you from deducting.

The general deduction provision [clause 8-1] is the first place to go to find out if a particular loss or outgoing is deductible. It essentially restates subsection 51(1) of the Income Tax Assessment Act 1936. Interpretation of that provision has evolved over many years in the courts. The Bill rewrites subsection 51(1) with a clearer structure but does not disturb its language and is not intended to affect previous interpretations.

If an amount is not deductible under the general deduction provision, it may be deductible under a specific provision. A specific provision may also prevent an amount from being deducted under the general deduction provision or may vary the amount that would be deductible. The new law will include a checklist of provisions about specific deductions to help identify these situations with more certainty than is currently possible [clause 12-5] .

Some amounts may satisfy both the general deduction provision and one or more specific deduction provisions. In such cases, you cannot deduct the same amount twice. It will be deductible under the most appropriate provision.

If an amount is deductible under both the general deduction provision and a specific deduction provision, in the absence of a contrary intention, the specific provision would generally be the appropriate one to apply.

Checklists [Part 1-4]

The checklists are a new feature designed to help readers quickly find their way to the operative provisions they need to know about. When the rewrite is finished, these provisions will generally be in either Chapter 2 of the Bill (Liability rules of general application) or Chapter 3 (Specialist liability rules). Until the completion of the rewrite, some of these provisions will be in the Income Tax Assessment Act 1936.

The two lists in Division 9 set out the kinds of entities that:

•

are subject to income tax and the provisions which make them so [clause 9-1] ; and

•

calculate income tax by reference to something other than taxable income and the provisions which require this [subclause 9-5(1)] .

The other six checklists in the Bill catalogue provisions that:

•

include an amount in assessable income or vary when, how much of, or to whom, an amount is assessable [clause 10-5] ;

•

exempt all ordinary and statutory income of a taxpayer because of who the taxpayer is [clause 11-5] ;

•

exempt specified types of ordinary or statutory income, no matter who the taxpayer is [clause 11-10] ;

•

exempt specified types of ordinary and statutory income if the taxpayer falls within a special category [clause 11-15] ;

•

allow a deduction or vary a deduction [clause 12-5] ; and

•

allow an amount as a tax offset [clause 13-1] .

The lists are intended to be comprehensive. They are not operative rules but are provided as a form of navigational help.

B. Consequential amendments

Exempt income of non-residents [schedule 1, item 11 of the Income Tax (Consequential Amendments) Bill 1996]

Paragraph 23(r) of the Income Tax Assessment Act 1936 provides that 'income derived by a non-resident from sources wholly out of Australia' is 'exempt from income tax'. The 1936 Act contains a few provisions which assess an amount on a basis not strictly expressed as having an Australian source eg. the capital gains and losses provisions bring to account gains and losses on the disposal of a 'taxable Australian asset' rather than on Australian-sourced capital gains and losses.

Under the current law, paragraph 23(r) does not exempt these amounts. It is merely a corollary of the general income provision, subsection 25(1), which assesses non-residents on all their income from sources in Australia.

The core provisions will not change this position. However, because of the rewording of the source rules for assessable income of non-residents in subclauses 6-5(3) & 6-10(5), paragraph 23(r) on its face would no longer perfectly complement these rules.

Consequently, it has been rewritten with additional words in parenthesis clarifying that the paragraph does not exempt income that a specific provision assesses on a basis other than having an Australian source.

Chapter 5 - Capital Allowances

This chapter summarises the different kinds of capital allowances, and their main features, and explains common rules that the Income Tax Assessment Bill 1996 will apply to some capital allowances.

Overview of this chapter

This chapter deals with the general rules for deductions for capital allowances.

The first part of the chapter summarises the rules for capital allowances as it is proposed they will appear in Divisions 40 and 41 of the Income Tax Assessment Bill 1996.

The second part explains the changes that the Bill proposes to make to the content of the law.

These Divisions bring together provisions on capital allowances which are scattered throughout the present Act.

A. Summary of the new law

Guide to Divisions 40 and 41

What does the Division do?

Division 40 will explain what a capital allowance is and will summarise the key features of all capital allowances.

Common rules

Division 41 will set out three common rules that apply to all capital allowances, unless specifically excluded:

•

Common Rule 1 - Roll-over relief for related entities

•

Common Rule 2 - Non-arm's length transactions

•

Common Rule 3 - Anti-avoidance provision relating to the ownership of property.

What a capital allowance is [Subdivision 40-A]

A capital allowance is

A deduction for certain types of capital expenditure that you can write off, either immediately or over a period of years.

Who can deduct?

Some allowances are available to taxpayers generally. Others are available to specific industries or for specific activities.

How much can you deduct?

Divide your expenditure by the number of years over which you can write it off.

Balancing adjustments

Some capital allowances require you to do a balancing adjustment if property is disposed of, lost, destroyed or no longer used for a qualifying purpose.

What is a balancing adjustment?

A balancing adjustment is a means of ensuring that the total amount you write off for property corresponds to your actual capital loss over the same period.

The adjustment is worked out by comparing the value of the property at the time of the disposal, loss or destruction with the written down value of the allowance. The written down value is the remaining expenditure in relation to the property which you are yet to claim.

If you get more for it than the written down value, the difference (up to what you have received in deductions) is included in your assessable income. If you get less, the difference is deductible.

Summary and finding table [Subdivision 40-B]

Summary Table

A table in this Subdivision summarises the key features of all capital allowances. It tells you:

•

what expenditure qualifies

•

who may claim it

•

how long the write off period is

•

what happens on disposal of the property.

It shows where the operative provisions are in the law.

Common Rules for Capital Allowances [Division 41]

Common rules

There are rules which are common to some capital allowances.

They also apply in a modified form to other capital allowances - see Chapter 8 of this Explanatory Memorandum.

Summary Table

A table in the Guide to this Division identifies which common rules apply to capital allowances that have been rewritten and included in this Bill. It also identifies when the rules apply in a modified form.

Common Rule 1 - Roll-over relief for related entities [Subdivision 41-A]

The rule is

If property is disposed of, a balancing adjustment can be deferred in certain circumstances. This is called roll-over relief.

Roll-over relief is available if

•

Under the capital gains provisions where property is disposed of in the following circumstances:

-

on marriage breakdown

-

by an individual to a wholly owned company

-

from a partnership to a wholly owned company of the partners

-

between related companies.

•

There is a change in the ownership due to change of partnership interests.

What is the effect of roll-over relief?

•

No balancing adjustment is required for that disposal.

•

The transferor loses any deduction entitlement for expenditure on the property.

•

The transferee gains the deduction entitlement (subject to satisfying any rules of deductibility).

What happens if there is a subsequent disposal and roll-over relief does not apply?

In calculating the balancing adjustment, the transferee will be treated as:

•

acquiring the property for an amount equal to the expenditure incurred by the transferor;

•

having been allowed the deductions the transferor has already been allowed.

Common Rule 2 - Non-arm's length transactions [Subdivision 41-B]

The rule is

If parties to a transaction do not deal with each other at arm's length and, as a result:

•

expenditure claimed as a deduction is greater than the market value of what that expenditure is for, or

•

the amount received on disposal of property for which a capital allowance has been claimed is less than the market value of what that amount is for;

then the expenditure or the amount received is adjusted to the market value.

Common Rule 3 - Anti-avoidance provisions relating to the ownership of property [Subdivision 41-C]

The rule is

Persons entitled to a capital allowance for property they do not own are treated as the owners for the purposes of applying anti-avoidance tests in section 51AD and Division 16D of the Income Tax Assessment Act 1936.

B. Discussion of changes

Division 40 Overview of capital allowances

Change

This Division explains what a capital allowance is and summarises the main features of each capital allowance in the law.

Explanation

The existing law contains many kinds of capital allowances, all of which are dealt with separately. This Division will readily identify all the available capital allowances for the convenience of readers. It will also summarise the key features of each capital allowance, for easier understanding.

Division 41 Common rules for capital allowances

Change

Some common rules that can apply to a range of capital allowances are being brought together.

Explanation

Under the existing law, some rules apply in substantially the same way to various capital allowances. This causes unnecessary duplication and length. Adopting common rules will eliminate that duplication and make the law easier to understand.

New rules applying to roll-over relief for related entities

Clause 41-30 What is the effect of the roll-over on the transferor's and transferee's entitlement to a deduction?

This clause will explain the effect of roll-over relief on transferors and transferees of mining property.

Change

This clause streamlines the present detailed rules which apply for roll-overs about capital allowances for the mining and quarrying industries.

Explanation

This will be the operative section for roll-over relief for capital allowances. For the moment the change applies only to the mining and quarrying industries but in future it is expected to apply more broadly to other capital allowances.

The effect of this section is to transfer entitlements to deductions from transferors to transferees. Transferors give up deductions in the year of the transfer and subsequent years.

Transferees are treated as if they had incurred the original expenditure. They must also satisfy the capital allowance rules when seeking deductions.

Chapter 6 - General Losses

This chapter summarises the rewritten rules allowing deductions for losses that apply to taxpayers generally, and explains the changes the Income Tax Assessment Bill 1996 will make to these rules.

Overview of this chapter

This chapter deals with the general rules about losses.

The first part of the chapter summarises the losses rules that apply to taxpayers generally as they are proposed to be rewritten by clause 26-55, Division 36 and Subdivision 375-G of the Income Tax Assessment Bill 1996 .

The second part explains changes that the Bill proposes to their content.

The existing law on general losses is contained in sections 79C, 79E and 79F of the Income Tax Assessment Act 1936.

This summary is to orient readers to how the new law is structured and expressed. As these provisions have been in the law for some time, there is no need for a detailed exposition. An explanation is given of changes proposed to the general losses provisions.

A. Summary of the new law

Tax losses of earlier income years [Subdivision 36-A]

What is a tax loss?

A tax loss is the excess, in a year, of any deductions over the sum of assessable income and net exempt income.

When, and how, can a tax loss be deducted?

In a later year:

•

first, from any net exempt income;

•

then, from any assessable income.

Losses are deducted in the order incurred.

Net exempt income is

Exempt income (other than certain income that has been exempted so as to prevent double taxation), reduced by expenses incurred in deriving that income.

Effect of you becoming a bankrupt [Subdivision 36-B]

The general rule is

You cannot deduct a tax loss incurred before you became bankrupt (or were released from a debt under a bankruptcy law).

Exception: the rule does not apply if

You subsequently pay a debt that was taken into account in determining the amount of such a loss.

You can deduct so much of the amount repaid as does not exceed the amount of the loss.

However, if the loss was a film loss:

•

the debt must be incurred in deriving assessable film income or exempt film income; and

•

the amount you can deduct is limited to the amount of the film loss.

Film losses [Subdivision 375-G]

The general rule is

A film loss is deductible, in a later year, only from:

•

first, net exempt film income;

•

then, net assessable film income.

Film losses are deducted from film income ahead of other losses (overriding the general rule that losses are deducted in the order incurred).

What is a film loss?

A film loss is the film component of a tax loss. A tax loss has a film component if film deductions exceed the sum of assessable film income and net exempt film income.

The amount of the film component is the excess up to, but not exceeding, the amount of the tax loss.

Limit on certain deductions [clause 26-55]

The general rule is

The following deductions cannot create or add to a tax loss:

•

gifts;

•

promoters recoupment tax;

•

development allowance of a leasing company; and

•

superannuation contributions of self-employed persons and unsupported employees.

Exception to the rule

If a taxpayer is entitled to deductions under the mining and quarrying provisions, the deductions listed above may cause surplus mining and quarrying deductions to create a loss if the taxpayer so elects.

B. Discussion of changes

Clause 26-55 Limit on certain deductions

This clause will limit the amount that can be claimed for certain deductions, so that they cannot, as a general rule, create or add to a loss.

1. Change

The deductions that cannot contribute to a tax loss will be identified, and dealt with, in the same place and on the same basis. This will give a more generous treatment to the development allowance of a leasing company.

Explanation

The rule that the development allowance of a leasing company cannot create or add to a loss will now be subject to an exception to the extent that the leasing company is entitled to elective deductions under the mining and quarrying provisions.

2. Change

This clause will ensure that the limitation on certain deductions contributing to a loss does not apply to deductions that are also allowable under another provision of the law that is not limited in this way.

Explanation

Some deductions are allowable under two or more provisions of the law. The existing law that limits the deductions that can create losses does not recognise this possibility. However, the law is administered so that the limitation only applies if a deduction is allowable solely under deduction provisions that cannot contribute to a loss.

Clause 36-15 How to deduct tax losses

This clause will explain how tax losses of earlier years must be deducted.

Change

The clause will clarify that losses of an earlier year must only be offset:

•

against net exempt income remaining after allowing all deductions of the current year, (compared to simply requiring the earlier year losses be deducted from net exempt income of the current year); and

•

if assessable income exceeds deductions of the current year, against assessable income remaining after allowing all other deductions (compared to simply requiring the losses to be deducted from assessable income of the current year).

Explanation

The existing law could be interpreted as requiring:

•

deductions of the current year and a loss of a previous year to be offset against the same net exempt income,

and is not clear that:

•

prior year losses are to be deducted only from any assessable income remaining after all other deductions.

Clause 36-20 Net exempt income

This clause will define the term net exempt income. Tax losses of earlier years must be offset against any net exempt income.

1. Change

This clause will omit the exclusion, from net exempt income, of net exempt income from petroleum.

Explanation

This is a redundant reference. Prior to 1986, income from petroleum mined in Australia or Papua New Guinea was exempt if it was taxed in the country from which it was derived. This exemption was repealed when the foreign tax credit system was introduced.

2. Change

This clause will exclude, from net exempt income, employment fringe benefits that are subject to fringe benefits tax (FBT). These benefits will not have to be offset against losses.

Explanation

It is equivalent to double taxation of income to require that losses be offset against fringe benefits that have been taxed under the FBT law. Under the existing law, exempt foreign source investment income, which is exempted to prevent double taxation, is not required to be offset against losses. Excluding these benefits will remove an anomaly.

C. Date of effect

The new law will apply from 1 July 1996 and have effect for the 1996-97, and subsequent, income years. The application and transitional provisions relating to the proposed new law are contained in the Income Tax (Transitional Provisions) Bill 1996.

Substituted accounting periods

The new law is proposed to apply with effect from the beginning of the 1996-97 income year for all taxpayers, including those who have the approval of the Commissioner of Taxation to account for their income according to a year that commences other than on 1 July. For taxpayers whose 1996-97 income year commences before 1 July 1996, the new law would have effect from the commencement of their 1996-97 income years. For taxpayers whose 1996-97 income year commences after 1 July 1996, the new law would not have effect until the commencement of their 1996-97 income years.

D. Transitional arrangements

Tax losses and film losses of 1996-97 and subsequent income years [clause 36-100 of the Income Tax (Transitional Provisions) Bill 1996]

The amounts of tax losses and film losses of 1996-97 and subsequent income years will be determined under the new law. These losses will also be deductible under the new law.

Losses and film losses of 1989-90 to 1996-96 income years [clause 36-105 of the Income Tax (Transitional Provisions) Bill 1996]

Amounts of general domestic losses and film losses of the 1989-90 to 1995-96 income years will have been determined under the existing law. To the extent that these have not previously been deducted, they will be treated as tax losses and film losses deductible in the 1996-97 and later income years, under the new law.

Pre-1990 losses [clause 36-110 of the Income Tax (Transitional Provisions) Bill 1996]

Amounts of pre-1990 primary production losses will have been determined under the existing law. To the extent that these have not previously been deducted, they will be deductible in the 1996-97 and later income years, under the new law and subsections (9), (10) and (11) of section 80AA of the Income Tax Assessment Act 1936.

These primary production losses will be deductible in the order in which they were incurred, after film losses but before other losses of the same or any other loss year.

E. Consequential amendments to the Income Tax Assessment Act 1936 and other Commonwealth legislation

Losses and foreign income [Schedule 1, item 70 of the Income Tax (Consequential Amendments) Bill 1996]

Subsections 79E(5) and (6) of the Income Tax Assessment Act 1936 prevent losses from being offset against assessable foreign income unless the taxpayer so elects. This protection will be preserved by a new section 79DA to be inserted in the Income Tax Assessment Act 1936.

Chapter 7 - Company Losses

This chapter summarises the rewritten rules for company losses and explains the changes that the Income Tax Assessment Bill 1996 will make to those rules.

Overview of this chapter

This chapter deals with the rules about company losses.

The first part of the chapter summarises the company loss rules as they are to be rewritten by Divisions 165 and 175 and Subdivisions 170-A, 195-A and 975-W of the Income Tax Assessment Bill 1996 .

The second part explains the proposed changes in content.

The existing law on company losses is contained in sections 79EA, 79EB, 80A, 80B, 80DA, 80E and 80G and Subdivision B of Division 2A of Part III of the Income Tax Assessment Act 1936.

This summary is to orient readers to how the new law is structured and expressed. As these provisions have been in the law for some time, there is no need for a detailed exposition. An explanation is given of changes proposed to the company losses provisions.

A. Summary of the new law

Deducting tax losses of earlier income years [Subdivision 165-A]

The general rule is

A company cannot deduct a tax loss of an earlier year unless:

•

it had the same majority ownership throughout both the loss year and the income year; and

•

no person controlled the voting power in the company at any time during the income year who did not control it throughout the loss year;

or the company has continued to carry on the same business.

Has a company maintained majority ownership?

