House of Representatives

Explanatory Memorandum

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

General outline and financial impact

AMENDMENTS OF THE INCOME TAX ASSESSMENT ACT 1936

Offshore banking units

Amends the offshore banking unit (OBU) and withholding tax provisions of the income tax law to:

•

allow OBUs undertaking funds management to invest in Australian assets on behalf of offshore persons, subject to a 10 per cent limit (by value) on the Australian asset component of each investment portfolio. However, the income earned from managing the Australian component of the portfolio will not be eligible for the concessional tax rate;

•

exempt, from interest withholding tax, gold fees paid by OBUs as part of gold borrowings;

•

allow borrowing and lending in Australian currency between related OBUs; and

•

deny an income tax deduction for foreign tax paid by OBUs where a foreign tax credit is also available because of the operation of a double tax treaty.

Date of effect: The proposed OBU measures will apply from the commencement of the OBU's 1996-97 year of income. The interest withholding tax measure will apply to interest paid by an OBU during the 1996-97 and subsequent years of income.

Proposal announced: Not previously announced by the Government. Announced by the previous Government in its Innovate Australia Statement of 6 December 1995.

Financial impact: There will be a negligible cost to the revenue.

Compliance cost impact: There will be an increase in record keeping for those OBUs that intend to take advantage of the relaxation in the rules for fund managers because they will need to calculate the Australian asset component for each portfolio.

Complying funds - expenses of investing in pooled superannuation trusts or life assurance policies

This measure will allow complying superannuation funds and complying approved deposit funds (ADFs) to claim deductions for expenses relating to investments in pooled superannuation trusts and life assurance policies issued by life assurance companies and registered organisations.

Date of effect: 1 July 1988.

Proposal announced: Not previously announced.

Financial impact: There will be a small but unquantifiable cost to the revenue.

Compliance cost impact: Superannuation funds and ADFs are currently required to identify their expenses that are not deductible. If they are not already doing that, it will be necessary for them to identify the proportion of their expenses that relate to current pension liabilities. Those amounts will continue to be non-deductible because income derived from assets used to pay pension liabilities is exempt at all investment levels.

Deductions for gifts

Amends the income tax law to allow income tax deductions for gifts made to The Central Synagogue Restoration Fund and The Borneo Memorials Trust Fund.

Date of effect: 23 December 1995.

Proposals announced: 22 December 1995 by the former Government.

Financial impact: No significant impact on the revenue.

Compliance cost impact: Taxpayers will be required to keep a record of gifts made to enable deductions to be claimed.

Repeal of section 261

Amends the income tax law to repeal section 261.

Date of effect: Date of introduction of the Bill into the Parliament.

Proposal announced: Not previously announced.

Financial impact: The revenue impact will be negligible.

Compliance cost impact: The repeal of the section will simplify loan documentation for the banking industry.

Taxation of income derived from sources outside Australia

Amends various provisions relating to the taxation of foreign source income to:

•

ensure that a company will not lose its entitlement to an underlying foreign tax credit under the foreign tax credit system (FTCS) when a liquidator is appointed to a related company.

Date of effect: This amendment will apply from the 1987-88 year of income - the time of commencement of the FTCS.

Proposal announced: Not previously announced.

Financial impact: The revenue cost of this measure is negligible.

Compliance cost impact: Compliance costs should be reduced because the measure will provide greater certainty.

•

make technical corrections to the provisions that apply in relation to capital gains and losses when calculating the attributable income of a controlled foreign corporation.

Date of effect: These amendments will apply to disposals of assets after 2 April 1992.

Proposal announced: Not previously announced.

Financial impact: There will be no effect on revenue.

Compliance cost impact: The measures will have no effect on compliance costs.

•

change the basis on which foreign investment fund income is accrued from residency during a year of income to residency during the notional accounting period of a foreign investment fund (FIF) or foreign life assurance policy (FLP).

Date of effect: This amendment will apply to assessments for the 1996-97 and later years of income.

Proposal announced: Not previously announced.

Financial impact: It is not possible to quantify any revenue gain or loss arising from this amendment.

Compliance cost impact: There will be no effect on the cost of compliance.

•

allow foreign investment fund income accrued from a FIF or a FLP to be reduced by assessable distributions that relate to that income.

Date of effect: These amendments will apply from 1 January 1993 - the date of commencement of the FIF measures.

Proposal announced: Not previously announced.

Financial impact: There will be a small but unquantifiable cost to revenue in removing the present double taxation of certain income from investments in foreign funds.

Compliance cost impact: This measure will have no effect on compliance costs.

Forgiveness of commercial debts

Inserts a new Schedule, dealing with the forgiveness of commercial debts, into the income tax law. The Schedule defines a commercial debt, and contains rules that apply the net amounts of debts forgiven in a year of income to reduce the debtor's accumulated revenue losses, net capital losses, certain undeducted expenditures and cost bases of assets. In certain circumstances, the net forgiven amount of a debtor which is a company is apportioned among companies related to the debtor company.

Date of effect: The amendments will apply to commercial debts forgiven after the day the Bill is introduced in the Parliament. However, if forgiveness occurs after that day pursuant to an agreement or arrangement entered into on or before that day, the forgiveness will not be affected by the amendments.

Proposal announced: Not previously announced by this Government but the provisions broadly reflect the measures announced by the previous Government as part of the 1995-96 Budget.

Financial impact: There will be negligible impact on revenue in 1996-97. The estimated revenue gains in following years will be $20 million in 1997-98, $40 million in 1998-99, rising to $130 million by 2003-2004.

Compliance cost impact: It will be necessary for debtors affected by this amendment to measure and record the value of debts forgiven. That information ought to be readily available from business records that would be kept anyway. The additional compliance cost is likely to arise from needing to be aware of these changes in the taxation law and ensuring that appropriate reductions are made to accumulated losses, capital losses, undeducted expenditures and asset cost bases. In relevant cases, there will be an onus on a company that is one of a related group of companies to ascertain the net forgiven amount of debt of other group companies and undeducted revenue losses and net capital losses of other group companies. Debt forgiveness is not usually an ongoing aspect of business and the required adjustments are not routine. The likelihood is, therefore, that taxpayers would seek professional assistance in dealing with the taxation effects of debt forgiveness.

AMENDMENTS OF THE SUPERANNUATION GUARANTEE (ADMINISTRATION) ACT 1992

The Aberfoyle Award Superannuation Scheme

Amends the Superannuation Guarantee (Administration) Act 1992 to ensure that the earnings base specified in the Aberfoyle Superannuation Award is recognised as a valid notional earnings base for the purposes of that Act.

Date of effect: 1 July 1992, applying in relation to assessments of superannuation guarantee shortfall for years up to and including the 1995-96 year.

Proposal announced: Not previously announced.

Financial impact: There will be no effect on the revenue.

Compliance cost impact: This measure will reduce compliance costs for employers contributing to the Aberfoyle Award Superannuation Scheme. Those employers would otherwise be required to calculate their potential liability to pay the superannuation guarantee charge by reference to each employee's ordinary time earnings.

AMENDMENTS OF THE SUPERANNUATION INDUSTRY (SUPERVISION) ACT 1993 AND THE INCOME TAX ASSESSMENT ACT 1936

Tax file numbers - use for superannuation purposes

Amends the superannuation law to:

•

require regulated superannuation funds and approved deposit funds (funds) to seek tax file numbers (TFNs) from their beneficiaries and pass them on when transferring beneficiaries to other funds and exempt public sector superannuation schemes (exempt schemes);

•

allow exempt schemes to seek TFNs from their beneficiaries and pass them on when transferring beneficiaries to other exempt schemes and funds;

•

require employers to quote employees' TFNs to funds on the employees' behalf;

•

allow employers to quote employees' TFNs to exempt schemes on the employees' behalf;

•

allow funds and exempt schemes to use TFNs for locating and amalgamating beneficiaries' benefits and identifying beneficiaries;

•

consolidate provisions relating to TFNs;

•

require funds and pooled superannuation trusts (superannuation entities) to provide their TFNs to the Insurance and Superannuation Commissioner (ISC) in certain circumstances;

•

allow the ISC to require superannuation entities' TFNs in certain circumstances;

•

allow the ISC to pass superannuation entities' TFNs to the Commissioner of Taxation (ATO); and

•

allow the ISC to use superannuation entity TFNs collected under superannuation legislation previously applying to the superannuation industry for the purpose of superannuation legislation which currently applies to the industry.