Ownership is measured by:

•

voting power;

•

rights to dividends; and

•

rights to capital distributions.

To determine majority ownership:

•

apply the primary test; or

•

if at least one company is a beneficial owner of shares in the company, apply the alternative test.

Alternatively, has the company continued to carry on the same business?

If majority ownership has changed or there is a change of control, the company must carry on throughout the income year the same business as it did immediately before:

•

the change in ownership that caused the failure to maintain majority ownership; or

•

the change in control of the voting power.

A company can deduct part of a tax loss of a prior year

If it would have been able to deduct it, had the period of the loss year in which the part loss was incurred been a whole year.

Working out the taxable income and tax loss for the income year of the change [Subdivision 165-B]

The general rule is

How a company works out its taxable income is affected if, during the income year it:

•

experienced a change in majority ownership or control of voting power;

•

did not maintain the same business; and

•

incurred a notional loss in a period whether before or after the change in ownership or control.

Has a company maintained majority ownership during the year?

Ownership is judged from the:

•

voting power in the company;

•

rights to its dividends; and

•

rights to its capital distributions.

There is a primary test of majority ownership and an alternative test for cases where one or more companies beneficially own shares in the company.

Has the company carried on the same business?

If majority ownership has not been maintained or there is a change of control, the company is required to carry on the same business throughout the rest of the income year as it carried on immediately before either:

•

the change that broke the continuity of majority ownership; or

•

the change in control of the voting power.

Did the company incur a notional loss in a period?

The income year when the change takes place is divided into periods set by when a change in majority ownership or control occurred (except where the same business is maintained after the change). A notional loss or notional taxable income is worked out for each period.

To work out a company's taxable income for an income year of change

Add: each amount of notional taxable income and any full year amounts as described below.

Subtract: any full year deductions (as described).

The amount remaining is the taxable income for the year.

Notional taxable income is

The excess of a company's assessable income attributable to a period over the deductions attributable to the period.

Full year amounts are

Amounts of assessable income derived by a company as a beneficiary of a trust, which are not reasonably attributable to a particular period.

Full year deductions are

Deductions of a company that are not attributable to a particular period.

To work out a company's tax loss for an income year of change

Add: each notional loss and any excess full year deductions.

Subtract: any net exempt income.

The amount remaining is the tax loss for the year.

A notional loss for a period is

Any amount by which deductions attributable to the period exceed assessable income attributable to the period.

Excess full year deductions are

The excess of allowable deductions for bad debts and certain prepaid expenses over the sum of notional taxable income amounts and full year deductions.

Net exempt income is

Exempt income (other than certain income that has been exempted in order to prevent double taxation), reduced by any expenses incurred in deriving that income.

If a company is a member of a partnership

The company's share of:

•

any notional net income of the partnership for a period is assessable income of the company for the period; and

•

any notional loss of the partnership for the period is a deduction of the company for the period.

The partnership's notional net income or notional loss for a period is

•

calculated in the same way as the notional loss or notional taxable income of the company, if the partnership and the company have the same income year;

•

if not, it is so much of the partnership's net income or loss of the income year as was derived during the period.

The company's share of notional net income or loss of the partnership for a period is

The amount that reflects the company's interest in the net income or loss of the partnership.

Tests for finding out whether the company has maintained the same owners [Subdivision 165-D]

The primary test is

There are persons who, between them at all times during a relevant period, beneficially own shares that carry more than 50% of the company's ownership rights.

The alternative test is

It is reasonable to assume, after tracing through interposed entities, there are individuals who between them at all times during the relevant period:

•

are able to control the voting power in the company;

•

would receive more than 50% of any dividend paid; and

•

would receive more than 50% of any distribution of capital.

Public companies

A public company is taken to have satisfied the primary test if it is reasonable to assume it has done so.

The primary and alternative tests are standard

They apply to the prior year and current year loss provisions.

The relevant period can be

For prior year losses: the loss year; the income year; or any intervening period between the loss year and the income year.

For current year losses: the income year.

Commissioner may treat shares as not being beneficially owned by a person if

An arrangement relating to the beneficial interest in the shares, or a right to them, was entered into to reduce a person's liability to income tax.

The same business test [Subdivision 165-E]

The same business test is satisfied if

Throughout the income year (for prior year losses) or the rest of the income year (for current year losses) the company carries on the same business as it did immediately before a change in majority ownership or control.

However it must not:

•

derive income from a business of a kind that it did not carry on earlier;

•

derive income from a transaction of a kind that it had not previously entered into in the course of its business operations;

•

commence a business or initiate a transaction in order to meet the same business test.

For the purpose of calculating the company's taxable income and tax loss for the year of change (see above)

Things that prevent a company from being taken to have carried on the same business as it carried on before are:

•

incurring expenditure in carrying on a business of a kind that it did not previously carry on;

•

incurring expenditure as a result of a transaction of a kind not previously entered into in its business operations.

Use of a company's tax losses or deductions to avoid income tax [Division 175]

For prior year losses the general rule is

The Commissioner can disallow a deduction for some or all of a tax loss if:

•

income is injected into a company because the tax loss is available (except where the continuing shareholders benefit); or

•

someone other than the company would obtain a tax benefit in connection with a scheme entered into because a deduction was available for the tax loss (except a person who beneficially owns shares in the company and for whom the benefit is fair and reasonable).

Who are the continuing shareholders?

These are the beneficial owners of shares in the company who are taken into account to see whether the company maintained majority ownership during the loss year and the income year.

The general rule does not apply if

Although the company fails to maintain majority ownership, it satisfies the same business test for the income year.

For current year losses the general position is

The Commissioner can disallow deductions if:

•

income is injected into a company because deductions are available (and the income does not benefit continuing shareholders);

•

losses or outgoings are loaded into the company because it has assessable income to absorb deductions against (except again where continuing shareholders benefit);

•

a person other than the company obtains a tax benefit from a scheme entered into because the company had incurred a loss or outgoing giving rise to the deduction (unless the person is a beneficial owner of shares in the company for whom the benefit is fair and reasonable); or

•

a person other than the company would obtain a tax benefit from a scheme entered into because the company had derived assessable income before the company incurred a loss or outgoing that gave rise to the deduction (again excepting a beneficial owner of shares for whom the benefit is fair and reasonable).

Who are the continuing shareholders?

Persons who beneficially own shares before and after the income or losses or outgoings are injected into the company.

Transfer of tax losses within wholly-owned groups of companies [Subdivision 170-A]

The general rule is

A resident company with a tax loss can transfer it to another resident company if the companies are members of the same wholly-owned group at all times during:

•

the income year in which the loss was incurred ;

•

the income year for which the tax loss is transferred; and

•

any intervening income year.

Effects of the transfer

The income company is taken to have incurred the loss in the year in which it was incurred by the loss company.

However, if the loss is transferred for the year in which it was incurred the income company is taken to have incurred the loss in the preceding year. This allows the income company to deduct the loss as though it were a loss of a prior year.

The income company must deduct the loss immediately.

The amount that can be transferred cannot exceed

•

the amount that the loss company could deduct, if it had sufficient income in the deduction year; or

•

that the income company can deduct without creating a loss for itself.

Order in which losses may be transferred

•

Tax losses (other than film losses) can only be transferred in the order in which they were incurred.

•

Film losses are transferred before other losses, in the order in which they were incurred.

Any payment for the loss (subvention payment)

•

is not assessable income or exempt income of the loss company; and

•

cannot be deducted by the income company.

The transfer agreement

A transfer can only take place by a duly made written agreement.

Wholly-owned group companies [Subdivision 975-W]

The general rule is

Two companies are members of the same wholly-owned group if:

•

one is a 100% subsidiary of the other; or

•

each is a 100% subsidiary of a third company.

A company is a 100% subsidiary of a holding company if

All its issued shares are beneficially owned by:

•

the holding company;

•

one or more 100% subsidiaries of the holding company; or

•

the holding company and one or more of its 100% subsidiaries.

Any companies that are 100% subsidiaries of another full subsidiary are also subsidiaries of the holding company.

A company is not a 100% subsidiary if

A person can affect the rights of the holding company in relation to the subsidiary.

Pooled development funds [Subdivision 195-A]

The general rule is

If a company is a Pooled Development Fund at the end of an income year for which it has a tax loss:

•

it can deduct the tax loss in a later income year only if it is a PDF throughout the later income year; and

•

it cannot transfer any of the tax loss to another company.

B. Discussion of changes

Removal of discretions

One of the aims of this rewrite of the law is to replace with objective criteria many of the discretions that the Commissioner of Taxation may exercise under the existing law, to more fully reflect the introduction of the self assessment system.

Where a discretion is being replaced with more specific criteria, that change is explained in the explanatory material on the new law. In many cases, however, the change will merely replace the rest of what the Commissioner considers to be reasonable with a simple test of reasonableness. In these cases, the explanatory material will only identify the clauses where such a change has occurred. In this Division, those clauses are 165-20, 165-55(3), 165-60(2), 165-80, 165-85, 165-90, 165-150(2), 165-155(2), 165-160(2), 165-165(2) and 170-25(1).

Losses of corporate taxpayers

Subdivision 165-A Deducting tax losses of earlier income years

This Subdivision will set out the conditions that a company must satisfy before it can deduct a tax loss incurred in an earlier year (a prior year loss).

Change

The Bill will separate out from the operative loss deduction provisions the tests for determining whether a company has maintained majority ownership or continued to carry on the same business.

Explanation

The tests are being standardised for both the current and prior year loss provisions. This structural change will not affect the application of the two tests and the outcome is the same as under the existing law.

Clause 165-12 Company must maintain the same owners

This clause will set out the conditions that must be satisfied in order for a company to be treated as maintaining the same majority ownership.

Change

When testing beneficial ownership in a company there are two measures. The second of these, the alternative test, will now automatically apply where one or more companies beneficially own shares in the company claiming the loss.

Explanation

Under the existing law, the alternative test applies for prior year losses only if:

•

the loss company requests the Commissioner to apply it; or

•

the Commissioner considers it reasonable to do so.

For current year losses, the existing law applies the alternative test in a similar way as now proposed.

The role of the Commissioner in the present law is inconsistent with the self-assessment system.

Clause 165-13 Alternatively, company must carry on same business

This clause will set out when a company must satisfy the same business test.

Change

It will clarify precisely when a change of beneficial ownership has occurred that results in a company not maintaining majority ownership.

Explanation

Broadly, the section will require a company to carry on the same business at all times during the income year as it carried on immediately before a change of beneficial ownership that results in it not maintaining its majority ownership.

The existing law does this less explicitly.

Clause 165-15 Same people must control the voting power, or company must carry on same business

This clause will provide that a prior year loss cannot be deducted if:

•

there is a change in control of the voting power in the loss company during the loss year or the income year; and

•

a reason for the change is to give someone a benefit or advantage under the Act.

Change

Even if there is a change of control of voting power, the loss company can deduct the loss if it satisfies the same business test.

Explanation

Under the existing law, if there is a change of control in the company's voting power, the same business test does not apply.

However, such a change generally precedes, or is part of, a change of beneficial ownership of shares that results in a company failing to maintain majority ownership. As the same business test already applies to this outcome, it should also apply where there is a change in control. It will simplify the law if both cases are subject to the same business test.

Subdivision 165-B Working out the taxable income and tax loss for the income year of the change (the 'current year loss provisions')

This Subdivision sets out how a company must calculate its taxable income and tax loss if:

•

majority ownership or control changes during a year; and

•

it does not satisfy the same business test.

1. Change

The tests for whether a company has maintained continuity of ownership or carried on the same business will be separated from the provisions that apply them.

Explanation

The change will enable the two tests to be stated once and drawn on for the purposes of both the current year loss provisions, and the prior year loss provisions.

The change in structure will not change the outcome from applying the tests.

2. Change

A company will not have to apply the current year loss provisions if it satisfies the same business test for a year in which there is a change in its majority ownership or control [paragraph 165-35(b) and subclause 165-40(2)] .

Explanation

Under the existing law, if a company experiences a change of majority ownership or control it has to apply the current year loss provisions even if it maintains the same business throughout the year. This involves complex calculations of income and losses of periods. Despite this compliance burden, the company's tax liability would be no different from what it would have been if the current year loss provisions did not apply.

The change will eliminate unnecessary application of the current year loss provisions.

3. Change

A further simplification is where a company is subject to more than one change in ownership during a year. In such a case a company will not be required to treat as separate, adjacent periods between which the company has continued the same business [subclause 165-45(4)] .

Explanation

Under the existing law, once the current year loss provisions apply, a company must account separately for each period that is separated by a change in majority ownership, regardless of whether the same business has been maintained between the periods. The Bill will treat what are, under the existing law, separate adjoining periods as a single period, if there is a change in majority ownership but not of business.

This will simplify accounting requirements where a company experiences more than one change of ownership but maintains the same business across one or more of the changes. The change will remove lengthy and complex provisions from the existing law. This will make it easier to know and apply the law.

As a result of this change, a company will not be able to set off a loss of a period against the income of a non-adjoining period where, following a change in majority ownership and a change of business, a restoration of the previous majority ownership takes place.

Clause 165-37 Who has a more than 50% stake in the company during a period

This clause will set out:

•

the criteria for determining whether a company has maintained continuity of ownership; and

•

whether the primary or alternative test is to be applied to determine the issue.

Change

The primary test will apply, where appropriate, in determining whether a company has maintained continuity of beneficial ownership for the purposes of the current year loss provisions.

Explanation

The existing law applies an equivalent of the alternative test which requires tracing through to the natural persons who are the beneficial owners of the shares.

The outcome will be the same under the rewritten provisions because the alternative test will be applied where one or more companies are beneficial owners of shares in the company.

The change helps standardise the continuity of beneficial ownership test.

Clause 165-50 Next, calculate the notional loss or taxable income for each period

This clause will identify whether a company has, for a period, a notional loss or notional taxable income.

Change

The Bill will specifically state that a company can calculate its income in the usual way if it does not have a notional loss for any period in a year.

Explanation

The existing law does not state that a company can work out its taxable income in the usual way if it does not have a notional loss.

It makes no difference to the taxable income of such a company whether it calculates its income in the usual way or under the current year loss provisions. However, it is far easier to calculate taxable income normally.

Clause 165-55 How to attribute deductions to periods

This clause will set out the rules for attributing deductions to periods within a year in which a company:

•

has a change in majority ownership or control; and

•

has not continued the same business.

Change

There will be a single rule that deductions in identified categories (called 'divisible deductions' in the existing law) be attributed to each period in proportion to the length of the period.

Explanation

The existing law has 22 separate statements of rules for attributing divisible deductions to periods - a separate statement for each category of deduction. These statements have complex and varying ways of expressing the notion that the deductions should be allocated according to the length of each period.

Standardising the expression of these rules and avoiding repetition will significantly shorten and simplify the law. Outcomes will not be altered.

Clause 165-60 How to attribute assessable income to periods

This clause will set out the rules for attributing assessable income to periods within a year in which a company changes majority ownership or control, and does not continue the same business.

Change

The categories of assessable income to be apportioned to periods will be reduced, from 8 to 3, and there will be a single rule that assessable income in each category be attributed to each period in proportion to its length.

Explanation

The existing rules, although effectively the same, are separately stated, expressed differently and use unnecessarily complex forms of expression.

Standardising the expression of these rules and avoiding repetition will shorten and simplify the law, make it easier to comply with, but not disturb the outcomes.

Clause 165-65 How to calculate the company's taxable income for the income year

This clause will set out the rules for calculating a company's taxable income for a year in which it:

•

experiences a change in majority ownership or control; and

•

does not continue the same business.

Change

Current year loss companies will calculate the make-up of their taxable income on the same basis as other companies.

Explanation

The existing law requires current year loss companies, in calculating their inter-corporate rebate, to show the order in which they offset deductions against their dividend and other income. The calculations are extremely complex and of limited relevance.

Clause 165-75 How to calculate the company's notional loss or taxable income for a period when the company was a partner

This clause will set out the rules for calculating whether a company has a notional loss or notional taxable income during a period in which it is a partner in a partnership.

Change

The Bill will specifically state that a company can calculate its income in the usual way if it does not have a notional loss for any period in a year.

Explanation

The existing law does not state that a company can work out its taxable income normally if it does not have a notional loss.

If a company does not have a notional loss, it makes no difference to the taxable income of the company whether it calculates its income in the usual way or under the current year loss provisions. However, it is easier to calculate taxable income normally.

Subdivision 165-D Tests for finding out whether the company has maintained the same owners

This Subdivision will set tests for whether a company has maintained majority ownership.

Change

The Bill will have only one set of tests about maintaining majority ownership. These will apply to both current and prior year losses.

Explanation

Under the existing law, the current year and prior year loss provisions have similar, but not identical, tests. By standardising them the law will be shortened and clarified, but not changed in a substantive way.

Clause 165-150 Who has more than 50% of the voting power in the company during a period

Clause 165-155 Who has rights to more than 50% of the company's dividends during a period

Clause 165-160 Who has rights to more than 50% of the company's capital distributions during a period

These clauses will set out the tests of whether a company has maintained majority ownership. They will be known as the primary and alternative tests.

1. Change

The Bill will restructure the primary and alternative tests, so that they will have separate application in respect of each of the rights by which beneficial ownership is measured.

Explanation

Beneficial ownership is measured having regard to:

•

voting power;

•

rights to dividends; and

•

rights to capital distributions.