Amends the income tax law to:

•

deem TFNs of beneficiaries quoted for superannuation purposes as quoted also for taxation purposes; and

•

allow the ATO to use the TFNs of individuals held by the ATO for the purpose of processing reasonable benefit limits forms.

Date of effect: The amendments will apply from the 60th day after Royal Assent, except for amendments requiring funds to seek TFNs from existing beneficiaries which commence with either the first member or fund statement (as chosen by the fund) that is sent to the beneficiary on or after that 60th day.

Proposal announced: Not announced by this Government but most measures were announced by the former Government on 28 June 1994.

Financial impact: No impact on revenue is expected.

Compliance cost impact: If employees quote their TFNs for superannuation purposes, this measure will increase employers' compliance costs as they will be required to pass on the TFN to the employees' fund. Funds and exempt schemes may have additional compliance costs through seeking and processing beneficiaries' TFNs. However, these are expected to be offset by increased efficiency which the extended use of TFNs will bring.

AMENDMENTS OF THE FRINGE BENEFITS TAX ASSESSMENT ACT 1986

Minor benefits exemption

Amends the fringe benefits tax law to ensure that benefits with a value less than $100 can qualify for the exemption from fringe benefits tax for minor benefits.

Date of effect: Royal Assent.

Proposal announced: This measure was announced on 18 February 1996 in the document Capital Gains Tax and Fringe Benefits Tax Reform.

Financial impact: This measure will have an unquantifiable cost to revenue.

Compliance cost impact: There is likely to be a small reduction in compliance costs, mainly because record keeping obligations will be reduced for benefits which will become exempt.

AMENDMENTS OF TAXATION LAWS AMENDMENT ACT (NO. 4) 1995

Amends certain application dates and section references in the Act to:

•

restore the application dates to those intended by Parliament; and

•

replace incorrect section references with the correct section references.

Date of effect: The proposed amendments will apply from 16 December 1995, that is immediately after the commencement of Schedules 1 and 2 of Taxation Laws Amendment Act (No. 4) 1995.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: None.

Chapter 1 - Offshore banking units

Overview

1.1 The amendments in Part 1 of Schedule 1 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) to:

•

extend the scope of the offshore banking unit (OBU) concessional tax regime;

•

exempt, from interest withholding tax, gold fees paid by OBUs as part of gold borrowings; and

•

make a minor technical correction.

Summary of the amendments

Purpose of the amendments

1.2 The proposed amendments will:

•

permit OBUs undertaking funds management on behalf of offshore persons to more fully diversify their global portfolios by allowing investments in Australian assets, subject to a 10 per cent limit (by value) on the Australian asset component of each investment portfolio. However, the income earned from managing the Australian component of the portfolio will not be eligible for the concessional tax rate;

•

provide an exemption from interest withholding tax for gold fees paid by OBUs as part of gold borrowings;

•

provide greater flexibility in the dealings between companies within a group by allowing borrowing and lending in Australian currency between related OBUs; and

•

make it clear that where an OBU is entitled to claim a foreign tax credit because of the operation of a double tax treaty an income tax deduction is not also available for the foreign tax paid.

Date of effect

1.3 The proposed amendments will apply from the commencement of an OBU's 1996-97 year of income. The interest withholding tax measure will apply to interest paid by an OBU during the 1996-97 and subsequent years of income.

Background to the legislation

What is an OBU?

1.4 The term offshore banking broadly refers to the intermediation by institutions operating in Australia of financial transactions between non-resident borrowers and non-resident lenders. It also includes the provision of financial services to non-residents in respect of transactions or business occurring outside Australia.

1.5 Declaration as an OBU is confined to certain financial entities being authorised banks subject to the Banking Act 1959, wholly owned subsidiaries of banks which are already registered as OBUs and State banks and other financial institutions that the Treasurer is satisfied are appropriately authorised to carry on business as dealers in foreign exchange.

1.6 Income derived by an OBU from 'OB activities' is effectively taxed at a concessional rate of 10 per cent. The meaning of an 'OB activity' is set out in sections 121D, 121E and 121EA of the Act. The proposed amendments impact on two of these activities. These are 'borrowing or lending activity' as defined in subsection 121D(2) and 'investment activity' as defined in subsection 121D(6).

Investments in Australian assets

1.7 Under the current concessional tax regime for OBUs an 'investment activity' is the making or making and managing of investments (as a broker, an agent or a trustee) for non-residents, other than non-residents operating at or through a permanent establishment (for example, a branch) in Australia, if the investments are shares in non-resident companies, units in non-resident unit trusts, land and buildings outside Australia or other foreign assets. Investments cannot be made in Australian dollars. The fee income derived from making, or making and managing the investments is concessionally taxed.

1.8 Under current rules, OBUs that hold any component of Australian assets in their funds management portfolios do not qualify for the concessional tax rate for those activities. To allow OBUs to more fully diversify their global portfolios the Government has decided to allow OBUs undertaking funds management to invest in Australian assets on behalf of offshore persons (for example, non-residents), subject to a 10 per cent limit (by value) on the Australian asset component of each investment portfolio. However, the income earned from making and managing the Australian asset component of the portfolio will not be eligible for the concessional tax rate.

1.9 A new subsection 121D(6A) will allow OBUs, subject to the 10 per cent limit, to invest in shares in Australian companies, units in Australian unit trusts, land and buildings located in Australia or other Australian assets on behalf of offshore persons.

Removing the permanent establishment restriction

1.10 In undertaking the OB activity the other party to the transaction must be an 'offshore person'. The term 'offshore person' is defined in section 121E and in very broad terms means a non-resident, an offshore branch of a resident or another OBU.

1.11 As the law now stands, an OBU can only obtain concessional tax treatment on its fee income if it manages the funds of an offshore person who is a non-resident and that person does not have a 'permanent establishment' in Australia. 'Permanent establishment' is a technical term which basically means that a person has an economic connection with a country such as carrying on business in that country. A branch is a common example of a permanent establishment. Because managing an investment portfolio containing some Australian assets could be construed as having an economic connection with Australia, the current restriction imposed by paragraph 121E(a), that offshore persons are not permitted to have a permanent establishment, will be removed.

Allowing OBUs to undertake investments activities with residents and non-residents

1.12 Under the current law, when making an investment on behalf of an offshore person the other party to the transaction must be a non-resident who does not have a permanent establishment in Australia: subsection 121D(6) and paragraph 121E(a). This restriction will be removed in relation to Australian assets in order to allow OBUs to purchase Australian assets from or make loans to both residents and non-residents (whether or not they have a permanent establishment in Australia). In relation to non-Australian assets the current permanent establishment restriction will also be removed and OBUs will be able to invest with non-residents (whether or not they have a permanent establishment in Australia). However, purchases of non-Australian assets from residents will not be permitted.

Income tax and capital gains derived through investment trusts

1.13 Section 121EL currently exempts income and capital gains derived by OBU offshore investment trusts in the course of investment activities. Section 121EL, in effect, exempts offshore persons investing through OBUs from Australian tax. In its current form section 121EL would, once the above amendments to section 121D are made, have the effect of exempting the OBU investment trust and, therefore, the offshore persons from Australian tax even on the Australian component of the investment. Therefore, section 121EL needs to be amended to make it clear that the income derived from the Australian asset component will not be exempt from income tax and that capital gains will accrue under Part IIIA.

Borrowing or lending in Australian dollars between related OBUs

1.14 Income derived from borrowing or lending money or gold to an offshore person is also concessionally taxed under the OBU regime. In order to protect the Australian domestic money market, however, the law provides that if the offshore person is a related person (as defined in section 121C and which includes another OBU) the money cannot be in Australian dollars.

1.15 The Government has decided to remove the current restriction on the borrowing or lending in Australian dollars between related OBUs in order to allow greater flexibility in dealings between companies within a group given the fact that the money must originally have been borrowed offshore. Subsection 121D(2) is to be amended to allow borrowing and lending between related OBUs in any currency.