Under the existing law the primary and alternative tests apply to these matters collectively. The proposal is to restructure the tests so that each matter will have a primary and alternative test.

This will not affect the outcome but will help towards standardisation of the current and prior year losses rules.

2. Change

Where the alternative test is applied under these new provisions, if it is reasonable to assume the test will be satisfied it will be taken to be satisfied.

Explanation

The change will allow the tests to operate on a uniform basis for both current and prior year losses.

Clause 165-165 Rules about the primary test for a condition

This clause is one of a number which clarify, or modify, how the primary and alternative tests apply for identifying continuing majority ownership.

Change

The new law will clearly state that it is not necessary for persons to beneficially own exactly the same shares at all times during a period. What is relevant is the amount of the beneficial ownership.

Explanation

The existing provisions operate to the same effect but the change will make that operation clearer.

Clause 165-180 Arrangements affecting beneficial ownership of shares

This clause will allow the Commissioner to treat a person as not the beneficial owner of shares if the person has entered into a particular arrangement affecting those shares.

Change

For both current and prior year losses, the Commissioner's discretion will depend on whether the arrangement was entered into for the purpose of eliminating or reducing someone's income tax liability.

Explanation

Under the existing law, there is a variation in the description of purpose for which an agreement must have been entered:

•

for current year losses, it is the same as proposed in this clause;

•

for prior year losses, the purpose is expressed as one of enabling a prior year loss to be taken into account.

In the case of prior year losses while the stated purpose has changed the outcome is the same. Because of the arrangement a loss that is not otherwise able to be taken into account is taken into account, so the loss company's tax liability is reduced.

An alternative view is that the arrangement might allow 'new owners' to transfer income from another entity to the loss company. The loss is taken into account by offsetting the transferred income. The entity transferring the loss has its income tax liability reduced by reason of it not having derived that income.

This change allows the provision to operate on a uniform basis for both current and prior year losses.

Subdivision 165-E The same business test

This Subdivision will set out the same business test. If a company fails to maintain majority ownership, or there is a change in its control, it can still deduct a loss if it satisfies the same business test.

Change

The same business test is being standardised to a single test across current and prior year losses.

Explanation

Under the existing law, the current and prior year loss provisions have separate but virtually identical same business tests. Standardising the tests will shorten and simplify the law.

Clause 165-210 The test

This clause will set out the same business test.

Change

The new law will make it clear that the new business test and the new transactions test of the same business test will be triggered if a company derives assessable income from the business or transaction.

Explanation

Under the existing law, the new business test and the new transactions test refer to 'income'. This creates an uncertainty because that term could be taken to mean income according to ordinary concepts, both exempt and assessable. However, in the context of the same business test especially its purpose, the only proper and sensible meaning that can be given to the term is assessable income. This is the existing meaning given to the term as set out in the Taxation Ruling TR95/31 issued by the Commissioner of Taxation.

The change will ensure the law is certain in its application.

Subdivision 170-A Transfer of losses within wholly-owned groups of companies

This Subdivision will allow the transfer of losses between companies that are members of the same wholly owned group of companies.

Change

The conditions that must be satisfied for two companies to be members of the same wholly-owned group have been transferred to the Dictionary (see the discussion in Chapter 11 of this Explanatory Memorandum).

Explanation

The transfer is part of the strategy of standardising concepts that are used in more than one area of the income tax law, so as to avoid repetition.

Clause 170-25 Tax treatment of payment for transferred tax loss

This clause will set out the tax treatment that applies to a payment for a tax loss (known as a subvention payment).

Change

A payment received for the transfer of a loss will be neither assessable income nor exempt income of a loss company.

Explanation

Under the existing law, such a payment is specifically prevented from being income of the payee loss company only where the loss company is a shareholder in the payer income company.

The change removes a potential anomaly by extending the rule to any loss company. It is unlikely that such a receipt would be income of a loss company under ordinary concepts. Even if it were, the receipt should not be assessable to the loss company, as the payment would not be deductible to the income company.

Clause 170-35 The loss company

This clause is one of several that will set out conditions that must be satisfied for a tax loss to be transferred between companies. It contains conditions that must be satisfied by the loss company.

Change

The expression in subclause (2) makes it clear that a company will not be denied the right to transfer a loss in the year the loss was incurred solely because of a change in majority ownership or control of the company in that year. To be denied the right to transfer, it must also be that the company would be prevented from deducting the loss in the year in which it was incurred, by operation of either:

•

the current year loss provisions [Subdivision 165-B] ; or

•

the anti-avoidance provisions [Division 175] .

Explanation

It could be argued under the existing law that the right to transfer a loss in the year in which it was incurred could be denied solely on the basis of a change in majority ownership or control in that year, even though the company continued the same business. The law is not administered in such a restrictive way.

Clause 170-50 Transfer by written agreement

The clause will set out the requirements for an agreement transferring a loss.

Change

The time for making an agreement to transfer a loss has been extended to include the day on which the transferee income company lodges its return of income for the year in which the deduction is claimed.

Explanation

The existing law requires the agreement to be entered into before the date of lodgement. It is usual, in the law, for such deadlines to conclude on or before a particular date.

Use of tax losses or deductions of a company to avoid tax

Division 175 Use of a company's tax losses or deductions to avoid income tax

This Division contains anti-avoidance measures that will allow the Commissioner to reverse the effect of schemes that bring together in the same company:

•

assessable income; and

•

tax losses or current year deductions that wouldn't otherwise be used.

1. Change

The anti-avoidance provisions for current and prior year losses have been collocated.

Explanation

This is a structural change designed to clearly identify anti-avoidance provisions which, in the existing law, are not identified as such and are merged into the current and prior year loss provisions.

2. Change

The Bill will omit an anti-avoidance rule that denies current and prior year deductions if the operations of a company are managed or conducted without paying regard to the rights of the continuing shareholders.

Explanation

The rule is very difficult to apply and little understood. The circumstances it is meant to cover are clearly indicative of either a change of ownership or control, which are dealt with by other provisions.

Clause 175-10 First case: income injected into company because of available tax loss

Clause 175-20 Income injected into company because of available deductions

These clauses will authorise the Commissioner to disallow deductions if assessable income is injected into a company because of the availability of a current or prior year loss.

Change

The new law will make it clear that it is assessable income that must be injected into the company to trigger the application of these provisions.

Explanation

Under the existing law, the income injection tests refer to 'income' being derived because of the availability of the loss. This creates an uncertainty because that term could be taken to mean income according to ordinary concepts, both exempt and assessable. However, in the context of these tests, especially their purpose, the only proper and sensible meaning that can be given to the term is assessable income.

The change will ensure the law is certain in its application.

Clause 175-15 Second case: someone else obtains a tax benefit because of tax loss available to company

Clause 175-30 Someone else obtains a tax benefit because of a deduction or income available to company

These clauses will authorise the Commissioner to disallow deductions if a person other than the company would obtain a tax benefit in connection with a scheme using current or prior year losses.

Change

The term tax benefit, when used in this clause, will have the same meaning as in Part IVA of the Income Tax Assessment Act 1936.

Explanation

Under the existing law, the current and prior year loss provisions contain their own meaning for the term 'benefit'. This meaning is slightly different from the meaning in Part IVA of the Income Tax Assessment Act 1936, the general anti-avoidance provision of the income tax law.

Broadly, the existing law states that a person receives a benefit in relation to the application of the income tax law to the extent that the person's income tax liability is reduced because of the scheme.

Under Part IVA a person obtains a tax benefit where:

•

an amount is not included in the person's assessable income and that amount would have been included, or might reasonably be expected to be included but for the scheme; or

•

a deduction is allowable to the person and the whole or part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, but for the scheme.

The effect of this change is to narrow the focus of the benefit to income not being assessed or deductions being allowed. Also, the concept of reasonable expectation has been introduced.

The proposed change will improve consistency throughout the income tax law. Taxpayers will no longer need to take account of slight variations to what is essentially a single concept.

Clause 175-20 Income injected into company because of available deductions

Clause 175-25 Deduction injected into company because of available income

Clause 175-30 Someone else obtains a tax benefit because of a deduction or income available to company

These clauses will set out the anti-avoidance measures that apply to schemes using current year losses.

Change

There will no longer be a first step of dividing an income year into different periods to calculate the current year loss for which a deduction is denied.

Explanation

Under the existing law, the first step in disallowing deductions for current year losses is to divide the income year into periods separated by points in time when;

•

income is injected because there is a loss;

•

deductions are loaded in to absorb income; or

•

a person obtains a benefit because there is a loss or income.

The next step is to calculate a loss or income amount for a period and then to disallow a deduction for any loss. This is achieved through a series of complex calculations.

Under the proposal the same outcome is achieved more simply. The catalysts for denying a deduction - the events set out above - remain the same.

Pooled Development Funds

Clause 195-30 PDF cannot transfer tax loss

This clause will provide that, if a company is a Pooled Development Fund at the end of an income year for which it has a tax loss, it cannot transfer the loss to another company.

Change

This provision is currently situated with other provisions dealing with transfers of tax losses within wholly-owned groups of companies.

Explanation

The provision is only relevant to PDF companies. It is, therefore, more appropriate to relocate it to the Subdivision that specifically deals with PDFs.

Concepts

Subdivision 975-W Wholly-owned groups of companies

This Subdivision will set out the conditions that must be satisfied for two companies to be members of the same wholly-owned group.

Change

The Bill will use the terms members of the same wholly-owned group and 100% subsidiary to replace the terms group company in relation to another company and subsidiary company, which are used in the existing law.

Explanation

The new terms give a more accurate indication of the concepts they embody.

C. Consequential amendments

Inter-corporate dividend rebate [Schedule 1, item 16 of the Income Tax (Consequential Amendments) Bill 1996]

Section 46 of the 1936 Act provides a rebate on dividends paid from one company to another.

Usually, the rebate is calculated by reference to the tax payable on the gross amount of dividends included in a company's taxable income.

However, for companies subject to the current year loss provisions, it is calculated by reference to the net amount of dividends included in their taxable income. Under the existing law this net amount is calculated under section 50N.

It is proposed to close off the Division that section 50N is in, so that it doesn't apply to future years [Schedule 1, item 23] .

Consequently, companies subject to the current year loss provisions will now have to follow the general rule and calculate their dividend rebate by reference to the gross amount of dividends.

This item will omit the provision that makes the exception to the general rule for companies subject to the current year loss provisions.

Dividend stripping [Schedule 1, items 17 to 21 of the Income Tax (Consequential Amendments) Bill 1996]

Section 46A of the 1936 Act deals with rebates on dividends paid from one company to another as part of a dividend stripping arrangement.

Broadly, that rebate is based on the net amount of dividends included in the taxable income of a company. This net amount is calculated by special rules designed to counter the tax advantages created by dividend stripping arrangements.

For companies subject to the current year loss provisions there are further rules. First, the net amount of dividends is calculated by a different provision - section 50N. Secondly, that amount is then modified by section 46A.

It is proposed to close off the Division that section 50N is in, so that it doesn't apply to future years [Schedule 1, item 23] .

Consequently, the rules in section 46A that modify the net amount calculated by section 50N will be omitted.

Also, a new provision will be added providing that the taxable income of companies, both with current year losses and involved in dividend stripping arrangements, will be calculated in the normal way. This amendment will produce the same effect for these companies as the existing law.

Section 63CA [Schedule 1, items 50 and 76 of the Income Tax (Consequential Amendments) Bill 1996]

It is proposed to relocate section 80F (which applies the same business test in some cases where a deduction for bad debts gives rise to a prior year loss), so that it is next to the bad debt provisions. It is presently located immediately after the existing prior year loss provisions which will be closed off. Consequently, it may have been seen as part of the redundant prior year loss provisions and not taken into consideration.

Section 80F now becomes section 63CA.

Chapter 8 - Mining and quarrying

This chapter summarises the rewritten rules allowing special deductions for general mining, petroleum mining and quarrying and explains the changes that the Income Tax Assessment Bill 1996 will make to those rules.

Overview of this chapter

This chapter deals with deductions for capital expenditure on mining and quarrying operations.

The first part of the chapter summarises the law as it is proposed to be rewritten by the Division 330 of the Income Tax Assessment Bill 1996.

The second part explains the changes that the Bill proposes to the content of these provisions.

The existing law on mining and quarrying is contained in:

•

Division 10 (Mining and Quarrying);

•

Division 10AAA (Transport of Minerals and Quarry Materials);

•

Division 10AA (Prospecting and Mining for Petroleum);

•

Division 10AB (Rehabilitation and Restoration of Mining, Quarrying and Petroleum Sites);

of Part III of the Income Tax Assessment Act 1936.

This summary is to orient readers to how the new law is structured and expressed. As these provisions have been in the law for some time, there is no need for a detailed exposition. An explanation is given of changes proposed to the mining and quarrying provisions.

A. Summary of the new law

Guide to Division 330

What the Division does

Deductions are allowed for expenditure, in general mining, petroleum mining and quarrying, on:

•

exploration and prospecting;

•

mining and quarrying operations;

•

transporting the product of those operations;

•

rehabilitating the mine or quarry site.

Exploration and Prospecting [Subdivision 330-A]

The general rule is

You can deduct expenditure on exploration or prospecting for minerals, or quarry materials, obtainable by eligible mining or quarrying operations.

You deduct the expenditure in the year you incur it.

You need to

•

carry on eligible mining or quarrying operations; or

•

propose to carry on such operations; or

•

carry on a business that includes exploration or prospecting for minerals or quarry materials.

Limitations on how much you can deduct

You cannot deduct, in a year:

•

more than the amount of assessable income left after all other deductions (unless you elect for the limit not to apply);

•

deductions you have transferred to the buyer of a mining right or information; or

•

expenditure in producing exempt income.

Exempt Income [ Subdivision 330-B]

The general rule is

Genuine prospectors are exempt from tax on income from the sale of rights to mine a particular area in Australia for gold and certain metals and minerals.

Who is a genuine prospector?

•

An individual who personally, or a company that itself' carries out most of the field work; or

•

An individual who contributes to a major part of the field work.

How much is exempt?

So much of that income, for a particular area, remaining after exploration or prospecting deductions.

Operation of the mine or quarry [Subdivision 330-C]

The general rule is

You can write-off allowable capital expenditure.

How much can you deduct?

Your deduction for a year is worked out by dividing your undeducted expenditure, called unrecouped expenditure, by the years remaining for deduction.

You cannot deduct, in a year, more than the amount of assessable income left after all other deductions (except exploration deductions).

Allowable capital expenditure is expenditure incurred on

(a)

carrying out eligible mining or quarrying operations;

(b)

site preparation;

(c)

necessary buildings and improvements;

(d)

provision of water, light or power to the site of those operations;

(e)

buildings directly used to operate or maintain treatment plant;

(f)

buildings and improvements for storing minerals or quarry materials for treatment;

(g)

cash bidding payments for an authority to explore, prospect or mine;

(h)

acquiring mining, quarrying or prospecting rights or information to the extent specified in an agreement; or

(i)

housing and welfare.

Allowable capital expenditure does not cover

•

plant or articles;

•

facilities to transport minerals or quarry materials from the operations site;

•

ship facilities;

•

an office building not at or adjacent to the site.

Unrecouped expenditure is

The balance of your allowable capital expenditure, after allowing for:

•

deductions claimed in earlier years;

•

deductions transferred by an agreement for the sale of information or rights; or

•

property that has ceased to be used for mining etc.

Years remaining are

The lesser of:

•

10 years (for mining) or 20 years (for quarrying), reduced by the number of earlier years in which expenditure was deductible; and

•

the number of years in the estimated life of your petroleum field or of your longest mine, quarry or petroleum field (or proposed mine, quarry or petroleum field).

What is a proposed mine?

One where work preparatory to the extractive operations has started but not actual extractive operations.

Cash bidding [Subdivision 330-D]

The general rule is

Your allowable capital expenditure includes cash bidding payments for the grant of a mining authority or for the grant of an exploration or prospecting authority for a particular area.

Deductions can be transferred

You can transfer your deduction for an exploration or prospecting cash bidding payment if you sell an interest in the exploration or prospecting authority.

Limit on how much you can transfer

You cannot transfer more than the amount you specify in the agreement, which must be reduced by any amount you have already transferred.

Selling a right or agreement [Subdivision 330-E]

The general rule is

If you sell a mining, quarrying or prospecting right (or information), you can agree to transfer to the buyer's allowable capital expenditure an amount specified in the sale agreement.

You give up your own entitlement to deduct that amount.

Limits on amount transferred by agreement

The amount transferred cannot exceed the lesser of:

•

the amount paid by the buyer; and

•

the sum of:

(a)

the balance of allowable capital expenditure relating to the right or information, and exploration expenditure, that the seller has left to deduct; and

(b)

any assessable balancing adjustment from the sale.

Excess deductions [Subdivision 330-F]

The general rule is

You can only deduct, in a year, an amount for:

•

exploration or prospecting expenditure; and

•

allowable capital expenditure

up to your available assessable income.

Any excess can be deducted in a subsequent year up to the limit of available assessable income. Conditions met when exploration or prospecting expenditure was incurred must also be met when an excess amount is being claimed.

Available assessable income is

Your total assessable income less all your other kinds of deductions.

Electing that the limit not apply

You can choose not to have your deductions limited in this way. This means that the deductions can form part of a loss.

A formula reduces the amount of excess deductions carried forward from earlier years that can be deducted if the election is made.