Interest withholding tax exemption for gold fees

1.16 As noted above, income derived from borrowing or lending money or gold to an offshore person is concessionally taxed under the OBU regime. In addition, an exemption from interest withholding tax (IWT) is available for interest paid by OBUs to non-residents where the money borrowed is part of a borrowing activity and the money is used to fund other OB activities: section 128GB.

1.17 As part of a gold loan contract, the borrower is required to pay an additional amount of gold known as a 'gold fee'. In taxation ruling TR92/5 the Australian Taxation Office has ruled that gold fees are payments in the nature of interest and if a gold fee is paid to a non-resident an IWT liability will arise.

1.18 Gold fees paid by OBUs to non-residents where the gold borrowed is part of a borrowing activity and the gold is used to fund other OB activities are not currently exempt from IWT. The Government has decided to amend the IWT provisions to exempt these payments. The measure will provide consistency in the treatment of interest paid by OBUs whether it is paid in the form of moneyor gold.

Treatment of foreign tax

1.19 Under the foreign tax credit system, a foreign tax credit is available only to residents for foreign tax paid on foreign income. As a foreign tax credit is not available for offset against Australian tax payable on 'OB income' (income derived from OB activities) because the income is deemed to have an Australian source, the OBU regime allows a tax deduction (section 121EI).

1.20 Under the terms of a number of Australia's double tax agreements, however, the source article provides that where foreign tax (for example interest withholding tax) is paid on income the source of the income is deemed to be in the foreign country. It is possible, therefore, that an OBU may attempt to claim both a credit and a deduction in respect of the same amount of tax.

1.21 Section 121EI is to be amended to make it clear that where a taxpayer is entitled to claim a foreign tax credit, an income tax deduction is not allowable.

Explanation of the amendments

Investments in Australian assets

1.22 The amendments will introduce a distinction between merely making an investment on behalf of an offshore person and both making and managing of such an investment given that the purpose of the proposed measure is to extend the scope of funds management activities. Accordingly, the measures will only extend the scope of the OBU regime in situations where the investments are both made and managed by the OBU. The existing rules will apply where the OBU merely makes an investment on behalf of an offshore person. [Items 6, 8, 9 and 10 - new subsection 121D(6A)]

1.23 The meaning of the term 'investment activity' will be extended to include the managing of (as a broker, an agent or a trustee) a portfolio investment during an investment management period for non-residents, where:

•

if the investments are shares in non-resident companies, units in non-resident unit trusts, land and buildings outside Australia or other foreign assets the investment is made with a non-resident;

•

if the investments are Australian things the investment is made with either a non-resident or resident;

•

the currency in which investments are made is not in Australian dollars;

•

the investment portfolio comprises more than one Australian thing; and

•

the average Australian asset percentage of the portfolio investment is 10 per cent or less. [New subsection 121D(6A)]

Portfolio investment

1.24 The proposed amendments will introduce the concept of a 'portfolio investment'. This term is defined in new subsection 121DA(1) [items 5 and 11] as one or more investments managed by an OBU (as a broker, an agent or a trustee) under a contract or trust instrument for the benefit of a non-resident.

Investment management period

1.25 The investment management period means either the whole or a part of a year of income. [New subsection 121D(6A)]

Australian things

1.26 The term 'Australian things' is defined in new subsection 121DA(5) [items 2 and 11] as shares in resident companies, units in resident unit trusts (as defined in section 102Q), land or buildings in Australia, loans made to Australian residents or other assets in Australia.

1.27 The inclusion of loans made to residents within the definition of Australian things will allow for situations where, for example, money is deposited with a bank on a short term basis prior to using the funds to invest in other assets.

Calculating the average Australian asset percentage

1.28 In order for the OBU to obtain the concessional rate of tax on the fee income derived from the non-Australian asset component of the investment portfolio the 'average Australian asset percentage' of the portfolio investment must not exceed 10 per cent.

Monthly Australian percentage

1.29 The 'monthly Australian asset percentage' is, in broad terms, the percentage of Australian assets, calculated by reference to the value of the assets, in the investment portfolio for a particular month or part of a month. [Items 4 and 11 - new subsection 121DA(3)]

1.30 The calculation of the monthly Australian asset percentage for part of a month will be necessary where, for example, the OBU commences or ceases to manage an investment portfolio part way through the month.

1.31 A further requirement is that the monthly Australian asset percentage be calculated according to reasonable accounting practice and on the same basis for all months of a year of income. This will require the valuing of the assets to be undertaken in accordance with reasonable accounting practice and will allow OBUs to use their existing records to calculate the monthly Australian asset percentage. It also provides flexibility in that it does not impose any stringent timing requirements as to when the calculations must be done, as long as, it is consistent during the year of income. [New subsection 121DA(4)]

Average Australian asset percentage

1.32 The 'average Australian asset percentage' is the average, over the year of income, of the monthly Australian asset percentages. [Items 3 and 11 - new subsection 121DA(2)]

1.33 Where the average Australian asset percentage in respect of the portfolio investment exceeds 10 per cent, the activity will no longer fall within the definition of 'investment activity' in new subsection 121D(6A) and the whole of the fee income will be subject to the general company rate of tax.

Assessable OB income

1.34 In broad terms, the income from OB activities of an OBU is taxed at a rate of 10 per cent. Rather than providing a special rate of tax for this purpose, the assessable income and allowable deductions are adjusted downwards to achieve the same result. Each amount of income and each amount of allowable deductions is reduced by a fraction referred to as the 'eligible fraction'. The eligible fraction is 10 divided by the general company tax rate applicable to the year of income. As the rate of company tax is currently 36 per cent the fraction is:

10/36


1.35 The OBU's assessable OB income will be reduced by the average Australian asset percentage in respect of the portfolio investment concerned. This will have the effect of taxing the fee income derived from the non-Australian asset component of the investment portfolio at the concessional rate of 10 per cent. The fee income derived from managing the Australian asset component of the portfolio will not be eligible for the concessional tax rate and will be subject to the general company tax rate. [Items 1, 12 and 13 - new subsection 121EE(3A)]

Allowable deductions

1.36 The reduction in the OBU's assessable OB income (as explained in the previous paragraph) will mean that expenses incurred in managing an investment portfolio which qualifies for the concessional rate of tax will not fall within the definition of 'exclusive OB deduction' in subsection 121EF(3). The expense will, therefore, relate to both OB and non-OB activities and will need to be apportioned as a general OB deduction: subsection 121EF(4).

Removing the permanent establishment restriction

1.37 New subsection 121D(6A) reflects the change in policy by allowing OBUs to invest on behalf of a non-resident whether or not the non-resident has a permanent establishment in Australia. [New paragraph 121D(6A)(a)]

Allowing OBUs to undertake investments activities with residents and non-residents

1.38 Similarly, the restriction that when making an investment on behalf of an offshore person the other party to the transaction must be a non-resident who does not have a permanent establishment in Australia is removed in new subsection 121D(6A) . OBUs will be able to purchase Australian assets from or make loans to both residents and non-residents (whether or not they have a permanent establishment in Australia). [New paragraph 121D(6A)(c)]

1.39 in relation to non-Australian assets OBUs will be able to invest with non-residents (whether or not they have a permanent establishment in Australia). However, purchases of non-Australian assets from residents will not be permitted. [New paragraph 121D(6A)(c)]

Income tax and capital gains derived through investment trusts

1.40 The amendments made to section 121EL make it clear that the income, profits or capital gains of the trust estate that are derived from the Australian asset component will not be exempt from Australian income tax and that capital gains will accrue under Part IIIA. [Items 15, 16 and 17 - new paragraphs 121EL (f) and (g)]

Example

1.41 AusOBU managed an investment portfolio for three and a half months during a year of income. The portfolio comprises of shares in both resident and non-resident companies. AusOBU produces reports on the portfolio it manages from its records on a monthly basis. It uses this information to calculate the average Australian asset percentage.

1.42 AusOBU derives a fee of AUD57,500 for managing the portfolio.

Average Australian Asset Percentage

4 + 5 + 4 + 3.5 = 16.5 = 4.125% --------------- ---- 4 4


1.43 As the average Australian asset percentage does not exceed the 10 per cent limit, AusOBU is eligible for the concessional rate of tax on the fee income derived from the non-Australian asset component of the investment portfolio.