Loss of right to deduct excess amounts

You lose any continuing entitlement to deductions for excess amounts attributable to property that you stop using for exploration or mining purposes.

Petroleum resource rent tax [Subdivision 330-G]

The general rule is

Payments of this tax are deductible whether you are liable to make them personally or liable to make them as agent or trustee.

Certain receipts included as assessable income

Refunds and amounts credited, paid or applied under the Petroleum Resource Rent Tax Assessment Act 1987 are included in your assessable income.

Transporting the product [Subdivision 330-H]

The general rule is

You can deduct capital expenditure on a facility you use principally for mining or quarrying transport.

The expenditure is deducted in equal instalments over 10 years (for mining transport) and 20 years (for quarrying).

Transport capital expenditure is

Capital expenditure on:

•

a railway, road, pipeline, port or other facility used principally for mining or quarrying transport;

•

obtaining a right to construct or install such a facility;

•

compensation for damage from constructing or installing such a facility;

•

earthworks, bridges, tunnels or cuttings.

The expenditure must be incurred in carrying on a business to produce assessable income.

Transport capital expenditure does not cover

Expenditure on:

•

road vehicles, ships, railway rolling stock;

•

providing housing and welfare, or water, light or power in connection with a facility for ships.

Mining or quarrying transport is

Transport, from the site of general mining, petroleum mining or quarrying operations, of:

•

minerals (including oil or gas) or quarry materials; or

•

materials processed from such minerals or quarry materials.

It does not include transport of refined petroleum, or a system of reticulation to consumers.

Rehabilitating the site [Subdivision 330-I]

The general rule is

You can deduct expenditure on rehabilitating a mining or quarrying operations site or a prospecting or exploration site.

Rehabilitation is

Restoring, rehabilitating (or partly rehabilitating ) a site to a reasonable approximation of its condition before the mining or quarrying operations or prospecting or exploration.

Rehabilitation expenditure does not cover

•

acquiring an interest in land;

•

constructing buildings or other structures (except dams and levees essential for rehabilitation);

•

a bond or security for performing rehabilitation;

•

housing and welfare; or

•

depreciable items.

Balancing adjustments [Subdivision 330-J]

The general rule is

A balancing adjustment is needed if:

•

you have either deducted expenditure on property under the mining and quarrying provisions or were prevented from doing so because of the limitation rules; and

•

the property is disposed of, lost or destroyed, or you stop using the property for a purpose that qualifies for a deduction; and

•

roll-over relief is unavailable.

What is a balancing adjustment?

It is a final accounting worked out by comparing the property's termination and written down values:

•

if the termination value exceeds the written down value, you include the excess, up to the amount of deductions claimed, in your assessable income;

alternatively,

•

if the written down value exceeds the termination value, the excess is a deduction.

The termination value of property is

•

if the property is sold - the sale price (less expenses of sale);

•

if you owned it and disposed of it or no longer use it for a qualifying purpose - its market value;

•

if you did not own it and no longer use it for a qualifying purpose - a reasonable amount;

•

if it is lost or destroyed - the amount receivable as insurance.

The written down value of property is

The balance of your total deductible capital expenditure after allowing for previous or current deductions.

Partial change in ownership [Subdivision 330-K]

The general rule is

When a partnership interest in property changes, the change is treated as a disposal of the whole property by the partnership. This requires the partnership to make a balancing adjustment.

Is a balancing adjustment always required?

Not if all the parties to the disposal make a joint election for roll-over relief. The balancing charge is then deferred.

Common Rules [Subdivision 330-L]

The common rules contained in Division 41 are modified by this Subdivision.

Common rule 1

What this rule is about

This rule concerns roll-over relief (ie. when a balancing adjustment is deferred).

Presumed sale of a mining or prospecting right or information

Where property disposed of is a mining quarrying or prospecting right or information it is treated as though an agreement had been made for the sale of the right or information between a transferor and transferee.

The amount presumed transferred

The amount presumed transferred is the transferor's unrecouped expenditure in respect of the property.

No maximum amount

The usual maximum limit on expenditure that can be transferred as part of an agreement does not apply.

Cash bidding agreement

Where property disposed of is a qualifying interest in relation to a cash bidding exploration permit the transfer is treated as though it were an agreement made for the sale of such an interest by the transferor and the transferee.

The amount of the agreement

The amount taken as transferred is the whole of the transferor's entitlement to the eligible cash bidding amount.

Common rule 2

What this rule is about

This rule is about non-arm's length transactions.

What transactions does it apply to?

•

the purchase of property that is not a mining, quarrying or prospecting right;

•

transactions about expenditure on rehabilitation.

What adjustments are required?

Both parties to these transactions are required to adjust the price to reflect market value.

Special situations [Subdivision 330-M]

What this Subdivision is about

This Subdivision contains some miscellaneous rules.

1. Recoupments

Division 330 does not apply to expenditure for which you are entitled to be recouped, if the recoupment is not included in your assessable income.

2. Expenditure must be deducted under this Division

Capital expenditure deductible under Division 330 can only be deducted under that Division.

However, if plant is no longer used for qualifying purposes under Division 330, it may qualify for depreciation on the basis of another use.

3. Petroleum mining or prospecting - getting someone else to do the work

Holders of a prospecting or mining right who get someone else to carry out eligible mining operations or exploration or prospecting for petroleum, are taken to be doing the work themselves.

4. No deduction for petroleum income sharing

The rule applies if you derive income from selling petroleum obtained from eligible mining operations in an area, and:

•

you pay someone else a share of that income;

•

that person has mined, explored, or has a mining information or a prospecting right for, that area.

The rule is:

•

the share payment is treated as assessable income of the payee from selling petroleum; and

•

you cannot deduct your payment.

5. No deduction for paying transferees or sub-lessees of petroleum rights

This rule applies if:

•

an original licensee transfers or sub-lets, a petroleum right for an area to a contractor; and

•

the contractor mines or explores in that area or another area where the licensee has a mining right.

The rule is the licensee is taken not to have incurred deductible expenditure under Division 330.

B. Discussion of changes

Division 330 Mining and Quarrying

This Division will contain the rules specifying what deductions are available to the mining and quarrying industries.

1. Change

The Division will bring together, in one place, the provisions dealing with general mining, petroleum mining and quarrying, mineral transport and site rehabilitation.

Explanation

The existing law deals separately with these subjects, leading to unnecessary duplication.

Existing differences in the treatment of general and petroleum mining will be preserved (unless otherwise stated).

2. Change

Replace a number of discretions given to the Commissioner under the existing law with an objective test, generally based on reasonableness.

Explanation

One of the secondary aims of the rewrite of the law is to replace, where possible, discretions that the Commissioner has under the existing law which can affect tax liability. Such discretions do not fit well with the modern self-assessment system.

Where a discretion is being replaced with detailed criteria, the change will be explained in the notes on the particular clause. In many cases, however, the changes merely replace the test of what the Commissioner considers to be reasonable with an objective test of reasonableness. In these cases, the explanatory material simply identifies the clauses where such a change has occurred. In this Division, those are clauses 330-15, 330-100, 330-115, 330-120, 330-125, 330-270, 330-275, 330-405, 330-410, and 330-490.

Clause 330-15 What types of expenditure qualify?

This clause will explain:

•

what expenditures attract deductions; and

•

under what conditions.

Change

It will be made clear that a deduction is allowable under this Division for expenditure on exploration or prospecting, even if the expenditure is in nature revenue expenditure.

Explanation

The existing law intends to allow a deduction for exploration or prospecting expenditure, whether it is on capital or revenue account. This clause will make that explicit.

Clause 330-20 Meaning of exploration or prospecting

This clause sets out what the term exploration or prospecting means.

1. Change

Exploration or prospecting will not be defined exhaustively but will have flexibility to take in over time comparable activities that evolve from technological and other changes.

Explanation

The existing law is inconsistent in its treatment of activities that can be regarded as exploration and prospecting. For general mining and quarrying, the term is tightly confined to certain activities and no others. For petroleum mining, the term specifies the same kinds of activities while leaving it open for new activities to be included. In standardising this term, the more flexible approach is being adopted.

2. Change

Exploration or prospecting will include feasibility studies into the economic viability of mining.

Explanation

The Commissioner treats certain feasibility studies as exploration and prospecting. These are studies that evaluate the economic viability of the proposed extractive process or treatment process. Not all feasibility studies can be regarded this way. For example, feasibility studies into:

•

infrastructure costs for housing and welfare;

•

the provision of water, light or power;

•

the viability of facilities to transport minerals

are not treated as 'exploration or prospecting' (expenditure on these activities could qualify for a deduction under another provision ) - [see Subdivisions 330-C and 330-G].

The clause will align the law with the established practice.

Clause 330-35 No deduction for an amount transferred by a seller of a right or information

This clause will preclude sellers of mining, quarrying or prospecting rights or information from deducting exploration or prospecting expenditure that they have 'transferred' to a buyer.

Change

This is a new clause, which will support the effect of the existing law.

Explanation

When a person sells:

•

a mining, quarrying or prospecting right; or

•

mining, quarrying or prospecting information,

the seller and the buyer can agree, in effect, to transfer expenditure from the seller to the buyer [clause 330-235] . That expenditure is then deductible to the buyer.

This clause will express the intention that the expenditure does not remain deductible to the seller. That result, so far as exploration expenditure incurred by the seller in the year of transfer is concerned, is not explicit in the existing law, but it is the logical outcome and is administered that way.

Clause 330-60 Exempt income from the sale of rights to mine

This clause specifies the particular metals and minerals that are covered by the exemption.

Change

The particular metals and minerals are being included in the Bill.

Explanation

Under the existing law the specific metals and minerals are contained in the Income Tax Regulations. However, as the list of metals and minerals has not been added to since 1977 it is being incorporated in the Act.

Clause 330-90 Meaning of housing and welfare

This clause explains the meaning of housing and welfare.

1. Change

Housing and welfare will be extended to facilities provided for employees of contractors and other parties provided they are engaged in the taxpayer's mining operations.

Explanation

Under the existing law, housing and welfare only covers facilities for a taxpayer's own employees. The law predates what has now become a significant role of independent contractors, and their employees, in mining operations. Also, many mining operations are conducted by joint ventures where a management company provides the labour force but does not itself hold a proprietary interest in the operation.

2. Change

Housing and welfare will include general community facilities to which a taxpayer has contributed, even if the facilities are provided by someone else (for example, a local government body.)

In the case of expenditure on residential accommodation it will still be necessary for the taxpayer to provide the accommodation to qualify as housing and welfare expenditure.

Explanation

The existing law limits a deduction for welfare facilities to those the taxpayer provides. While historically that was industry practice, today these facilities are often provided by government (with industry contributing to their cost).

3. Change

Housing and welfare will include facilities for meals, even where the facilities are run for profit.

Explanation

Under the existing law, welfare facilities must be non-profit making. However, industry now often finds it more efficient and cost effective to contract out food services to professional caterers.

Clause 330-95 What expenditure is not allowable capital expenditure?

This clause will set out classes of expenditure that cannot be deducted under this Division.

1. Change

The Bill will clarify that a deduction is not allowed under the mining provisions for expenditure on plant or articles used in mining operations.

Explanation

The existing law is unclear about whether a deduction is allowable, under the mining provisions, for expenditure on plant or articles which cannot be deducted under the general depreciation provisions. The Bill makes it clear that expenditure on plant or articles cannot be allowable capital expenditure under the mining provisions.

In contrast, expenditure on something that doesn't qualify as plant or articles (eg. a dry development oil well) is not deductible under the depreciation provisions but could be deductible under the mining provisions as allowable capital expenditure.

2. Change

The clause will clarify that a deduction is not allowable for expenditure on an office building unless it is at, or adjacent to, a site where the taxpayer carries on mining operations.

Explanation

Under the existing law, the general mining rules specifically limit the deduction for expenditure on an office building. The building must be on, or adjacent to, one of the taxpayer's mining sites. The petroleum mining provisions in the existing law are silent on this point, but it is generally accepted that the law intends that an office building must be adjacent to the site before expenditure on it qualifies for deduction.

3. Change

The clause will make clear that a deduction is not allowed for expenditure on housing and welfare facilities provided for persons carrying on quarrying operations.

Explanation

Under the existing law, there is a specific deduction for expenditure on housing and welfare facilities provided for mining operations. This is because of the often remote locality of mine sites. There is no equivalent deduction for quarrying operations. This section makes clear that an entitlement to such expenditure is not extended by one of the more general expenditure headings in the new combined Mining and Quarrying Division.

Clause 330-110 Expenditure not related to a mining or quarrying property or to a petroleum field

This clause will allow you to deduct expenditure transferred to you under an agreement to purchase a mining right or information even though the right or information does not relate to a mine you own.

Change

The clause clarifies that you can deduct allowable capital expenditure transferred to you as the buyer of a mining or prospecting right or information so long as you carry on extractive operations at some site. It won't be necessary for the acquired expenditure to relate to a mine, quarry or a petroleum field you operate.

The deduction will be allowable over 10 years for mining or petroleum operations and over 20 years for quarrying.

Explanation

Under the existing law it is arguable that expenditure transferred to the buyer is only deductible if it relates to the buyer's mine, quarry or petroleum field. This would prevent deductions that, for example, were for expenditure on obtaining information that wasn't area specific.

In practice, the Commissioner administers the law to allow deductions for such expenditure transferred to you so long as you carry on mining or quarrying operations somewhere. This clause will align the law with that practice.

Clause 330-310 Excess amount deductible in the next income year

This clause, among other things, will ensure that a deduction is not allowed under this Division for excess amounts of exploration expenditure unless you are engaged in a business of exploration or mining at the time you claim these amounts.

Change

The clause will clarify that excess amounts of exploration deductions can only be claimed by those in the exploration or mining industries.

Explanation

The explorations provisions have always contained tests to ensure that deductions, regardless of when they are claimed, are restricted to taxpayers in the mining industry. This position was clear prior to 1984. Amendments introduced in that year restated the rule but not as clearly as before. There is some uncertainty about the operation of the law even though the Explanatory Memorandum which dealt with the 1984 amendments made no mention of a change in the operation of the same business test for the regime applying from that time. The rewrite puts the matter beyond doubt.

Clause 330-315 Election not to limit deductible amounts

This clause will allow you to choose not to limit your deductions for exploration or prospecting expenditure, or allowable capital expenditure, to the amount of your available assessable income for the year.

Change

The clause reproduces the effect of the existing law but in a different way.

Explanation

Under the existing law, you can elect not to be subject to the limit on the amount of your annual deduction for allowable capital expenditure or for expenditure on actual exploration or prospecting.

If you make that election, you can also claim a partial deduction for any amounts of excess allowable capital expenditure or exploration or prospecting expenditure carried forward from previous years when you didn't make such an election.

This clause allows you to make the election for all expenditure (including excess expenditure carried forward from previous years). It contains a formula the effect of which is to allow only a portion of the excess amounts to be converted into a revenue loss that can be carried forward or transferred within a company group.

The formula is a drafting device necessary to amalgamate 6 existing election provisions into one. It puts their operation beyond doubt and achieves the same result as the existing 6 elections. The complexity of the existing expression of the rule in the mining and quarrying provisions had led to some uncertainty about its operation.

Clause 330-320 Excess amount not deductible for certain property

If you don't make the election offered by clause 330-315, your deductions for exploration or prospecting expenditure, or for allowable capital expenditure, in excess of your available assessable income are deductible in the next income year [clause 330-310].

This clause disallows those carry-over deductions if the original expenditure was on property that is destroyed, disposed of, lost, or no longer used for exploration or prospecting or eligible mining or quarrying operations.

Change

Excess deductions will be disallowed in these cases for both exploration or prospecting expenditure and allowable capital expenditure.

Explanation

The existing law only disallows excess deductions for allowable capital expenditure. This change will simplify the law by aligning the treatment for the two kinds of expenditure. It will also make sure that an excess deduction for exploration or prospecting expenditure cannot be counted twice - once to reduce a balancing adjustment on disposal of the property [see Subdivision 330-J] and again as an excess deduction carried over against future income.

Clause 330-375 The meaning of transport capital expenditure

This section will explain what transport capital expenditure can be deducted under this Division.

Change

The law will make clear that taxpayers can get a deduction for transport capital expenditure, even if they did not themselves supply the transport facility, as long as they are in business for the purpose of producing assessable income.

Explanation

Transport capital expenditure is capital expenditure on a transport facility or on certain incidental costs of constructing a transport facility.

Under the existing law, it is not absolutely clear whether it is the taxpayer or the supplier of the facility who has to be in business for the purpose of producing assessable income. The law is administered as if it meant the taxpayer, and this clause is consistent with that.

Clause 330-450 No deduction for certain expenditure

This clause sets out classes of expenditure on site rehabilitation that are not deductible under this Division.

Change

The present exclusion from deductibility of expenditure on levees and dams necessary for the rehabilitation of a mine site is being removed. Future expenditure on these kinds of levees and dams will be deductible under this Division.

Explanation

Under the existing law, expenditure on enhancement or redevelopment of the site is not deductible as rehabilitation expenditure.

However, some dams are necessary for proper rehabilitation (eg. dams to secure a water supply for revegetation). They are an integral part of the rehabilitation process and have little or no residual value to the miner making the expenditure and so should not be treated as an enhancement or redevelopment. This is not true of all dams (eg. expenditure on tailings dams and dams for recreational purposes will not be deductible).