Assessable OB income

1.44 $57,500 - ($57,500 x 4.125%) = $55,128


Borrowing or lending in Australian dollars between related OBUs

1.45 Item 7 amends paragraphs 121D(2)(a) and (b) to remove the current restriction on the borrowing or lending in Australian dollars between related OBUs.

Interest withholding tax exemption for gold fees

1.46 Item 18 amends subsection 128AE(1) to insert a definition of 'offshore gold borrowing'. This term is defined to mean borrowing gold from an offshore person.

1.47 Items 24 and 26 amend subsections 128GB(1) and 128GB(4) to provide the exemption from interest withholding tax for gold fees paid by OBUs in respect of an offshore gold borrowing.

1.48 Subsection 128GB(3) is amended by item 25 to exclude offshore gold borrowings from section 128GB when the borrowings are used as part of the arrangement described in subsection 128GB(3).

Other consequential issues relating to the interest withholding tax exemption

1.49 Item 19 also amends subsection 128AE(1) to insert a definition of 'tax exempt gold'. This term is used, broadly, to describe that part of an offshore gold borrowing in respect of which an interest withholding tax exemption will be treated as having been available. The definition has application in determining whether dealings in those borrowings are liable to attract a special penalty tax under section 128NB.

1.50 Subsections 128AE(5), (7), (8), (9) and (11) will be amended to deem gold to retain or lose its status as tax exempt gold in certain situations. [Item 21]

1.51 Subsection 128AE(4) is to be amended to provide for offshore gold borrowing to be treated as tax exempt gold for the purposes of the withholding tax provisions. [Items 20 and 21]

1.52 Subsections 128AE(9) and 128AE(11) will also be amended by Item 23 to bring offshore gold borrowings within those provisions.

1.53 Subsection 128AE(8) will also be amended by item 22 to clarify that an amount transferred can be either money or gold.

1.54 Items 27 and 28 amend section 128NB in order to bring offshore gold borrowings within the special penalty tax imposed by the section.

Treatment of foreign tax

1.55 Item 14 inserts new subsection 121EI(2) to make it clear that where a taxpayer is entitled to claim a foreign tax credit an income tax deduction is not allowable.

Application

1.56 The amendments to the OBU provisions apply to assessments of income for 1996-97 and subsequent years of income. The interest withholding tax amendments apply to interest paid by an OBU during the 1996-97 and subsequent years of income. [Item 29]

Chapter 2 - Complying funds - expenses of investing in pooled superannuation trusts or life assurance policies

Overview

2.1 The amendments in Part 2 of Schedule 1 of the Bill will allow complying superannuation funds and complying approved deposit funds (ADFs) to claim deductions for expenses relating to investments in pooled superannuation trusts (PSTs) and life assurance policies issued by life assurance companies and registered organisations.

Summary of amendents

Purpose of the amendments

2.2 The amendments to the Income Tax Assessment Act 1936 (the Act) will make expenses of superannuation funds and ADFs deductible irrespective of whether they relate to a direct investment in an asset which gives rise to taxable income or an indirect investment in a PST or a life assurance policy which gives rise to exempt income.

2.3 Expenses that relate to current pension liabilities will continue to be non-deductible because income on assets used to pay pension liabilities is exempt when derived by superannuation funds, ADFs, PSTs, life assurance companies and registered organisations.

2.4 The amendments only apply to complying superannuation funds and complying ADFs, that is, those funds which satisfy the prescribed standards of the Superannuation Industry (Supervision) Act 1993.

Date of effect

2.5 The amendments will apply from the year of income in which 1 July 1988 occurred. This is the date when the income of superannuation funds and ADFs became subject to taxation. [Item 32]

Background to the legislation

2.6 The profits or gains derived by superannuation funds and ADFs from investments in PSTs and life assurance policies are exempt from tax. That is because tax is paid by the PST, life assurance company or registered organisation on the share of the income that is distributed to the superannuation funds or ADF. It would be inequitable to tax the income twice.

2.7 As the income is exempt in the hands of the superannuation fund or ADF, they cannot claim a deduction for expenses relating to investments in PSTs and life assurance policies, even though that income has been subject to income tax. If the superannuation fund or ADF had invested directly in the assets in which the PST, life assurance company or registered organisation invests, a deduction would be available.

2.8 Where a superannuation fund or ADF makes a direct investment in a product which is taxable in its hands, it is allowed a full deduction for related expenses. The amendment is being made to enable the same taxation treatment in respect of expenses incurred in earning income from investments in PSTs and life assurance policies, which is also taxable, albeit in the hands of the PST, life assurance company or registered organisation. In practice, it is understood that superannuation funds and ADFs have generally claimed deductions although not entitled to under the existing law.

Explanation of the amendments

Superannuation funds

2.9 Item 30 inserts new section 279E into the Act. It deals with the expenses of a complying superannuation fund.

2.10 New subsection 279E(1) applies to expenditure by a superannuation fund in relation to an investment in a PST [new paragraph 279E(1)(a)] , or an investment in a life assurance policy issued by a life assurance company or registered organisation [new paragraph 279E(1)(b)] . It also covers arrangements where a superannuation fund invests in a life assurance policy by way of an investment in a 'custodian trust' [new paragraph 279E(1)(c)] . Such trusts allow small superannuation funds to invest in group life policies by way of investment in the 'custodian trust'. In these cases the investment in the 'custodian trust' will be treated as an investment in a life policy.

2.11 Where a superannuation fund incurs expenditure in relation to an investment covered by the new subsection 279E(1) , for the purpose of being allowed a deduction for that expenditure, any profits or gains of a capital nature from the investment are considered to be of an income nature [new paragraph 279E(2)(a)] . For example, where a superannuation fund acquires units in a PST, the gains that may accrue from an increase in the units' value will, for the purposes of claiming a deduction, be treated as income.

2.12 In a similar manner, the new paragraph 279E(2)(b) treats reversionary bonuses and non-reversionary bonuses from life assurance policies (which are ordinarily exempt under paragraph 26AH(7)(b) and section 282A, respectively) as being assessable income for the purposes of claiming a deduction for expenditure in relation to an investment in a life assurance policy.

2.13 This overcomes the problem, in the absence of new subsection 279E(2) , of the expenses not being deductible because the profits, gains or income from such investments are either exempt income or are of a capital nature.

Approved deposit funds

2.14 Item 31 inserts new section 289A into the Act. It is a parallel provision to the new section 279E and covers the expenses of a complying ADF.

2.15 New subsection 289A(1) applies to expenditure by a complying ADF in relation to an investment in a PST [new paragraph 289A(1)(a)] , or an investment in a life assurance policy issued by a life assurance company or registered organisation [new paragraph 289A(1)(b)] . It also covers arrangements where an ADF invests in a life assurance policy by way of an investment in a 'custodian trust' [new paragraph 289A(1)(c)] . Such trusts allow an ADF to invest in group life policies by way of investment in the 'custodian trust'. In these cases the investment in the 'custodian trust' will be treated as an investment in a life policy.

2.16 Where an ADF incurs expenditure in relation to an investment covered by the new subsection 289A(1) , for the purpose of being allowed a deduction for that expenditure, any profits or gains of a capital nature from the investment are considered to be of an income nature [new paragraph 289A(2)(a)] .

2.17 In a similar manner, the new paragraph 289A(2)(b) treats reversionary bonuses and non-reversionary bonuses from life assurance policies (which are ordinarily exempt under paragraph 26AH(7)(b) and section 291A, respectively) as being assessable income for the purposes of claiming a deduction for expenditure in relation to an investment in a life assurance policy.

Chapter 3 - Deductions for gifts

3.1 The amendments in Part 3 of Schedule 1 will allow income tax deductions for gifts of $2 or more to the funds listed in paragraph 3.2. This will be done by listing them in table 5 of the gift provisions in subsection 78(4) of the Income Tax Assessment Act 1936. The index to the gift provisions in subsection 78(3) will also be updated. [Items 33 to 35]

3.2 The amendments will result in gifts being tax deductible as follows:

Chapter 4 - Repeal of section 261

Overview

4.1 Part 4 of Schedule 1 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) to repeal section 261.

Summary of the amendments

Purpose of the amendments

4.2 The proposed amendments will repeal section 261 in order to decrease the costs involved in negotiating secured offshore lending agreements and further promote Australia as a major financial centre in the Asia Pacific region.