Clause 330-480 When a balancing adjustment is required.

A taxpayer must make a balancing adjustment for property that is disposed of, lost, destroyed or no longer used for qualifying purposes.

1. Change

The clause will require a balancing adjustment when no amount has been deducted for the property in any year and will help prevent double deductions.

Explanation

A balancing adjustment is commonly required in cases where deductions have been allowed over time for the cost of income producing property which is disposed of.

Subdivision 330-J makes balancing adjustments to do with deductions for:

•

capital expenditure on exploration or prospecting;

•

allowable capital expenditure;

•

transport capital expenditure.

This clause will require a balancing adjustment when:

(a)

property has been disposed of, is lost or destroyed, or ceases to be used for the relevant purposes; and

(b)

roll-over relief is not available; and

(c)

either:

•

the taxpayer has claimed, or is entitled to claim deductions in relation to the property; or

•

the taxpayer could not claim deductions because of the limitation rules [see Subdivision 330-F] .

The existing law is unclear as to whether a balancing adjustment is required in circumstances where no deductions have been made. The rewrite makes it clear that a balancing adjustment is required and this in turn helps prevent double deductions.

The change in this clause is part of a wider change, linking clauses 330-320 and 330-495. The effect of this wider change is that, when property is disposed of, lost or destroyed, or ceases to be used for the relevant purposes, the taxpayer will be able to claim an immediate deduction to the extent that the law specifies. It will also ensure that the same amount cannot be claimed as a deduction twice.

2. Change

The clause will continue to treat a partial change in the ownership of property as a disposal, but only by those whose interests in the property have changed.

Explanation

Under the existing law, if there is a partial change in the ownership of, or interests in, property:

•

that would be taken as a disposal of the property from the old owners to the new; and

•

a balancing adjustment would be required.

In the case of joint ventures, it would be unfair to treat a continuing joint venturer, who had not disposed of any interest as having done so. The Commissioner's practice, therefore, has been to apply the partial disposal provisions only to the joint venturer who disposed of an interest. Subclause 330-480(6) will give support to this practice.

Clause 330-490 Meaning of termination value

This clause will explain the meaning of the term termination value, which is one of the components in calculating a balancing charge.

1. Change

The clause will specify the termination value of property in two circumstances where the existing law is silent. These are:

•

a disposal of property otherwise than by sale; and

•

property owned but no longer used for qualifying purposes or for transporting the product.

In these cases, the termination value will be the property's market value.

Explanation

To work out a balancing adjustment, a taxpayer needs to know the value of the property when it is disposed of, lost, destroyed or no longer used for qualifying purposes. This is its termination value.

The existing legislation does not say what the value is if you dispose of property otherwise than by sale (eg. by gift) or if you simply stop using your property for relevant purposes. In these cases, the Commissioner applies market value.

Subclause 330-490(1) will give effect to this practice.

2. Change

The clause will require a taxpayer that stops using property for a relevant purpose, and does not own the property, to include a reasonable amount as the termination value in working out the balancing adjustment.

Explanation

A taxpayer can obtain deductions for capital expenditure on property it does not own. An example is a contribution to the capital cost of a transport facility such as a State rail network.

It would be inappropriate in such a case to bring the property's full market value to account for balancing adjustment purposes. Instead, the termination value will be measured as a reasonable amount in the prevailing circumstances.

For example, if a mining company paid $40 million towards a rail line, entitling it to 10 years use but ceased using it after 6 years, a reasonable value might be based on the remaining 40% of the term, ie. $16 million. Other factors may influence the value in that case or other cases.

Clause 330-495 Meaning of written down value

This clause will define written down value, another of the components of a balancing adjustment.

1. Change

It will be made clear that a taxpayer's total capital expenditure on property, which is one of the components of its written down value, refers only to expenditure deductible under Division 330.

Explanation

A balancing adjustment compares the termination value of property and the undeducted capital expenditure (called the written down value) on the property. The written down value is the total capital expenditure on the property that qualifies for a deduction under the relevant Subdivision, reduced by amounts deducted for that expenditure.

It has been contended that the capital expenditure in respect of the property can include amounts that are otherwise not deductible. The rewrite makes the policy intention clear that only amounts that are deductible under the division are to be taken into account when calculating a balancing adjustment.

2. Change

This clause will also clarify that the written down value is the total capital expenditure on the property if the taxpayer has been unable to claim any deductions because of the limitation rules [see Subdivision 330-F] .

Explanation

This clause complements the first change discussed in the notes on clause 330-480. Making the written down value the same as total capital expenditure will ensure that the balancing adjustment is calculated correctly:

•

if the termination value exceeds the written down value, there will be no adjustment because a deduction has not been claimed;

•

if the termination value is less than the written down value, the difference will be deductible.

Clause 330-500 Partial disposals of interests in property

This clause specifies what proportion of your total capital expenditure will be taken into account if you dispose of only part of your property.

Change

This clause is a new provision.

Explanation

This clause also complements the first change discussed in the notes on clause 330-480. It reduces the written down value a taxpayer uses to calculate a balancing adjustment so as to reflect the proportion of the property being disposed of.

Clause 330-520 Partial change of ownership

This clause will require a balancing adjustment by all members of a partnership when there is a change in the ownership of partnership property, unless roll-over relief is obtained.

1. Change

The clause will limit the existing law about partial changes of ownership of property to only cover changes to ownership of partnership property.

Explanation

It is unclear whether the existing law applies to more than just changes in ownership of partnership property. In particular, it is not clear whether it also covers property owned by joint venturers who are not in partnership. The Commissioner's practice is not to apply the law to them.

This clause ensures that the rule only applies to changes in the ownership of partnership property. It further complements the second change discussed in the notes on clause 330-480. Changes in ownership of property owned by joint venturers are dealt with by subclause 330-480(6).

2. Change

The clause will require a balancing adjustment where no amount has been deducted for the property in any year.

Explanation

One of the changes brought about by clause 330-480 is the removal of an uncertainty as to whether a balancing adjustment is required when property is disposed of but no amount had been deducted. The Bill clearly requires a balancing adjustment in these circumstances. This clause complements that clarification when there is a partial change in the ownership of partnership property and similar circumstances exist.

Clause 330-547 Roll-over relief

This clause will set out further situations where roll-over relief is available in relation to disposals of property.

Change

The clause will allow roll-over relief where no amount has been deducted for the property in any year.

Explanation

Changes to clauses 330-480 and 330-520 have required balancing adjustments when property has been disposed of but no amount has been deducted for any year. Where the circumstances are the same but the conditions for roll-over relief are met, this clause will not require a balancing adjustment by a transferor.

C. Transitional arrangements

Pre-19 July 1982 mining capital expenditure [clause 330-1 of the Income Tax (Transitional Provisions) Bill 1996]

Undeducted amounts of pre-July 1982 mining capital expenditure will be treated as if they had been incurred in the 1996-97 income year. This will allow them to be written off under Subdivision 330-C over the lesser of 10 years or the life of the mine or petroleum field.

Post-19 July 1982 mining capital expenditure and post-15 August 1989 quarrying capital expenditure [clauses 330-5 and 330-60 of the Income Tax (Transitional Provisions) Bill 1996]

Any:

•

post-19 July 1982 mining capital expenditure;

•

post-15 August 1989 quarrying capital expenditure; or

•

pre-July 1996 transport capital expenditure;

that has not yet been deducted, will be treated as incurred in the 1996-97 income year. This will allow it to be written off under Subdivisions 330-C or H over 10 years (20 for quarrying). This period is reduced by the number of years over which a taxpayer has already been writing off these amounts.

Undeducted pre 1 July 1975 general mining exploration expenditure [clauses 330-10, 330-15 and 330-20 of the Income Tax (Transitional Provisions) Bill 1996]

Undeducted general mining exploration expenditure incurred before 1 July 1975 will be treated as exploration expenditure incurred in the 1996-97 income year [clause 330-10 of the Income Tax (Transitional Provisions) Bill 1996]

However if:

•

a mining right has been sold and some or all of the income from the sale is exempt from tax; and

•

there was pre-1 July 1975 exploration expenditure relating to the area subject to the mining right;

the undeducted exploration expenditure will be reduced by the amount of the exempt income [clauses 330-15 and 330-20 of the Income Tax (Transitional Provisions) Bill 1996].

Old mining capital expenditure on plant [clause 330-25 of the Income Tax (Transitional Provisions) Bill 1996]

Pre-July 1996 mining capital expenditure on plant cannot be transferred to a purchaser under an agreement for the sale of a mining or prospecting right or information.

Undeducted old exploration expenditure [clauses 330-30, 330-35 and 330-40 of the Income Tax (Transitional Provisions) Bill 1996]

These amounts of undeducted exploration expenditure incurred in earlier years will be treated as exploration expenditure incurred in the 1996-97 income year:

•

petroleum exploration expenditure incurred before the 1996-97 income year;

•

general mining exploration expenditure incurred from 1 July 1975 to 21 August 1984;

•

general mining exploration expenditure incurred after 21 August 1984; and

•

quarrying exploration expenditure incurred after 15 August 1989.

They will be deductible under clause 330-15 of the Income Tax Assessment Bill 1996 in the first income year in which the tests set out in the relevant transitional provision are met.

Undeducted expenditure relating to gold mining incurred from 20 May 1988 to 31 December 1990 will remain deductible for 7 income years from the time the expenditure was outlaid [subclause 330-40(4) of the Income Tax (Transitional Provisions) Bill 1996].

Old undeducted mining and quarrying amounts [clause 330-45 of the Income Tax (Transitional Provisions) Bill 1996]

Pre-July 1996 mining and quarrying amounts that have not been deducted because of the limitation rules will be treated as having been incurred in the 1996-97 income year. This means they will be deductible under Subdivision 330-C.

Preserving old election rules [clause 330-50 of the Income Tax (Transitional Provisions) Bill 1996]

Undeducted mining capital expenditure incurred after 1 July 1985 and before the 1996-97 income year will be treated as mining capital expenditure incurred in the 1996-97 income year [clauses 330-1, 330-5 and 330-45 of the Income Tax (Transitional Provisions) Bill 1996].

This will mean that the election permitted by clause 330-315 is available to the taxpayer for that expenditure. That election changes the rate of deduction that otherwise applies. Clause 330-50 of the Transitional Provisions Bill will ensure that the effect of that election is what it would have been under the existing law.

Elections for pre 1 July 1985 allowable capital expenditure [clause 330-55 of the Income Tax (Transitional Provisions) Bill 1996]

Under the existing law, you can make an election in relation to undeducted general mining capital expenditure incurred before 1 July 1985. That election changes the rate of deduction than would otherwise apply for that expenditure.

Clause 330-55 of the Income Tax (Transitional Provisions) Bill 1996 will enable you to make an election in respect of that expenditure even though clause 330-1 of the Income Tax Assessment Bill 1996 will treat that expenditure as being expenditure incurred in the 1996-97 income year. Because the expenditure cannot be transferred within a company group under the existing law, it will not be transferable under the new law.

Balancing adjustments where old roll-over relief [clause 330-65 of the Income Tax (Transitional Provisions) Bill 1996]

This clause will modify the balancing adjustment under the new law where property is disposed of that was eligible for roll-over relief under the existing law.

The balancing adjustment adjusts the taxable income of taxpayers when property is disposed of, lost, destroyed, or stops being used for qualifying purposes. It is explained in Part A of this chapter, under the heading Balancing adjustments.

If the property was eligible for roll-over relief when the taxpayer acquired the property under the existing law (eg. because the property passed in a marriage settlement), the balancing adjustment may have been postponed.

Consequently, on a subsequent disposal of that property, the balancing adjustment has to take into account the previous owner's capital expenditure and deductions. This clause ensures that the new law does that by treating:

•

amounts deductible to the prior owners as deductible to the present owner; and

•

capital expenditure of the prior owners as capital expenditure of the present owner.

Corresponding previous law [clause 330-70 of the Income Tax (Transitional Provisions) Bill 1996]

The balancing adjustment provisions and the modifications to the common rules refer to the 'corresponding previous law'. This clause spells out what the corresponding provisions are.

Modifying common rule 1 [clause 330-75 of the Income Tax (Transitional Provisions) Bill 1996]

If a disposal of property takes place in 1996-97 or a later income year, common rule 1 in Division 41 is modified so that it takes into account:

•

any rules contained in the existing law;

•

any references to recoupment provisions in the existing law; and

•

any roll-over relief obtained under the existing law.

Chapter 9 - Deduction for capital works

This chapter summarises the rewritten rules allowing deductions for the cost of buildings and other capital works and explains the changes that the Income Tax Assessment Bill 1996 will make to those rules.

Overview of this chapter

This chapter summarises the capital allowance rules for buildings and other capital works.

These rules are contained in Divisions 10C and 10D of Part III of the Income Tax Assessment Act 1936.

In the rewritten Act they will be contained in Division 43.

This summary is to orient readers to how the new law is structured and expressed. As these provisions have been in the law for some time, there is no need for a detailed exposition. An explanation is given of changes proposed to the capital works provisions.

A. Summary of the new law

Guide to Division 43

What does the Division do?

It allows the capital cost of constructing capital works to be written-off. Capital works are:

•

buildings, structural improvements and environment protection earthworks; and

•

extensions, alterations or improvements to these.

Key operative provisions [Subdivision 43-A]

This Subdivision contains the key provisions that explain how expenditure on capital works can be written-off.

The general rule is

You can deduct an amount for capital works in an income year if:

•

the works have a construction expenditure area;

•

there is a pool of construction expenditure for that area; and

•

you use your area in the year to produce assessable income.

There can be other uses which apply.

The rate of deduction is

For capital works begun:

•

after 26 February 1992 the rate is 21/2%, or 4% for certain purposes;

•

between 22 August 1984 and 15 September 1987it is4%;

•

for other periods it is 21/2%.

Limit on when you can deduct

You cannot claim a deduction for a period before construction is completed.

Limit on amount of deduction

Your deduction in a year cannot exceed the undeducted construction expenditure for your area.

Balancing deduction on destruction

You can deduct the balance of your construction expenditure in a year in which capital works are destroyed, whether the destruction is voluntary or involuntary.

Establishing the deduction base [Subdivision 43-B]

This Subdivision explains the meaning of the terms construction expenditure, construction expenditure area and pool of construction expenditure. These concepts describe elements central to working out what deductions are available for capital works.

Construction expenditure is

Capital expenditure on constructing capital works, but not on:

•

purchasing land;

•

demolishing existing structures;

•

preparing the construction site;

•

landscaping;

•

plant;

•

property deductible under section 73A, 73B, 75B, 75D, 124F or 124JA or Division 10, 10AAA or 10AA of Part III of the Income Tax Assessment Act 1936;

•

heritage conservation expenditure within the meaning of Subdivision AAD of Division 17 of Part III of the Income Tax Assessment Act 1936; or

•

property deductible under Division 330.

Construction expenditure area is

•

For capital works begun after 30 June 1996, such part of capital works on which construction expenditure is incurred as is to be owned, leased or held under a quasi-ownership right by the entity who incurred the expenditure.

•

For capital works begun before 1 July 1996, in addition the works (or part) must be intended for use as set out in Table 43-90.

There can be more than one construction expenditure area eg. one for the original construction, another for an extension and a third for a subsequent extension or capital renovation.

Pool of construction expenditure is

The construction expenditure attributable to a construction expenditure area.

Capital works begin

When the first step in their construction phase begins, such as the pouring of foundations.

Your area and your construction expenditure [Subdivision 43-C]

This Subdivision explains the meaning of the terms your area and your construction expenditure. These concepts determine if you have deductible capital works and establish the basis on which your deduction is calculated.

Your area

How your area is determined depends on whether you are an owner, or lessee (or hold a quasi-ownership right).

Your area - owner

If you are an owner, your area is the part of the construction expenditure area you own.

Your area - lessees and holders of quasi-ownership rights

If you lease (or hold quasi-ownership rights) your area is:

•

the part of the area you lease (or hold) on which you have incurred construction expenditure; or

•

the area you acquired by assignment from the lessee or holder who incurred the expenditure (or one of their successors).

However, the area must have been leased or held continuously since the construction was completed. You would have continuously leased an area even if your original lease had expired provided you have renewed the lease in a timely manner, for example under an option in the lease or by negotiation with the building owner.

Your area - some general comments

Your area may comprise all or part of the construction expenditure area.

You can have more than one area (each separately referred to as your area) in relation to capital works, eg. if there is more than one construction expenditure area.

This can happen where:

•

you own, lease or hold part of a construction expenditure area in an income year and you acquire, lease or the hold another part during the year; or

•

during an income year you dispose of some but retain some of a construction expenditure area.

Your construction expenditure is

The portion of the pool of construction expenditure that is attributable to your area.

Deductible uses of capital works [Subdivision 43-D]

How your area must be used for you to claim a deduction depends on when the capital works were begun and what type of works they are.

If you use your area in the way set out in the first table following, for capital works begun after 26 February 1992, you will be entitled to a deduction calculated at the rate of 21/2%.

For works begun earlier the rate can be either 2 1/2% or 4%.

If you use your area in the way set out in the second table you will be entitled to a deduction calculated at the rate of 4%. This table only applies to capital works begun after 26 February 1992.

Special rules about uses [Subdivision 43-E]

This Subdivision contains some rules which modify the uses described in the tables above and in Table 43-90 of the Bill. Some examples are discussed below.

Use for any purpose or manner

Your area will be taken to be used for a particular purpose or manner if:

•

it is maintained ready for that use, is not used for another purpose and its use has not been abandoned; or

•

its use has temporarily ceased because of construction, repairs etc., or for seasonal or climatic conditions.

Taken not to be used to produce assessable income

Your area will not be accepted as being used to produce assessable income if:

•

it is used for display and is part of a building (other than a hotel or apartment building) begun before 1 July 1996;

•

it is used for residential accommodation (other than in a hotel or apartment building) and the building began before 18 July 1985;

•

you use it for residential accommodation (and it is not a hotel or apartment building).

Use for residential accommodation

Your area will be taken to be used as residential accommodation if:

•

it is part of an individual's home (other than a hotel or apartment building);

•

it is used as a hotel, motel or guest house but does not satisfy the definition of a hotel building.

Calculation of deduction [Subdivision 43-F]

This Subdivision shows how to calculate the amount of your deduction. There are two separate calculation provisions: one for capital works begun before 27 February 1992 and the other for capital works begun after 26 February 1992.

Capital works begun before 27 February 1992

The deduction is calculated separately for each part that meets the description of your area.

Your construction expenditure is multiplied by the applicable rate (2 1/2% or 4%) and by the number of days in the income year in which you owned, leased or held your area and used it in a relevant way. That amount is divided by the number of days in the year.

You apportion the amount if your area is used only partly to produce assessable income.

You also take out any part of a hotel or apartment complex not used as a hotel or for short-term traveller accommodation.

The amount you arrive at as a deduction cannot exceed the undeducted construction expenditure.

Capital works begun after 26 February 1992

Again, the deduction is calculated separately for each part of capital works that meets the description of your area.

Different parts of your area can be used in ways which attract different rates of deduction. If this is the case you will have to make separate calculations for the parts attracting the 2 1/2% and 4% rates respectively.

Undeducted construction expenditure [Subdivision 43-G]

This Subdivision explains how to calculate the undeducted construction expenditure.

Capital works begun before 27 February 1992

The undeducted construction expenditure for your area is the amount of your construction expenditure that remains available for deduction. It is calculated on the assumption that your area has been used in a deductible way throughout the period since it was first used for any purpose.

Capital works begun after 26 February 1992

The undeducted construction expenditure calculation for capital works begun after 26 February 1992 is different from that for earlier capital works. You first reduce your construction expenditure for parts used in a manner attracting the 4% rate. For the rest, it is assumed to have been used in a deductible manner ever since it was first used for any purpose.

Balancing deduction on destruction [Subdivision 43-H]

This Subdivision explains how to calculate a balancing deduction on destruction of your area.

You are entitled to a deduction for the excess (if any) of the undeducted construction expenditure for the destroyed part of your area over any amounts you are entitled to receive for the destruction (such as insurance receipts).

B. Discussion of Changes

Division 43 Deductions for capital works

This Division will set out the rules for obtaining deductions for capital expenditure on the construction of buildings and certain other capital works.

1. Change

The Bill will bring together, in new Division 43, the rules about deductions for traveller accommodation and other income-producing buildings.

Explanation

The existing law deals separately with deductions for expenditure on traveller accommodation (Division 10C of Part III of the Act) and on other buildings and structural improvements (Division 10D). However, the principles underlying these Divisions are essentially the same, and there is much unnecessary duplication of text.

2. Change

Replace a number of discretions given to the Commissioner under the existing law.

Explanation

One of the aims of this rewrite of the law is to replace with objective criteria many of the discretions that the Commissioner of Taxation may exercise under the existing law, to more fully reflect the introduction of the self-assessment system.

Most of the discretions in this part of the existing law require the Commissioner to determine an amount of expenditure attributable to a particular part of a building. The proposed legislation allows this attribution to be made by the taxpayer.

In other cases, a Commissioner's discretion based on his finding of reasonableness will be replaced with a simple objective test of reasonableness, see clauses 43-170 and 43-260.

One Commissioner discretion remains, that being part of an anti-avoidance provision which will be limited in its application - see the discussion below on clause 43-55.

Clause 43-2 Key concepts used in this Division

This clause will provide an illustration of the main concepts in this Division and the relationships between them.

Change

The proposed Division includes a graphic to illustrate the concepts and their relationships.

Explanation

This Division is constructed upon several linked concepts which need to be understood by readers. They fall into two main categories, areas of capital works and expenditure amounts relating to those areas. The graphic gives a visual insight into the workings of the Division as part of the introductory Guide. The graphic does not have operative status but is provided as an illustrative introduction to the main concepts.

Subdivision 43-A Key operative provisions

This Subdivision will contain all the key operative provisions.

Change

The structure is presented and the main operative provisions are brought together in Division 43.

Explanation

The structure and main concepts of the existing law are difficult to locate and follow.

Subdivision 43-A will set out the main provisions of the new law, explaining:

•

the key elements of an entitlement to a deduction [clause 43-10] ;

•

the type of capital works that can be deducted, and the relevance of when their construction began [clause 43-15] ;

•

the rate at which particular capital works can be deducted [clause 43-20] ;

•

that deductions commence only once construction is completed [clause 43-25] ;

•

what limits apply to the amount deductible in a year [clause 43-30] ;

•

what happens if property is destroyed [clause 43-40] ;

•

the operation of capital allowance common rules [clause 43-45] ;

•

the special anti-avoidance rules [clause 43-55] .

The remainder of the Division, Subdivisions B to H, contains material that will amplify the meaning of these main provisions.

Clause 43-10 Deductions for capital works

This clause will identify the key elements for determining an entitlement to a deduction for expenditure on capital works.

1. Change

The term capital works covers the range of structures and improvements to which this Division applies.

Explanation

The existing law refers to buildings and extensions, alterations or improvements to buildings. A building is also taken as an umbrella term to include a structural improvement and an environment protection earthwork. This can be quite misleading so the more generic term capital works has been adopted in the rewrite.

2. Change

Key concepts will be given labels more indicative of the operative rules.

Explanation

Some key terms used in the existing law do not readily convey their meaning. This does not assist in understanding how the law works.

The new terms, and their counterparts in the existing law, are set out in the following table.

Clause 43-15 Capital works to which this Division applies

This clause will identify the types of capital works to which the Division applies.

Change

The clause gives an example of the kinds of earthworks that can qualify for deduction as structural improvements.

Explanation

The existing law allows a deduction for expenditure on structural improvements. The example will clarify that earthworks integral to the construction of a structural improvement can also qualify.

Clause 43-55 Anti-avoidance arrangements with tax-exempt entity

This clause contains an anti-avoidance rule to disallow deductions if certain arrangements have been entered into.

Change

The provision will be limited to hotel and apartment buildings begun before 1 July 1996.

Explanation

This provision was introduced in 1980, in response to arrangements that transferred, to tax exempt entities, the benefit of deductions for traveller accommodation buildings. The general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 would now apply to arrangements of this kind.

Clause 43-70 What is construction expenditure?

This clause will spell out clearly the types of expenditure that are excluded from construction expenditure.

Change

The clause will spell out more clearly the types of expenditure that can be construction expenditure.

Explanation

The existing law does not detail what capital expenditure qualifies for the deduction. This clause will do so by listing items included in the Explanatory Memorandums to Act No. 57 of 1980 and Act No. 14 of 1983 which inserted Divisions 10C and 10D respectively.

The clause also incorporates matters set out in the then Treasurer's Press Release (No. 135 of 1979), which outlined the Government's proposed operation of the traveller accommodation building deduction prior to the introduction of legislation for Division 10C.

Specifically, construction expenditure will not include expenditure on:

•

acquiring land, demolishing existing structures or on landscaping; or

•

clearing, levelling, filling, draining or otherwise preparing the construction site prior to carrying out excavation work.

This does not change the practical effect of the law.

Clause 43-75 Construction expenditure area

This clause will explain the meaning of the term construction expenditure area. Capital works must relate to a construction expenditure area before a person can get a deduction under Division 43.

1. Change

This clause will allow a deduction for the cost of capital works to be based on their current use only (without also requiring regard to their original intended use as the present law does). This change will apply to capital works begun after 30 June 1996.

Explanation

The existing law does not allow a deduction for capital works unless:

•

their current use is for an eligible purpose; and

•

their originally intended use, on construction, was also for an eligible purpose.

If the works were not originally intended for an eligible purpose, neither the person who constructed them nor any subsequent person can obtain deductions.

Entitlement to a deduction in any given year will in future be based only on how the current owner, lessee or holder uses the building.

This change will apply to capital works begun after 30 June 1996.

2. Change

The clause will allow a person who acquires a building from a speculative builder and all subsequent purchasers of the building to claim a deduction for the cost of construction.

Explanation

The existing law allows a deduction only for capital construction costs. This would literally exclude the construction costs of a speculative builder or property developer whose costs are of a revenue nature. However, the original intention was to allow a deduction for that type of expenditure (in the hands of building purchasers). The Commissioner has administered the law to give effect to that intention and this change will align the law with that practice and intent.

Clause 43-80 When capital works begin?

This clause establishes when construction begins.

Change

It will be made clear that the construction of capital works begins when the first step in the construction phase starts.

Explanation

The existing law is silent on this issue but the change is consistent with the way in which the law has been administered by the Commissioner.

The time when construction of capital works begins is critical for several reasons, including:

•

whether particular capital works qualify for deduction;

•

the rate of deduction; and

•

the method used to calculate the deduction.

The fact that expenditure is incurred before capital works begin does not preclude it from deduction. For example, architects and engineers fees and the cost of excavating foundations are construction expenditure.

Construction is not taken to start simply because preliminary work such as site preparation has commenced. It requires a physical start, eg. pouring of foundations.

Clause 43-95 Meaning of hotel building and apartment building

This clause will explain the meaning of the terms hotel building and apartment building.

Change

These terms will be defined by reference to the use of the buildings and when their construction began.

Explanation

Hotel and apartment buildings will be defined by reference to:

•

their intended use when construction finished (for buildings begun after 21 August 1979 and before 18 July 1985 or after 26 February 1992 and before 1 July 1996); and

•

their use in the current year (for buildings begun after 30 June 1996).

There is no concept of a hotel or apartment building for buildings begun after 17 July 1985 and before 27 February 1992. Buildings of all kinds constructed in this period are treated on the same basis.

Clause 43-120 Your area and your construction expenditure - lessees and quasi-ownership right holders

This clause will explain the meaning of your area and your construction expenditure area in the context of property that is:

•

leased; or

•

held under a right granted by certain government agencies.

Change

These situations will be dealt with explicitly in the new law.

Explanation

The existing law deems such lessees (and holders) to be the owners of the areas they lease, or hold by a quasi-ownership right.

The new law avoids this kind of deeming device which can be confusing to readers.

Clause 43-140 Using your area in a deductible way

Clause 43-145 Using your area in the 4% manner

These clauses will set out how capital works must be used in order to qualify for deduction.

Change

In order to bring these use tests together in one place, they will be set out in tables in the new law.

Explanation

Under the existing law for capital works begun after 26 February 1992:

•

traveller accommodation buildings (Division 10C) can be deducted at the rate of 4% if they are used in the prescribed manner (ie. to provide traveller accommodation). If not used in the prescribed manner but, nonetheless, used to produce assessable income, they attract a deduction at 2 1/2%.

•

other buildings (Division 10D) can be deducted at the rate of 2 1/2% if they are used in the prescribed manner (ie. to produce assessable income or for research and development). If a building is also used for eligible industrial activities the rate increases to 4%.

Clause 43-140 will establish a basic entitlement to a deduction at the rate of 2 1/2%. Clause 43-145 establishes the higher rate of 4% equivalent to use in the prescribed manner in Division 10C and use in an eligible industrial manner in Division 10D.

The circumstances in which a deduction will be available at either the 2 1/2% or 4% rate have not been changed.

These rules apply to buildings begun after 26 February 1992.

Clause 43-150 Meaning of industrial activities

This clause defines the meaning of the expression industrial activities.

Change

The definitions of goods and manufactured goods used in the original provisions have been omitted.

Explanation

The existing law uses definitions of the terms goods and manufactured goods. These definitions are unnecessary as they do no more than explain the ordinary meaning of the expressions. The omission of these definitions is not considered to alter the meaning of the provisions in any way.

Clause 43-160 Your area is used for a purpose if it is maintained ready for use for the purpose

This clause will treat your area as being used for a particular purpose, or in a particular manner, if it is maintained for that use and is not used in any other way.

Change

This clause will apply to all capital works.

Explanation

Under the existing law, this rule applies only to general income producing buildings (Division 10D) and not to traveller accommodation buildings (Division 10C).

The change will:

•

standardise the treatment of buildings to which this Division applies; and

•

apply only to the use of capital works in the 1996-97 income year and subsequent years (regardless of when construction began).

Clause 43-165 Temporary cessation of use

This clause will allow a temporary cessation of use to be ignored.

Change

The clause will apply to all capital works.

Explanation

Under the existing law, this relieving rule applies only to traveller accommodation (Division 10C) and not to general income producing buildings (Division 10D).

The change will:

•

standardise the treatment of buildings to which the Division applies; and

•

apply in its extended operation only in the 1996-97 income year and subsequent years (regardless of when the capital works began).

Clause 43-170 Own use - capital works other than hotel and apartment buildings

This clause will exclude certain buildings (other than hotel and apartment buildings) that are used for residential accommodation from deduction.

Change

The adoption of a broader definition of the word associate may mean that a deduction that is allowable under the current law will be denied under the new law.

Explanation

As the notes on clause 995-1 explain, the definition of associate provided in the dictionary is broader than the definition provided in the existing provisions of Division 10D. Therefore the provision potentially denies the deduction in more cases than is possible under the present law.

However, the number of cases in which the deduction will actually be denied should be very limited, because:

•

the provision can only affect an associate who is a natural person;

•

the provision only denies a deduction if the building owner and the associate aren't dealing at arm's length; and

•

it is arguable that the Commissioner could disallow the deduction under the existing law by applying general law principles on the derivation of assessable income.

Clause 43-185 Residential or display use

This clause will treat certain buildings used for residential or display purposes as not being used for assessable income producing purposes, and therefore ineligible for deductions.

Change

A deduction will be extended to income-producing buildings, begun after 30 June 1996, that are used for display purposes.

Explanation

Under the existing law, a deduction is not allowed for income-producing buildings used for the purpose of display (such as a display home). This restriction will be limited to buildings begun before 1 July 1996.

Clause 43-210 Deduction for capital works begun after 26 February 1992

This clause explains how to calculate a deduction for capital works begun after 26 February 1992.

Change

Two apportionment provisions are amalgamated.

Explanation

Under the existing law, you are required to:

•

calculate your gross deduction;

•

consider, and where appropriate, apply two separate apportionment provisions to reduce the deduction; and

•

ensure that your net deduction does not exceed the residual capital expenditure (now called undeducted construction expenditure).

Amendments to the law in 1992 changed the calculation of the gross deduction for capital works begun after 26 February 1992. For works begun after that date the gross deduction is based on the portion of your construction expenditure for the part of your area used in the relevant way. For works begun before 27 February 1992 the gross deduction is based on your construction expenditure.

The gross deduction for capital works begun after 26 February 1992 is an amount attributable only to the part of your area that you use in the relevant way. This achieves the same result as one of the two apportionment provisions which is now being omitted as unnecessary.

Clause 43-215 Deduction for capital works begun before 27 February 1992

This clause explains how to calculate a deduction for capital works begun before 27 February 1992.

1. Change

Separate rules in Divisions 10C and 10D about reducing deductions are being combined.

Explanation

Under the existing law, you are required to:

•

calculate a gross deduction;

•

consider, and where appropriate, apply two separate apportionment provisions to reduce the deduction; and

•

ensure that your net deduction does not exceed the residual capital expenditure (now called the undeducted construction expenditure).

The gross deduction is calculated as if the whole of a building was used in a deductible manner. Apportionment rules then apply if necessary to reduce the deduction to an amount referable to the part actually used. However, the apportionment rules differed in each Division.

Under Division 10C, the deduction for traveller accommodation buildings is reduced if:

•

any part of the building was not used to operate a hotel or for short-term traveller accommodation; or

•

the building was used only partly to produce assessable income.

Under Division 10D, the deduction is reduced if:

•

any part of the building is not used to produce assessable income; or

•

the building is used only partly to produce assessable income.

Two separate reductions are appropriate to the calculation of the Division 10C deduction because there are two separate use tests which must be satisfied for hotel and apartment buildings, but Division 10D has only one use test.

Step 2 of clause 43-215 contains the reduction that is specific to hotel and apartment buildings. Step 3 contains the further reduction for any building that is used only partly to produce assessable income.

2. Change

The mechanism used to determine the total period over which deductions may be claimed has been made uniform for all capital works, irrespective of when they began.

Explanation

Under the existing law, two different mechanisms are used. For capital works begun before 27 February 1992 the time limit is either 25 or 40 years. For capital works begun after 26 February 1992 the limit is based on not deducting more than the residual capital expenditure (to be called undeducted construction expenditure).

The rewrite uses only one mechanism to determine the period for deduction. Undeducted construction expenditure is used because it is effective for all capital works.

C. Date of effect

Proposed Division 43

New Division 43 will apply to all capital works deductions claimed in the 1996-97 income year regardless of when capital works began.