Date of effect

4.3 Date of introduction of the Bill into the Parliament. The section will cease to apply to mortgages entered into after the date of introduction, but will continue to apply to mortgages entered into on or prior to that date.

Background to the legislation

4.4 Section 261 operates to make void any covenant or stipulation in a mortgage which has or purports to have the purpose or effect of imposing on a mortgagor the obligation of paying income tax on the interest to be paid under that mortgage.

4.5 The section was originally enacted to prevent mortgagees from passing on to mortgagors a tax imposed on income from land. The rationale was that the tax was intended to be paid by the mortgagee and was not a liability which should properly be passed on by the mortgagee to another person. The land tax has long since been repealed and the only area where section 261 still operates today is in relation to offshore loan agreements.

4.6 Most offshore loan agreements provide for the complete protection of lenders against withholding tax and other taxes which affect the return to the lender. These agreements typically provide that if taxes are required to be deducted, the borrower is obliged to pay additional amounts so that the lender receives the full amount due to it (this provision is generally referred to as a 'grossing-up' provision).

4.7 Section 261 has been found by the High Court to apply to make void a typical gross-up clause in an offshore loan agreement. This increases the costs involved in negotiating secured offshore lending agreements and hinders the development of Australia as a major financial centre in the Asia Pacific region.

Explanation of the amendments

4.8 Item 36 repeals section 261.

Application

4.9 The repeal applies to mortgages entered into after the date of introduction of the Bill into the Parliament. [Item 37]

Chapter 5 - Taxation of income derived from sources outside Australia

Overview

5.1 Part 5 of Schedule 1 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) to:

•

ensure that the appointment of a liquidator to a related company does not affect an Australian company's entitlement to underlying foreign tax credit under the foreign tax credit system (FTCS) on dividends paid by related companies;

•

make changes to terminology necessary because of amendments to Part IIIA in Taxation Laws Amendment Act (No.2) 1992 (TLAA (No.2) 1992);

•

amend the basis on which assessable foreign investment fund income is calculated to ensure that only foreign investment fund income accrued while a taxpayer is a resident is assessable; and

•

allow assessable foreign investment fund income accrued from a foreign investment fund (FIF) or a foreign life assurance policy (FLP) to be reduced by assessable distributions from the FIF or FLP that relate to the accrued income, regardless of whether the distribution is made in the same year of income.

Summary of the amendments

Purpose of the amendments

Liquidator appointed to a related company

5.2 The amendments will ensure that an Australian company does not lose its entitlement to a foreign tax credit for underlying foreign tax on dividends paid by a related foreign company when a liquidator is appointed to the related foreign company.

Date of effect

5.3 This amendment will apply to assessments for the 1987-88 year of income - the time of commencement of the FTCS. [Subitem 47(1)]

Modified capital gains tax provisions

5.4 The proposed amendments will amend the modified provisions that apply for taxing foreign source income on an accruals basis to employ terminology consistent with that used in the general provisions (section 160ZZO) following amendments enacted by section 42 of TLAA (No.2) 1992.

Date of effect

5.5 These amendments will apply to disposals of assets after 2 April 1992. [Subitem 47(2)]

Change to the basis of calculating assessable FIF income

5.6 The amendment will ensure that a taxpayer is taxed only on foreign investment fund income from a FIF or a FLP that accrued during the period the taxpayer was a resident of Australia.

Date of effect

5.7 This amendment will apply to assessments for the 1996-97 and later years of income. [Subitem 47(3)]

Reductions of FIF and FLP income for earlier distributions

5.8 These amendments will provide for assessable foreign investment fund income accrued from a FIF or a FLP to be reduced by:

•

a distribution made in the previous year of income which relates to accrued foreign investment fund income assessable in the current year; and

•

assessable distributions made by a FLP on the same basis as distributions made by a FIF.

Date of effect

5.9 These amendments will apply from 1 January 1993 - the date of commencement of the FIF measures. [Subclause 2(2)]

Background to the legislation

Appointment of a liquidator to a related company

5.10 Under the FTCS an Australian resident company which receives a dividend from a related foreign company is entitled to a credit for both foreign withholding taxes paid on the dividends received and any 'underlying' foreign company taxes paid on the profits out of which the dividend is paid.

5.11 A foreign company is treated as being related to an Australian company if the Australian company has a 10 per cent voting interest in the foreign company (subsection 160AFB(1)). Where the foreign dividend income is derived through a chain of foreign related companies, the Australian company is related if:

•

each company in the chain has at least a 10 per cent voting interest in the foreign company in the tier below; and

•

the Australian company has a direct or indirect voting interest of at least 5 per cent in each company in the chain (section 160AFB(2)).

5.12 An Australian company is taken to have a voting interest in a foreign company if the following conditions are satisfied:

•

the Australian company is the beneficial owner of shares in the foreign company which carry the right to exercise the voting power in the other company; and

•

there is no arrangement in force under which any person is in a position to, or may become in a position to, affect that right (subsection 160AFB(4)).

5.13 A person is in a position to affect a right of a company if that person has a right, power or option:

•

to acquire that right; or

•

to do an act or thing that would prevent the company from exercising that right or receiving any benefits accruing by reason of that right (subsection 160AFB(5)).

5.14 The voting power is the maximum number of votes that can be cast in a poll at a general meeting of the company, or arising out of a general meeting of the company, in relation to all questions that can be submitted to such a poll (subsection 160AFB(6)).

5.15 When a liquidator is appointed to a company the right to control and administer the company's property vests in the liquidator. The appointment of a liquidator effectively prevents the shareholders from exercising voting rights and can be construed as an arrangement that prevents the shareholders from exercising their voting power (subsections 160AFB(4) and (5)).

5.16 Since the appointment of a liquidator is an arrangement within the meaning of subsection 160AFB(5), the shareholder company ceases to have a voting interest in the company and the companies are no longer related. As the companies are no longer related the effect of the existing law is that the shareholder company is not entitled to a credit for underlying foreign tax, even though the appointment of a liquidator does not alter the essential nature of the relationship between a company and its shareholders.

5.17 The voting interest of a company in the voting power of another company for the purposes of entitlement to an underlying foreign tax credit (section 160AFB) is the test for determining whether dividends are non-portfolio dividends and exempt from tax (section 23J). A non-portfolio dividend is a dividend paid by a non-resident company to a company which has a 10 per cent or greater voting interest in the company paying the dividend (section 317).

5.18 Under the existing law, the appointment of a liquidator to the company paying the dividend affects the right of the company receiving the dividend to exercise its voting rights in the dividend paying company for the purposes of section 160AFB. The effect of the appointment is that the dividends are no longer non-portfolio dividends and the tax exemption is lost (section 23AJ).

Modified capital gains tax provisions

5.19 Section 419 modifies the application of section 160ZZO (which allows roll-over of assets between group companies in certain circumstances) for the purposes of calculating the attributable income of an eligible controlled foreign company (CFC). In the course of amending section 160ZZO in TLAA (No.2) 1992 certain changes made to the terminology in paragraph 160ZZO(1)(a) were not reflected in modified paragraph 160ZZO(1)(a) which operates by virtue of section 419.

5.20 The effect of section 42 of TLAA (No.2) 1992 is that an 'asset' in subparagraph 160ZZO(1)(a)(i) is now referred to as a 'roll-over asset'. Appropriate amendments were made to the rest of section 160ZZO to refer to 'roll-over' assets. However, amendments were not made to paragraph 160ZZO(1)(a) as modified by section 419. The effect of the failure to amend paragraph 160ZZO(1)(a) as modified by section 419 is that when the modified paragraph is applied with the remainder of section 160ZZO, the meaning of the term 'roll-over asset' is not specified.

5.21 An amendment effected by paragraph 42(d) of TLAA (No.2) 1992 inserted the word 'roll-over' before 'asset' (wherever occurring) in subsection 160ZZO(2D). The effect of this amendment is that a 'taxable Australian asset' incorrectly became a 'taxable Australian roll-over asset'.

Change to the basis of calculating assessable FIF income

5.22 Under the FIF measures the foreign investment fund income of a taxpayer accrued during a notional accounting period is included in the assessable income of the taxpayer for the year of income during which the notional accounting period ended (section 529). It is only foreign investment fund income that accrues while a taxpayer is a resident that should constitute assessable income under the FIF measures.

5.23 The basis for determining whether a taxpayer is assessable in respect of an interest in a FIF or a FLP should be the period of the notional accounting period during which the taxpayer was a resident. However, the basis on which foreign investment fund income accrued from an interest in a FIF or a FLP is assessable under the existing law is the period of the year of income during which the taxpayer was a resident.

5.24 A taxpayer is not assessed on the correct amount of foreign investment fund income accrued from a FIF or a FLP where the notional accounting period of the FIF or FLP does not coincide with the taxpayer's year of income and:

(a)

the taxpayer is a resident for the whole of the year of income but not for the whole of the notional accounting period that ended during that year of income; or

(b)

the taxpayer is a resident for the whole of the notional accounting period but not for the whole of the year of income during which the notional accounting period ended.

5.25 Where paragraph (a) applies, the taxpayer is incorrectly assessed on the whole of the income that accrued during the notional accounting period even though the taxpayer was not a resident for the whole of that period. Where paragraph (b) applies, the taxpayer's assessable foreign investment fund income for the year of income is reduced even though the taxpayer was a resident for the whole of the notional accounting period.

Reductions of FIF and FLP income for earlier distributions

5.26 Foreign investment fund income accrued to a taxpayer in respect of a notional accounting period of a FIF is included in the assessable income of the taxpayer for the year of income during which the notional accounting period ends (section 529). Generally, the notional accounting period of a FIF or a FLP is the year of income of the taxpayer (subsection 486(2) for a FIF and subsection 487(2) for a FLP). However, a taxpayer may make an irrevocable election that the notional accounting period of the FIF will be the accounting period for which the accounts of the FIF are made out (subsections 486(3) and (4)). In the case of an interest in a FLP a taxpayer may make an irrevocable election to adopt the period for which cash surrender values for the FLP are available (subsection 487(4)).

5.27 If a FIF attribution account payment (such as dividends, share of partnership net income or share of the net income of a trust) (section 603) is made during a notional accounting period, and an amount of foreign investment fund income from that FIF is included in the taxpayer's assessable income for that year of income, the amount of assessable foreign investment fund income is reduced by the amount of the FIF attribution account payment that is included in the taxpayer's assessable income for that year of income (section 530).

5.28 If the taxpayer's year of income coincides with the notional accounting period of the FIF, assessable foreign investment fund income will be reduced by all assessable distributions from the FIF. However, if the notional accounting period of a FIF does not coincide with the taxpayer's year of income, and the FIF makes a distribution to the taxpayer during the notional accounting period, but in the year of income prior to that in which the FIF amount is assessable, no reduction is allowable under the existing law for the amount of the distribution included in the taxpayer's assessable income of the previous year.

5.29 For example, if the taxpayer's year of income is 1 July to 30 June and the notional accounting period of the FIF is 1 January to 31 December, any distribution made by the FIF between 1 January 1996 and 30 June 1996 would be included in the assessable income of the taxpayer for the 1995-96 year of income. The foreign investment fund income accrued during that period would be included in the taxpayer's 1996-97 year of income - the year of income in which the FIF's notional accounting period ended. Under the existing law, no reduction would be made to the amount of foreign investment fund income assessable to the taxpayer for the 1996-97 year of income for the distribution included in the assessable income of the 1995-96 year of income. The effect of the existing law is that in those circumstances the taxpayer is taxed twice on the amount of foreign investment fund income that is equal to the distribution.

5.30 An oversight appears to have occurred in the original FIF legislation in that no reduction was provided for assessable FIF attribution account payments made by a FLP to a person who has an interest in the FLP. A payment made by the person who issued a FLP to a person who has an interest in the FLP is a FIF attribution account payment (paragraph 603(g)). If the payment constitutes assessable income, the amount of a taxpayer's interest in the FLP that is assessable on an accruals basis for that notional accounting period should be reduced by the amount of the distribution from the FLP that constitutes assessable income.

Explanation of the amendments

Appointment of a liquidator to a related company

5.31 The proposed amendment will apply in determining whether an Australian company is related to a foreign company and entitled to a credit for underlying foreign tax paid on the profits from which dividends were paid to the Australian company. The appointment of a liquidator is to be disregarded in determining whether the company has a voting interest in another company, and the extent of the voting interest. [Item 38 - new subsection 160AFB(5A)]

Modified capital gains tax provisions

5.32 The Bill will amend subparagraph 160ZZO(2D)(b)(ii) to replace the term 'taxable Australian roll-over asset' with 'taxable Australian asset'. [Item 39]

5.33 The Bill will also amend subparagraph 160ZZO(1)(a)(i) which applies in calculating the attributable income of an eligible CFC (section 419(a)). The amendments to this paragraph will change references to an 'asset' to a 'roll-over asset' which will result in the use of terminology that is consistent with the terminology used in the remainder of section 160ZZO following the amendment enacted by TLAA (No.2) 1992. [Item 40]

5.34 Other provisions of paragraph 160ZZO(1)(a) as modified by section 419 to be amended to insert 'roll-over' before 'asset' are:

•

sub-subparagraph (a)(i)(C) [item 41] ; and

•

subparagraph (a)(ii) [item 42] .

Change to the basis of calculating assessable FIF income

5.35 The Bill will amend the operative provision of the FIF measures in Part XI (section 529) to change the basis on which foreign investment fund income accrued from an interest in a FIF or a FLP constitutes assessable income of a year of income. The amount of assessable income will be calculated on the basis of the period of the notional accounting period that the taxpayer was a resident of Australia. [Item 43]

5.36 This amendment will ensure that where a taxpayer changes residence only foreign investment income accrued during the period that the taxpayer was a resident will constitute assessable foreign investment fund income.

5.37 Where a taxpayer changes residence the amount of assessable foreign investment fund income for a year of income will be calculated according to the number of days in the notional accounting period of the FIF or FLP that ended during the year of income that the taxpayer was a resident of Australia. This amendment will affect the amount of assessable foreign investment fund income accrued from a FIF or a FLP where the notional accounting period of the FIF does not coincide with the taxpayer's year of income.

Reductions of FIF and FLP income for earlier distributions

5.38 The Bill proposes three amendments to section 530. The first amendment will extend the entitlement for a reduction from accrued foreign investment fund income assessable in a year of income to FIF attribution amount payments made by a FLP to a FLP. This amendment will place reductions for FIF attribution payments made by a FLP on the same basis as those made by a FIF. [Item 44]

5.39 The second amendment will amend paragraph 530(1)(b) to recognise that foreign investment fund income accrued from an interest in a FLP during a year of income will be able to be reduced by FIF attribution account payments made by a FLP. [Item 45]

5.40 The third amendment will apply where the taxpayer's year of income and the notional accounting period of the FIF or FLP do not coincide. The amount of foreign investment fund income accrued from a FIF or a FLP that is assessable in a year of income will be able to be reduced by a distribution from the FIF or FLP that was assessable in the earlier year of income where certain conditions are present. [Item 46 - new paragraph 530(1)(ca)]

5.41 These conditions are:

•

a FIF or a FLP makes a FIF attribution account payment during a notional accounting period;

•

the year of income in which the FIF attribution account payment was made and in which it constituted assessable income is earlier that the year of income in which the notional accounting period ends; and

•

the amount of foreign investment fund income that accrued during that notional accounting period is assessable in the later year of income.

Chapter 6 - Forgiveness of commercial debts

Overview

6.1 Part 1 of Schedule 2 of the Bill will insert a new Schedule 2C into the Income Tax Assessment Act 1936 (the Act) to provide that amounts of commercial debt that are forgiven will be applied, in order, to reduce the debtor's prior revenue losses, prior net capital losses, undeducted balances of deductible expenditure and cost bases of capital assets. The new Schedule is inserted in a way to fit within the proposed new structure of the Act. The date referred to in subclause 2(3) of the Bill relating to the commencement of the new Schedule, is the date of introduction of the Bill in the Parliament. That date is referred throughout the new Schedule 2C as the 'commencement day', as defined in subsection 245-245(1) .