D. Transitional arrangements

Special transitional provision - quasi-ownership rights [clause 43-100]

Division 10D of Part III of the Income Tax Assessment Act 1936 allows a deduction to holders of Crown leases (as defined for the purposes of section 54AA of that Act). That definition extends the ordinary meaning of Crown lease to include easements and rights, powers and privileges over land. However, the extended meaning of Crown lease:

•

only applies to buildings begun after 26 February 1992;

•

does not apply to traveller accommodation buildings (Division 10C).

The extended meaning of Crown lease is covered by the new terms quasi-ownership right, exempt Australian government agency and exempt foreign government agency. These terms are explained in Chapter 11.

In so far as the extended meaning of Crown lease applies to hotel and apartment buildings it will only apply to buildings begun after 30 June 1996.

Special transitional provision - exclusive deduction provision [clause 43-105]

Division 10D of Part III of the Income Tax Assessment Act 1936 contains a provision ensuring that construction expenditure is only deductible to the owner, or subsequent owner, under that division.

It also prevents a subsequent owner from claiming a deduction for expenditure incurred in acquiring the part of the building that the construction expenditure relates to.

These rules will apply to all capital works under Division 43 [subclauses 43-50(1) and (2)] . However, a transitional provision will ensure that they only apply to hotel buildings and apartment buildings begun after 30 June 1996.

E. Consequential amendments to the Income Tax Assessment Act 1936 and other Commonwealth legislation

Consequential amendments - record keeping [clause 264]

A new subsection 262A(4AJA) will be inserted in the Income Tax Assessment Act 1936 to impose the same record keeping obligations for Division 43 as exist in subsections 262A(4AF) to (4AJ) for Divisions 10C and 10D of Part III of the 1936 Act. This is needed to reflect the merger of Divisions 10C and 10D into proposed Division 43.

Proposed subsection 262A(4AJA) will apply to disposals of capital works for which deductions have been allowed under Division 43, or under Divisions 10C or 10D, that occur in the 1996-97 or subsequent income years.

Chapter 10 - Substantiation

This chapter explains how the rewritten substantiation provisions will be included in the Income Tax Assessment Bill 1996.

Overview of this chapter

This chapter discusses the rewrite of the rules for substantiating work-related expenses and the rules for calculating deductions for car expenses.

These rules have already been rewritten by the Tax Law Improvement Project and are currently in the Income Tax Assessment Act 1936. They are being relocated in the new Income Tax Assessment Act.

This chapter discusses the minor changes that are proposed to make them consistent with the style of the new Act.

Background

The substantiation provisions of the Income Tax Assessment Act 1936 were the first to be rewritten by the Tax Law Improvement Project, in 1994. The rewritten provisions were included in the existing Act by the Tax Law Improvement (Substantiation) Act 1995 and apply from the 1994-95 income year.

In rewriting the substantiation provisions, it was noted that they serve two quite different functions.

•

They detail the records that a taxpayer must keep to claim a deduction for work-related expenses.

•

For car expenses, they contain the methods from which a taxpayer must choose to calculate deductions.

These distinct functions made it impracticable to rewrite the provisions as one subject matter. As a consequence, the car expenses and substantiation provisions were separated and placed in separate Schedules to the Income Tax Assessment Act 1936. The car expenses rules are in Schedule 2A and the substantiation rules are in Schedule 2B.

The provisions were placed in Schedules to the existing Act to facilitate their relocation as soon as the new Act was available. That opportunity is now being taken.

Transferring the substantiation and car expenses rules to the new law

The Income Tax Assessment Bill 1996 includes the rewritten car expenses rules [ Division 28 in the Bill] and the rewritten substantiation rules [Division 900] .

In transferring them from the Schedules in the existing Act to the proposed new Act, some minor changes were required to reflect further drafting and design improvements developed since they were rewritten.

Guides to the new law

Schedules 2A and 2B to the existing Act use key principles statements to summarise the main features of each segment of the law. Some of the key principles include operative provisions (that is, provisions which have legal effect rather than being only a summary). As it is intended that the new law will adopt explanatory Guides, which are not operative provisions, rather than key principles statements, it is necessary for consistency to transfer any operative provisions into the main body of the law. Some explanatory material is also being relocated.

The following table shows the relocation of provisions:

Use of terms expense, expenditure and loss or outgoing

Before the changes made by the Tax Law Improvement (Substantiation) Act 1995, the substantiation provisions defined an expense as including a loss or outgoing. This extended meaning of expense was not carried into the Schedules to the present Act, but will now be restored by this Bill.

Placement of definitions

All defined terms used in the Bill will be listed in clause 995-1. Each listed term will either:

•

be accompanied by its defined meaning; or

•

direct the reader accurately to where the term is defined.

The detail of many definitions will be found outside the Dictionary. This is because they are specific to only a particular segment of the law, and it is more convenient and helpful to understanding of readers if the definition is located where it is most relevant.

Some definitions about car expenses have been relocated. The following table shows the placement of relocated definitions.

Transitional arrangements

The changes will apply from the 1996-97 income year [clause 4-1 of the Income Tax (Transitional Provisions) Bill 1995].

Clause 28-100 of the Income Tax (Transitional Provisions) Bill 1995 will ensure that taxpayers who complied with log book requirements of Schedule 2A of the 1936 Act, or with the provisions it replaced, are treated as:

•

having used the log book method; and

•

having kept a log book

for the purposes of the 1996 Bill.

Log books are available as one method of substantiating the deductibility of car expenses. The pattern of use that a log book shows can be used to substantiate the deductibility of car expenses for up to 5 income years. Clause 28-100 will mean that taxpayers won't have to keep a new log book until the 5th year after they kept their last one, even if it was kept under the previous law.

Chapter 11 - Dictionary

This chapter explains how the Income Tax Assessment Bill 1996 deals with definitions, and the role of the Dictionary in helping readers to find defined terms.

Overview of this chapter

This chapter explains Chapter 6 of the Income Tax Assessment Bill 1996 - The Dictionary.

It discusses in general terms how the Bill proposes to deal with defined terms.

It then explains changes that the Bill proposes to make to terms defined in the Bill compared with present definitions.

A. Summary of the new law

Background

The Income Tax Assessment Act 1936 has nearly 5000 defined terms spread throughout the Act. The main problems for readers in following the definitions have been:

•

the large number of terms which have been given a meaning other than their ordinarily understood meaning;

•

knowing whether a term used in the law is a defined term;

•

if a term is defined, knowing where to find the definition;

•

some terms (such as 'associate' which is given many separate definitions in the present law) have a different meaning depending on where they appear in the Act.

Aims of the Bill

The Bill will:

•

provide a central point where readers can readily find, or be directed to, definitions of terms used in the Bill;

•

clearly identify defined terms wherever they are used in the law;

•

avoid giving an expression or word a different meaning in different parts of the Act;

•

avoid defining terms unnecessarily if their underlying meaning is clear;

•

attempt to ensure that terms used in the law are reasonably indicative of underlying meanings or concepts; and

•

remove duplication by ensuring that a term is defined only once.

The Dictionary

The Dictionary, located at the end of the Bill (in Chapter 6), will be the central reference point for locating the meaning of defined terms used in the new law.

All defined terms used in the Bill will be listed in clause 995-1. Each listed term will either:

•

be accompanied by its defined meaning; or

•

direct the reader accurately to where the term is defined.

The detail of many definitions will be found outside the Dictionary. This is because they are specific to only a particular segment of the law, and it is more convenient and helpful to understanding of readers if the definition is located where it is most relevant.

How to identify a defined term

All defined terms (except for a small number of frequently used basic terms) will be identified by the symbol *, which will appear in front of the term the first time it is used in each subclause. However, a defined term will not be asterisked in non-operative material for example, headings, Guides, notes, examples, or navigational help [clause 2-15] .

There will be a note, at the foot of each page of the new Act, telling readers that the asterisked terms are located in the Dictionary, at section 995-1.

The basic terms

Some terms are used so frequently in the law that it would distract readers if their status as a defined term is highlighted by an asterisk each time they are used.

These basic terms fall into 2 categories:

•

Key participants in the income tax system: you, Commissioner, person, entity, individual, company, partnership, trustee and Australian resident.

•

Core concepts: income tax, this Act, income year, taxable income, assessable income, deduct/deduction, assessment and amount.

Application of defined terms

Definitions in the Dictionary apply only to the Income Tax Assessment Bill 1996, and not to the Income Tax Assessment Act 1936, unless the 1936 Act expressly says otherwise [clause 995-1(2)].

Conversely, definitions in the 1936 Act will not apply to the 1996 Bill, except where a definition in the Bill expressly adopts the meaning in the 1936 Act.

Reducing the number of defined terms

The Bill will omit a number of definitions which are unnecessary because their ordinary meaning can be relied on. These terms are: agreement, expenditure, expense, land, market value, paid, property and provide.

B. Discussion of changes

The rest of this chapter discusses the commonly used definitions listed in the Dictionary.

If this Bill will change a term's meaning, there is an explanation of the effect of the change. A change in a term's meaning has no effect on parts of the law which have not yet been rewritten.

In the following explanations:

No change means no change in meaning from the 1936 Act, although the words may have been changed to use a clearer or simpler style.

New label, previously '[word or expression]' means that a concept called '[word or expression]' in the 1936 Act has been given a new label in the 1996 Act.

New term means the term is not defined in the 1936 Act.

100% subsidiary

New label, previously subsidiary company which is defined in subsections 80G(2) and (3) of the 1936 Act. The concept is unchanged.

adopted child

No change.

amount

Will specifically include a 'nil amount'. This is a drafting device to avoid expressly mentioning zero or nil when referring to amount.

arrangement

In the existing law, arrangement is used in a defined sense predominantly for anti-avoidance purposes but also in non-avoidance provisions.

The Bill will adopt the most modern definition in the 1936 Act, from the reportable payments system (section 220AC).

Unlike the most common definition of arrangement (eg. see subsection 26AJ(11) in the 1936 Act), the definition will not mention any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. When this wider concept is relevant, which is usually in an avoidance context, the defined term scheme will be substituted.

In this Bill, arrangement is used in the capital works provisions [clauses 43-55 and 43-170] and in the losses provisions [Subdivision 165-D] .

When it is used in this Bill, the term will now include a reference to a promise or undertaking. Very few, if any, kinds of arrangements will be affected by standardising the definition which, like the main provisions of the Bill, applies on a fully prospective basis.

assessment

No change.

assessable income

No change.

associate

There are 15 different definitions of associate in the 1936 Act. To standardise them, the Bill will adopt the definition in section 318 of the 1936 Act, which has generally been adopted in new provisions since it was enacted in 1991.

In this Bill, associate is used in 2 capital works provisions [Division 43] . It has a wider meaning than the current definition in subsection 124ZF(1). For example, for an individual the current definition only includes a spouse, parent or child of that person but the proposed definition would also include other relatives, a partner, a spouse or child of a partner and a trustee of a trust if the person benefits under the trust.

However, this will have no significant practical effect because:

•

Clause 43-170, which will effectively deny a deduction for capital works used mainly for residential accommodation by you or an associate, contains an exception for arm's length dealings.

•

Subclause 43-75(3) is a new rule and, therefore, the meaning of associate does not alter the existing law.

Australian law

New term, replaces the often used phrase law of the Commonwealth, a State, or a Territory, which is not defined in the 1936 Act.

Australian resident

New label, previously resident/resident of Australia.

Australian source

New term. Used instead of phrases like derived from a source in Australia.

business

No change.

car

There are 4 different definitions in the 1936 Act, notably those in sections 82KT(1) and 11-1 of Schedule 2A.

The definition used in the Bill distils the main ideas in those definitions. However, it doesn't mention the specific forms of car those definitions refer to (eg. station wagons and panel vans) because they are all within the general description of a motor vehicle designed to carry a load of less than 1 tonne or fewer than 9 passengers.

Car is used in the Bill only in the context of car expenses [Division 28] and substantiation provisions [Division 900] . Rather than define car to exclude taxis taken on hire and other vehicles taken on hire under particular agreements, as does the present law, clause 28-165 will provide that the methods used for deducting car expenses don't apply to cars that are taxis or such vehicles taken on hire. The effect of those provisions will not be changed by the new definition.

child

No change.

Commissioner

No change.

Commonwealth law

New term, used instead of law of the Commonwealth which is not defined in the 1936 Act. Used in defining Australian law.

company

No change.

constitution

New label, previously constituent document.

deduct

New term. Explained in Chapter 4 of this Explanatory Memorandum.

deduction

New label, previously allowable deduction.

derive

In the 1936 Act, derive is formally defined only in Division 13 and that inclusive definition does not extend its ordinary meaning. However, section 19 deems a person to derive income or money, although it is not actually received, if it is dealt with at the person's direction or on their behalf.

In the Bill, derive is not given a particular meaning. However, in working out when an entity derives an amount of ordinary income, the constructive receipt rule in subclause 6-5(2) - which corresponds to section 19 - must be considered. This causes no change to the law.

dividend

No change.

dual resident investment company

No change.

entity

This term will be used as a catch all for any individual or body. It will be used in contexts where it is appropriate to refer to such a wide grouping. For example, entity can be used in phrases such as the assets were acquired from another entity or income from the provision of services by the company to an entity.

New Division 9 lists those entities that must pay income tax.

The definition will bring together the elements of entity in the different definitions throughout the 1936 Act. Most of these definitions cover:

•

a company;

•

a partnership;

•

a person in the capacity of trustee; and

•

any other person.

Although not specifically stated, the definitions also include unincorporated associations (which are included within the definition of a company), individuals (who are persons), and bodies politic (who are also legal persons). The new definition will specifically include these.

In addition, the new definition will include:

•

a trust; and

•

a superannuation fund.

The concept of an entity also distinguishes between the different capacities in which a legal person may act. For example, an individual acting in the capacity of a trustee will be treated as a separate entity from that individual acting in a personal capacity. This will remove the necessity to continually state that a particular provision only applies to an individual otherwise than in the capacity of trustee.

exempt Australian government agency

New term. It will cover the Commonwealth, States and Territories. It will include Australian government agencies which are exempt from income tax because of a provision listed in the definition of relevant exempting authority (section 160K) of the capital gains provisions, eg. a municipal authority, a local governing body, a public authority constituted under an Australian law.

This will cause no change to the law.

exempt foreign government agency

This is a new term covering foreign governments and foreign government agencies, similar in scope to exempt Australian government agency (see above).

exempt income

The meaning will be clarified. See the detailed explanation in Chapter 4 of this Explanatory Memorandum.

financial year

New label, previously year of tax.

foreign law

New label, will replace law of a foreign country, which is not defined in the 1936 Act.

in a position to affect rights

New term, formally defines the concept (in subsection 80G(4) of the 1936 Act) of a subsidiary company for the purposes of transferring losses within company groups. It explains when a person is in a position to affect any rights of a company in relation to another company.

The concept is unchanged.

in existence

New term, formally defines the concept (in subsections 80G(5), (5A) and (5B) of the 1936 Act) of when a shelf company is taken to exist for the purposes of transferring losses within company groups. The concept is unchanged.

income tax

It will refer to annual taxes imposed as income tax and assessed under the Assessment Acts. Narrower than the definition in subsection 6(1) of the 1936 Act, which includes all taxes imposed as income tax and assessed under the 1936 Act.

Income tax will be used when it is necessary to refer only to annual income taxes, eg. it will be used in the core provisions on how to work out the income tax payable on your taxable income [Division 4] .

This will cause no change to the law.

income tax return

New label, previously return of income.

income year

New label, previously year of income.

individual

New term, means natural person.

leasing company

No change.

legal personal representative

Adopts the definition in subsection 27A(1) of the 1936 Act, so that it can apply generally where the concept of a legal personal representative is relevant.

This will cause no change to the law.

member

New label, previously shareholder. Member is a more logical label because currently shareholder is defined to include members of companies which do not have shares. Furthermore, member is the term used in the Corporations Law.

motor vehicle

This term is defined in 3 different ways in the 1936 Act (subsections 57AF(1), 82KT(1) and 82AF(2)) and differently again in the Income Tax Regulations. The definition in the Bill is slightly broader than some of those definitions, because it adopts the ordinary meaning of 'motor vehicle' with the clarification that it includes 4-wheel drive vehicles.

'Motor vehicle' is used in the Bill only in the car expenses and substantiation provisions and in the definition of car. The new definition does not change those provisions at all, because it is no wider than the definition already applying to those provisions.

ordinary income

New term, explained in Chapter 4 of this Explanatory Memorandum.

partnership

No change.

PAYE earner

New label, previously employee as defined in section 221A. Where employee is used in the Bill, it has its ordinary meaning.

PAYE earnings

New label, previously salary or wages as defined in section 221A. Where salary or wages is used in the Bill, it has its ordinary meaning.

PDF

No change.

person

No change.

plant

Same as the definition in subsection 54(2) (Depreciation) of the 1936 Act. The use of that definition in this Bill will result in no change to the law.

pooled development fund

No change.

private company

Same as the general definition in subsection 6(1) of the 1936 Act, which has the meaning explained in section 103A of that Act.

This causes no change to the law.

public company

This causes no change to the law in this Bill.

purpose of producing assessable income

New term. It will be used for brevity in place of the two limb test:

•

for the purpose of gaining or producing assessable income; or

•

in carrying on a business for the purpose of gaining or producing assessable income.