Summary of the amendments

Purpose of the amendments

6.2 The amendments will ensure that there are appropriate taxation outcomes when a commercial debt is forgiven. The present law contains no specific rules relating to debt forgiveness, with the result that, in general, there are no taxation consequences to the debtor while the creditor usually is entitled to a tax deduction or capital loss for the amount of debt forgiven. The amendments will not treat the debtor as having received a taxable gain, but will apply the forgiven amount in reduction of certain amounts otherwise taken into account in calculating the debtor's taxable income.

Date of effect

6.3 The provisions apply to commercial debts forgiven after the commencement day which is the date this Bill was introduced in the Parliament. However, if after that day, a debt is forgiven in accordance with the terms of a previous agreement or arrangement, the provisions will not apply. For example, a debt may be forgiven after the debtor has complied with an obligation under an agreement with the creditor to pay, say, 10% of monthly sales revenue to the creditor for 12 months in exchange for the balance of the debt being forgiven at the end of the 12 month period. The provisions would not apply to the forgiveness of the debt if the agreement was entered into on or before the commencement day. [Paragraph 245-10(2)(a)]

6.4 For the transitional rule to apply, the agreement or arrangement must be written in a document other than a document under which the debt arose. For example, the transitional rule would not apply to a post-commencement day forgiveness of a non-recourse debt incurred on or before the commencement day on the basis that the terms of the debt agreement provided for the forgiveness of the debt if, say, the value of the property to which the creditor had recourse fell below the amount owing on the debt. [Paragraph 245-10(2)(b)]

Background to the legislation

6.5 There are no provisions in the present income tax law that deal effectively with debt forgiveness transactions. When a debt is forgiven, the debtor benefits through being relieved of the economic burden of having to repay the debt. If the forgiveness occurs because of the debtor's inability to pay, the debtor's loss of assets that once represented funds provided by the creditor is effectively taken over and borne by the creditor.

6.6 While, appropriately, the creditor generally is entitled to a tax deduction or capital loss in respect of the forgiven debt, the debtor does not lose any entitlement to deductions in respect of revenue and capital losses, or other undeducted expenditures that accumulated up to the time the debt was forgiven. Therefore, the revenue suffers because both debtor and creditor are allowed deductions in respect of broadly the same losses, notwithstanding the relief afforded to the debtor by the forgiveness.

6.7 To redress this imbalance, the amendments will require that net amounts of debts forgiven in a year of income be applied, first, to reduce deductible revenue losses of the debtor that otherwise could be claimed as a deduction in the forgiveness year or a later year of income. Any balance will then be applied, in order, against net capital losses incurred in respect of the year before the forgiveness year, undeducted revenue or capital expenditure (eg., on prospecting and mining for petroleum) that would otherwise be deductible in the forgiveness year or a later year and, finally, the cost bases of assets of the debtor at the beginning of the forgiveness year.

Explanation of the amendments

Index to the explanation of the amendments

Exclusions

6.8 The commercial debt forgiveness provisions do not apply if the forgiveness of a debt is effected:

(a)

under a bankruptcy law;

(b)

by a person's will;

(c)

for reasons of natural love and affection.

[Section 245-40]

6.9 In addition, if the waiver of a debt constitutes a fringe benefit under the Fringe Benefits Tax Assessment Act 1986, the debt is to be disregarded for the purposes of the commercial debt forgiveness provisions. [Subsection 245-15(2)]

6.10 An amount of debt that has been or will be included in the debtor's assessable income of any year of income is also to be disregarded [subsection 245-15(3)] . For example, paragraph 108(1)(a) of the Act may treat an advance or a loan to a private company shareholder as a dividend to be included in the shareholder's assessable income under section 44. Such an advance or loan would not be treated as a debt for the purposes of the debt forgiveness provisions.

Forgiveness of a commercial debt

6.11 For the debt forgiveness provisions to apply, there must be forgiveness of a commercial debt. [Subsection 245-10(1)]

Debt

6.12 For this purpose debt is defined in subsection 245-15(1) to cover a legally enforceable obligation on a person (ie., the debtor) to pay an amount to another person (ie., the creditor). Accrued but unpaid interest on a debt is treated as part of the debt rather than itself being a separate debt [section 245-20] .

Commercial debt

6.13 A debt is a commercial debt for purposes of the debt forgiveness provisions if the whole or any part of the interest payable on the debt is or would be an allowable deduction to the debtor [paragraph 245-25(2)(a)] . That test could be satisfied at any time over the term of the debt.

6.14 A debt will be a commercial debt under that test notwithstanding that a specific provision of the Act would have the effect of precluding a deduction for the interest [paragraph 245-25(2)(b)] . For example, section 51AD has the effect of preventing deductions in respect of certain property financed by non-recourse debt. A debt the interest on which is not deductible because of section 51AD nevertheless will be a commercial debt because, apart from the operation of section 51AD, the interest would qualify for deduction under section 51 as an outgoing incurred in gaining or producing assessable income. Another example of such an exception provision is section 51AAA. However, subsection 51(1) is not to be treated as an exception provision. Accordingly, a debt the interest on which is denied deduction by the application of subsection 51(1), ie. because it is of a private, capital or domestic nature, or is incurred in relation to exempt income, could not on that account be 'converted' to a commercial debt.

6.15 The fact that interest is not payable on a debt does not prevent the debt being a commercial debt. To that end, a debt will be a commercial debt if interest on the debt - had it been charged - would have been an allowable deduction to the debtor. [Subsection 245-25(3)]

6.16 Some debts may not be capable of bearing interest. For example, the 'discount' on a bill of exchange technically is not interest. As for interest, such debts will be commercial debts if amounts which have the character of interest are or would be an allowable deduction to the debtor. [Subsection 245-25(3)]

6.17 Certain shares are to be treated as commercial debt owed by the company to the shareholder. They are shares the dividends on which are taken to be 'debt dividends' in accordance with section 46C or 46D of the Act [subsection 245-25(4)] . Those sections operate to deny a tax rebate for inter corporate dividends under section 46 or 46A if the dividends in question are paid instead of interest under finance arrangements.

Trustees of trust estates

6.18 When a trust estate's debt is forgiven, the debt forgiveness provisions apply to a trustee in its capacity as trustee of the trust estate. [Section 245-26]

Forgiveness

6.19 A debt is forgiven if the debtor's obligation to pay the debt is released or waived or otherwise extinguished [subsection 245-35(1)] ,except where the whole of the debt is paid in cash. 'Extinguished' is defined in subsection 245-245(1) to exclude debts fully paid in cash. It is important to bear in mind that a reference to a debt includes part of a debt [subsection 245-245(1)] . That enables the provisions to apply if only part of a person's debt is forgiven. What constitutes the forgiven debt is determined under section 245-50 , as explained in the section on how to calculate the gross forgiven amount .

6.20 When a creditor loses its right to sue the debtor for the recovery of a debt due to the operation of a statute of limitations, the debt will be treated as forgiven at that time. [Subsection 245-35(2)]

In substance forgiveness

6.21 Debts will be taken to be forgiven where a debtor is effectively released from the obligation to pay the debt notwithstanding the existence of arrangements which imply that the debt remains on foot.

6.22 Under some arrangements, the debtor's obligation to pay the debt may not cease immediately but at some future time. Nevertheless, the debt will be treated as forgiven immediately if the debtor and creditor are not acting at arm's length and they agree either that the debtor will not have to pay any consideration for the concession granted by the creditor or merely a token amount. [Subsection 245-35(3)]

6.23 A debt which is treated as forgiven because of such an arrangement would not be subject to the debt forgiveness provisions again when the debt is actually forgiven. To have the provisions apply upon actual forgiveness would result in double taxing of the debtor on the same debt. [Subsection 245-35(3)]

Example:

6.24 G owes H $100,000, but cannot pay the full amount of the debt. H agrees to release G from this debt in return for an immediate payment of $1,000 and an additional payment of $1 in 5 years time. Arguably, G's debt to H will exist until G pays this additional $1, as until then G has a further obligation to meet before H becomes obliged to release the debt. However, this further obligation would generally be regarded as of a nominal kind having regard to:

•

the amount of the debt;

•

the amount of the payment; and

•

the likelihood of the obligation being met.