The use of this new term causes no change to the law.

quasi-ownership right

New term, used to describe the rights over land that were previously covered by the definition of Crown lease in section 54AA. The term will be introduced so that Crown lease can have its ordinary meaning, rather than an extended artificial meaning.

The existing definition of Crown lease is an inclusive definition which extends the ordinary meaning of Crown lease to include interests over land which do not come within the ordinary meaning of lease or Crown lease, eg. easements and other rights, powers or privileges over land and extends the categories of entities who may grant such a right or interest.

The term quasi-ownership right will be used to cover leases, easements and other rights, powers or privileges over land granted by certain government bodies.

The government bodies that grant the interests are described in two other definitions - exempt Australian government agency and exempt foreign government agency.

redeemable shares

New term. Formally defines a concept explained in subsection 50K(4) but does not change its meaning.

relative

No change.

research and development activities

Adopts the meaning in section 73B (expenditure on research and development) of the 1936 Act. This causes no change to the law in this Bill.

scheme

In the existing law, scheme is used in a defined sense predominantly for anti-avoidance purposes. It will be used in the proposed Act in anti-avoidance provisions.

The Bill adopts the definition which has been used in anti-avoidance provisions since Part IVA was enacted in 1981 (see section 177A). In 2 losses provisions of the Bill [clauses 175-15 and 175-30] , scheme replaces the words agreement, scheme, arrangement, understanding, transaction, course of conduct or course of business.

The only potential difference between the definition in the Bill and the relevant definitions in the 1936 Act is that the new definition will include any promise or undertaking (because it includes the defined term arrangement). Very few, if any, arrangements will fall within the definition in the Bill and outside those in the existing law. Thus, standardising the definition of scheme will have no significant practical effect in this Bill, which is to have only a future application.

share

No change.

spouse

No change.

State law

New term, used instead of law of a State which is not defined in the existing law. Used in defining Australian law.

statutory income

New term, explained in Chapter 4 of this Explanatory Memorandum.

tax

No change. In the existing law it is synonymous with income tax but that term will have a narrower meaning in this Bill (see discussion of income tax above).

Tax will be used where it is necessary to refer to all income taxes assessed under the Assessment Acts.

tax loss

New term explained in chapter 6 of this Explanatory Memorandum.

tax offset

New term replacing 'rebate' and 'credit' used in the 1936 Act. Explained in Chapter 4 of this Explanatory Memorandum.

taxable income

No change.

termination value

New term. It will formally define a significant concept already present in the capital allowance provisions of the existing law. The termination value will be used in calculating any balancing adjustment on the disposal, loss or destruction of the property on which you incurred the expenditure which entitled you to a deduction.

Although it is a single concept, the value will be calculated in different ways, depending on the capital allowance and the circumstances. Defining this concept causes no change to the law.

Territory law

New term, used instead of the phrase law of a Territory which is not defined in the existing law. Used in defining Australian law.

this Act

Will include not only the 1936 Act but also the proposed 1996 Act and the objection, review and appeal provisions of the Taxation Administration Act 1953 (so far as they relate to the other 2 Acts). However, in Division 950 (Rules for interpreting this Act), this Act means only the proposed 1996 Act.

trustee

No change.

wholly-owned group

New term. Will formally define and re-label the notion of group company in relation to another company. The concept is important to the provisions governing transfer of losses within a company group in section 80G of the 1936 Act.

The concept is unchanged.

written down value

New term. It will formally define a significant concept in the capital allowance provisions of the existing law which is presently undefined. The written down value will be used in calculating any balancing adjustment on the disposal, loss or destruction of the property on which you incurred the expenditure which entitled you to a deduction.

Although it is a single concept, the value will be calculated in different ways, depending on the capital allowance and the circumstances. Defining this concept causes no change to the law.

you

New term. The existing law is written in the third person but much of the Bill is written in the second person. The reasons for using the second person are explained in Chapter 1 of this Explanatory Memorandum.

The word you will be extensively used in the proposed new Act, except in provisions which apply only to entities other than individuals, eg. the company loss provisions.

You refers to entities generally, unless its meaning is expressly confined.

Chapter 12 - Consequential and Transitional Provisions

This Chapter describes the arrangements proposed by the Income Tax (Transitional Provisions) Bill 1996 and the Income Tax (Consequential Amendments) Bill 1996, consequent on the introduction of the Income Tax Assessment Bill 1996.

Overview of this Chapter

This Chapter explains the operation of the Income Tax (Consequential Amendments) Bill 1996 and the Income Tax (Transitional Provisions) Bill 1996.

A. Income Tax (Consequential Amendments) Bill 1995

This Bill will amend the Income Tax Assessment Act 1936 (the 1936 Act ), and other Commonwealth laws, to make changes that are necessary as a consequence of the introduction of the Income Tax Assessment Bill 1996(the 1996 Act ) and its intended progressive replacement of the 1936 Act.

The amendments will:

•

close off the operation of parts of the 1936 Act that have been rewritten in the 1996 Act, so that they will not apply in the 1996-97 (and subsequent) income years; and

•

omit references to the 1936 Act, a part of the 1936 Act or a term used in the 1936 Act and replace it with references to the 1996 Act, a part of the 1996 Act (corresponding to the part of the 1936 Act that is omitted) or a term used in the 1996 Act (corresponding to the term used in the 1936 Act); and

•

insert, with existing references, additional references to the 1996 Act, a part of the 1996 Act or a term used in the 1996 Act.

Apart from the 1936 Act, the Bill will amend the following Acts:

Administrative Decisions (Judicial Review) Act 1977

Aussat Repeal Act 1991

Australian Industry Development Corporation Act 1970

Bank Integration Act 1991

Bounty and Capitalisation Grants (Textile Yarns) Act 1981

Child Support (Assessment) Act 1989

Commonwealth Funds Management Limited Act 1990

Commonwealth Serum Laboratories Act 1961

Consular Privileges and Immunities Act 1972

Crimes (Taxation Offences) Act 1980

Data-matching Program (Assistance and Tax) Act 1990

Diplomatic Privileges and Immunities Act 1967

Financial Corporations (Transfer of Assets and Liabilities) Act 1993

Fringe Benefits Tax Assessment Act 1986

Higher Education Funding Act 1988

Insurance (Agents and Brokers) Act 1984

International Tax Agreements Act 1953

Military Superannuation and Benefits Act 1991

Parliamentary Contributory Superannuation Act 1948

Petroleum Resource Rent Tax Assessment Act 1987

Pooled Development Funds Act 1992

Snowy Mountains Engineering Corporation Act 1970

Snowy Mountains Engineering Corporation Limited Sale Act 1993

Social Security Act 1991

Stevedoring Industry Charge Assessment Act 1947

Student and Youth Assistance Act 1973

Superannuation Act 1976

Superannuation Act 1990

Superannuation Industry (Supervision) Act 1993

Taxation (Interest on Overpayments and Early Payments) Act 1983

Taxation (Unpaid Company Tax) Assessment Act 1982

Telecommunications Act 1991

Trust Recoupment Tax Assessment Act 1985

Veterans' Entitlements Act 1986

Wool International Act 1993

all amendments of these Acts are of a minor, drafting nature, except for the changes to the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 which result in no substantive change but require significant drafting changes as referred to below.

There are, however, some additional amendments of the 1936 Act, and the Taxation Administration Act 1953, that will result in substantive change to the law. These changes are explained below.

Amendments of the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 (FCA)

The amendments of the FCA, while purely formal, are extensive. For this reason they have been placed in a separate schedule [Schedule 4 to the Bill] .

Division 8 of the FCA contains the variations to the tax losses provisions of the 1936 Act that must be made when applying them for the purposes of the FCA. As the losses provisions of the 1936 Act will be replaced by the losses provisions of the 1996 Act, Division 8 needs to be amended to incorporate an appropriately adapted version of the relevant losses provisions of the 1996 Act.

This could have been done by specifying the required variations to the losses provisions of the 1996 Act in Division 8 of the FCA. However, instead of this, to improve the readability of the FCA, Division 8 is made to refer to a schedule to the FCA (Schedule 1) which contains the relevant tax losses provisions of the 1996 Act with the required variations made to them.

The changes do not alter the operation of the FCA.

Substantive changes

Public and private rulings [Schedule 2 to the Bill]

Proposed change

Public and private rulings issued by the Commissioner of Taxation will continue to apply where provisions of the 1936 Act are rewritten in the 1996 Act, to the extent that the rewritten provisions express the same ideas as the provisions in the 1936 Act.

The present law

The income tax and fringe benefits tax laws authorise the Commissioner to issue public and private rulings. The rulings are legally binding on the Commissioner.

A public ruling is the Commissioner's opinion about the way a tax law applies to:

•

any person in relation to a class of arrangements; or

•

a class of persons in relation to an arrangement or class of arrangements.

A private ruling is the Commissioner's opinion about the way a tax law applies to a person in relation to an arrangement for an income year.

A tax law is a provision of an Act or a regulation which works out the liability for income tax, withholding tax, franking deficit tax, Medicare levy, or fringe benefits tax. In the absence of the proposed change, if a provision in the 1936 Act is rewritten and included in the 1996 Act, any ruling given before the re-enactment would apply only to the old provision. It would not be a ruling on the new provision.

Explanation of proposed amendments

If the Commissioner has made a ruling on a provision which is re-enacted or remade, the ruling will be treated as also applying to the corresponding new provision to the extent that the ideas in the two provisions are the same [Schedule 2, Part 1, items 2 and 3 - new sections 14ZAAM and 14ZAXA of the Taxation Administration Act 1953] .

To the extent that the ideas in the new provision are different from those in the old law, a ruling on the old provision is not a ruling on the new law.

The amendments will not be limited to rulings on provisions in the 1936 Act rewritten as part of the Tax Law Improvement Project. They will extend to any rewriting of a tax law from the date of effect.

Date of effect

The amendments will apply:

•

regardless of when a ruling is made [Schedule 2, Part 2, items 1 and 2] . Thus, the amendments will apply to rulings made at any time since 1 July 1992, when the system of public and private rulings provisions was established; and

•

only if the re-enacted or remade law commences on or after 1 July 1996, the proposed commencement date for the Income Tax (Consequential Amendments) Act 1996 [Schedule 2, Part 2, items 1 and 2] .

This item will replace paragraph 23(r) of the 1936 Act, which explains in what circumstances income derived by non-residents is exempt from income tax, with a rewritten paragraph having the same effect. The item is discussed under Consequential amendments in Chapter 4.

Losses: Inter-corporate dividend rebate [Schedule 1, item 16]

This item will omit subsection 46(6A) of the 1936 Act, which modified the operation of section 46 for companies affected by the current year loss provisions. The item is discussed under Consequential amendments in Chapter 7.

Losses: Dividend stripping [Schedule 1, items 17 to 21]

These items will replace subsections 46A(8A) and (8B) of the 1936 Act, which modified the operation of section 46 for companies affected by the current year loss provisions, with the insertion of subsection 46A(3A). The items are discussed under Consequential amendments in Chapter 7.

Losses: Section 63CA [Schedule 1, items 50 and 76]

By this item, a new section 63CA will replace section 80F of the 1936 Act, which describes the circumstances where a loss from a bad debt is not to be taken into account. The item is discussed under Consequential amendments in Chapter 7.

Losses and foreign income [Schedule 1, item 70]

This item will add a new section 79DA to the 1936 Act to preserve the effect of subsections 79E(5) and (6), which describe the circumstances in which a post 1988-89 loss is deductible from assessable foreign income. The item is discussed under Consequential amendments in Chapter 6.

Record keeping [Schedule 1, Item 264]

This item will add a new subsection 262(4AJA) to the 1936 Act to impose the same record keeping obligations for proposed Division 43 of the 1995 Act as already exist in subsections 262A(4AF) to (4AJ) for Divisions 10C and 10D of the 1995 Act of Part III of the 1936 Act. This item is discussed under Consequential amendments in Chapter 9.

B. Income Tax (Transitional Provisions) Bill 1995

The Income Tax (Transitional Provisions) Bill 1996 contains measures needed for the transition from the existing law to the new law.

The general rule in the Bill is that the provisions in the Income Tax Assessment Bill 1996 will apply to assessments for the 1996-97 income year and later income years [clause 4-1]. There are exceptions to this rule in specific transitional provisions and in some operative provisions in the new law.

Substituted accounting periods

Some entities have a substituted accounting period, ie. the Commissioner has approved them using an income year that does not start on 1 July.

For those whose 1996-97 income year commences before 1 July 1996, the new law would apply from that earlier date when their 1996-97 income year starts.

For those whose 1996-97 income year commences after 1 July 1996, the new law would not apply until that later date when their 1996-97 income year starts.

Core provisions

No double deductions [clause 8-10]

This clause will ensure that in moving from the existing law to the new law a taxpayer cannot obtain two deductions for the same amount, one deduction under the current law and one under the proposed new law.

Substantiation

Car expenses [clause 28-100]

This clause will ensure that log books kept to substantiate car expenses under the 1936 Act will also be log books under the 1996 Bill. That is discussed under Transitional arrangements in Chapter 10.

Losses

1996-97 and later tax losses and film losses [clause 36-100]

This clause will apply the provisions of the 1996 Bill to tax losses for the 1996-97 and later income years.

1989-90 to 1995-96 tax losses and film losses [clause 36-105]

This clause will apply the provisions of the 1996 Bill to undeducted tax losses for the 1989-90 to 1995-96 income years, as discussed under Transitional arrangements in Chapter 6.

Pre-1990 losses [clause 36-110]

This clause will apply the provisions of the 1996 Bill to undeducted primary production losses for the 1957-58 to 1988-89 income years, as discussed under Transitional arrangements in Chapter 6.

Deductions for capital works

Quasi-ownership rights [clause 43-100]

This clause will identify holders of quasi-ownership rights over land on which capital works are constructed who will be entitled to deduct amounts under proposed Division 43 of the 1996 Bill. The matter is discussed under Transitional arrangements in Chapter 9.

Exclusive deduction provision [clause 43-105]

This clause will limit the application of subclauses 43-50(1) and (2) of the 1996 Bill to particular buildings, as discussed under Transitional arrangements in Chapter 9.

Mining and quarrying

Pre-19 July 1982 mining capital expenditure [clause 330-1]

This clause will make undeducted pre-July 1982 mining capital expenditure deductible in the 1996-97 income year. It is discussed under Transitional arrangements in Chapter 8.

Post-19 July 1982 mining capital expenditure and post-15 August 1989 quarrying capital expenditure [clauses 330-5 and 330-60]

These clauses will make amounts of undeducted post-19 July 1982 mining capital expenditure, post-15 August 1989 quarrying capital expenditure and pre-July 1996 transport capital expenditure deductible in the 1996-97 income year. This is discussed under Transitional arrangements in Chapter 8.

Undeducted pre 1 July 1975 general mining exploration expenditure [clauses 330-10, 330-15 and 330-20]

These clauses will treat undeducted pre-1 July 1975 mining exploration expenditure as being incurred in the 1996-97 income year, as discussed under Transitional arrangements in Chapter 8.

Old mining capital expenditure on plant [clause 330-25]

This clause will limit the transferability under the 1996 Bill of deductions for pre-July 1996 general mining and petroleum mining expenditure on plant. This is discussed under Transitional arrangements in Chapter 8.

Undeducted old exploration expenditure [clauses 330-30, 330-35 and 330-40]

These clauses will treat undeducted amounts of old petroleum exploration expenditure, general mining exploration expenditure and quarrying exploration expenditure as incurred in the 1996-97 income year. They are discussed under Transitional arrangements in Chapter 8.

Old undeducted mining and quarrying amounts [clause 330-45]

This clause will treat some undeducted pre-July 1996 mining and quarrying amounts as having been incurred in the 1996-97 income year, as discussed under Transitional arrangements in Chapter 8.

Preserving old election rules [clause 330-50]

This clause will preserve in part the operation of the old law if you make an election under clause 330-315 of the 1996 Bill. The circumstances are discussed under Transitional arrangements in Chapter 8.

Elections for pre 1 July 1985 allowable capital expenditure [clause 330-55]

This clause will limit the right to make an election under clause 330-315 of the 1996 Bill, as explained under Transitional arrangements in Chapter 8.

Balancing adjustments where old roll-over relief [clause 330-65]

This clause will modify a balancing adjustment where roll-over relief was obtained before the 1996-97 income year. This is explained under Transitional arrangements in Chapter 8.

Corresponding previous law [clause 330-70]

This clause will explain the meaning of the expression 'corresponding previous law' which is used in the balancing adjustment provisions and in some modifications to the common rules.

Modifying Common rule 1 [clause 330-75]

This clause will modify the common rule about roll-over relief for related entities if certain amounts were deducted in respect of a property before the 1996-97 income year. This is discussed under Transitional arrangements in Chapter 8.

Chapter 13 - Finding Tables

This chapter cross references provisions in the Income Tax Assessment Bill 1996 to their corresponding provisions in the Income Tax Assessment Act 1936 (and vice versa).

Overview of this chapter

This chapter contains finding tables to enable you to locate quickly the provision in the Bill that corresponds to a particular provision in the existing law, and vice versa.

In the finding tables:

•

No equivalent means that this is a new provision that has no equivalent in the law being rewritten. Typically, these would be guide material;

•

Omitted means that the provision of the old law has not been rewritten in the new law;

•

Transitional means that the provision of the old law has been picked up by a provision in the Income Tax (Transitional Provisions) Bill 1996.