Debt parking

6.25 In relation to some debts, the creditor may assign its rights under a debt to a third party without the debtor's obligations under the debt being forgiven. It is possible for the debtor to be effectively released from its debt where, because of a relationship between the debtor and the assignee, the assignee would not seek to recover the debt. When this 'debt parking' type of arrangement occurs, the debt forgiveness provisions apply as if the debtor had been forgiven instead of being assigned [paragraphs 245-35(4)(d) and (e)]. Subsection 245-65(3) (discussed later) explains how the consideration in respect of the forgiveness of such a notional debt is to be worked out for the purposes of calculating the net forgiven amount.

6.26 In order for the provisions to apply in this manner, the relevant conditions are that the person to whom a creditor assigns a debt must either be:

•

an associate of the debtor; or

•

a party to an agreement or arrangement with the debtor in relation to the assignment.

[Paragraphs 245-35(4)(a) and (b)]

6.27 They will not apply, however, if the new creditor acquired the rights under the debt in the ordinary course of trading on a securities market . [Paragraph 245-35(4)(c)]

6.28 Section 245-61 (discussed later) explains how to calculate the notional value of a 'parked' debt for the purposes of working out any forgiven amount if the new creditor were to forgive the debt.

In-substance debt for equity swap

6.29 Another circumstance of debt forgiveness is a form of debt/equity swap. Under existing section 63E of the Act, a debt/equity swap occurs where a creditor releases a debt or part of a debt in return for the issue of shares or units in the debtor. The release of the debt or part of the debt would constitute forgiveness in terms of the basic rule in subsection 245-35(1) .

6.30 The form of debt/equity swap covered by subsection 245-35(5) occurs where the creditor acquires shares in a debtor company so that the money paid to acquire the shares can be used by the debtor to discharge the debt, or part of it. On its face, the payment by the debtor appears to be nothing more than a payment of the debt owing. However, subsection 245-35(5) will treat the debt as being forgiven to the extent it is paid out by this means, and the forgiveness to have occurred when the money the creditor used to pay for the shares is applied to pay off the debt. As explained later in these notes, subsection 245-65(4) treats the money so used by the debtor as consideration for the debt forgiven.

Gross forgiven amount calculation

6.31 Subdivision 245-C sets out how to calculate the gross forgiven amount of a debt. That gross amount will be reduced (if required) by the amounts specified in Subdivision 245-D to arrive at the net forgiven amount of a debt.

6.32 The starting point in calculating the gross forgiven amount is to determine what constitutes the forgiven debt. Ordinarily, it is simply the debt or part of the debt which the creditor releases or waives or is otherwise taken to be forgiven by the operation of section 245-35 . If consideration is given for the forgiveness, the amount of the forgiven debt is the part of the debt no longer payable and the part of the debt extinguished by the consideration. [Section 245-50]

Example:

6.33 If A owes B $1,000 and, in consideration of A paying $100, B agrees to waive the balance of the debt, the forgiven debt is to be taken as $1,000, ie., the proportion of the debt expressed to be forgiven ($900) plus the proportion of the debt extinguished by the consideration ($100).

6.34 The gross forgiven amount of a debt is its notional value less any amount of consideration in respect of the forgiveness of the debt. [Section 245-75]

Notional value of the debt

6.35 The basic rule is that the notional value of a debt is the amount that would be the value of the debt on forgiveness if the debtor's capacity to pay the debt on termination was the same as it was at the time when the debt was initially incurred [subsection 245-55(2)] , on an assumption that the debtor was solvent when the debt was incurred. This is called the first applicable amount .

6.36 The assumption contained in the basic rule of the debtor's initial solvency would affect a case where, notwithstanding that parties to a debt arrangement are at arm's length, a debt has arisen in circumstances where the debtor may not have been solvent at that time. For example, a bank may have lent money to a company in the belief that it was solvent when it was not.

6.37 The assumption will prevent a debtor being able to put only a nominal value on the debt, on the basis that it was close to worthless at the time it was incurred because the debtor was then insolvent. Thus, there will be a requirement to value the debt as if the debtor was solvent at the time it was incurred and that its capacity to pay at the time it was forgiven is the same as when it was incurred. The value of the debt will therefore be determined by reference to its arm's length terms.

6.38 The assumption of initial debtor solvency does not apply where the debtor and creditor were not dealing with each other at arm's length in relation to the debt and the debt is not a moneylending debt [subsection 245-55(4)] . The reason is that, in such circumstances, relevant capital gains rules (subsection 160ZH(9)) would treat the creditor as having given market value consideration for the debt when it was acquired as an asset by the creditor. If the creditor forgives a non-arm's length debt of nominal value and is (by subsection 160ZH(9)) thereby denied entitlement to a substantial capital loss, it is appropriate to treat the debtor as having been forgiven a debt of the same nominal value. (A moneylending debt is defined in section 245-245 . It is one which results from a loan made by the creditor in the ordinary course of a business of money lending.)

Eliminating market variables

6.39 If part of a debt forgiveness is attributable to changes in the value of the debt due to market variables, that part is not to be taken into account in applying commercial debt forgiveness provisions. For this purpose, 'market variables' are changes in interest rates and exchange rates that affect the value of the debt. [Subsection 245-55(5)]

6.40 If the value of the debt has increased due to market variables, the actual amount forgiven will contain a component that is attributable to those variables. In effect, part of the debt forgiven will constitute a notional market loss of the debtor, eg where a loan taken out in foreign currency has increased in Australian dollar terms because of unfavourable exchange movements. It would be inappropriate to include that component in the gross forgiven amount unless the debtor were entitled to a tax deduction in respect of that loss.

6.41 To eliminate the effects of market gains, and to ensure that non-deductible notional market losses of the debtor do not inflate the amount of debt forgiven, the value of the debt calculated under the basic rule contained in subsection 245-55(2) is compared to what the value of the debt (measured by the same rule) would be if there had been no changes in market variables since the debt was incurred, plus any amounts allowable as deductions to the debtor on the forgiveness of the debt which constitute losses due to market movements. This market-adjusted value is called the second applicable amount . [Subsection 245-55(3)]

6.42 The lesser of the first applicable amount and the second applicable amount is the notional value of the debt forgiven. [Subsection 245-55(1)]

Example:

6.43 X Ltd borrows USD 100. One year later, this debt is forgiven for no consideration, as X Ltd is unable to repay the amount. The exchange rates are:

6.44 On the assumptions expressed in subsection 245-55(2) , the value of the debt on forgiveness would be AUD 140 - the first applicable amount in respect of the debt.

6.45 However, on the assumption expressed in subparagraph 245-55(3)(a)(iii) of no change in market variables over the debt's term, its value on forgiveness would be AUD 130 - the second applicable amount in respect of the debt.

6.46 The difference between the two amounts reflects the increase in value of the debt over its term due to the movement in exchange rates. In this instance, because the second applicable amount is lower, it will be taken as the notional value of the debt.

Non recourse debt

6.47 Special rules apply in working out the notional value of non-recourse debt.

6.48 Subsection 245-60(1) defines non-recourse debt for this purpose. It is a two part test:

(i)

the debt must have been incurred directly in respect of financing the cost of the debtor's acquisition, construction or development of property; and

(ii)

the creditor's rights as against the debtor in the event of default in the payment of principal or interest are limited to the property itself or rights in relation to the property such as goods or services produced by the property, security over the property, etc.

6.49 A debt incurred in financing the cost of manufacturing goods would not qualify under subsection 245-60(1) as a non-recourse debt.

6.50 An obligation to pay an amount to the creditor may be non-recourse in a particular way. For example, the creditor's rights in the event of default in the payment of principal may be limited as described above, but the creditor may have full recourse against the debtor for the payment of interest. These rules apply to the non-recourse component of such a debt. The other component is valued under the ordinary rules for debt discussed above.

6.51 The notional value of a non-recourse debt is the lesser of:

(a)

the amount of the debt on forgiveness; and

(b)

the market value at that time of the rights of the creditor in respect of the property to which it has recourse.

[Subsection 245-60(2)]

Debt previously 'parked''

6.52 Section 245-61 contains a special rule for working out the notional value of a debt that was assigned under conditions mentioned in paragraphs 245-35(4)(a) to (c) . The rule prevents double taxation. That could happen if, on forgiveness of the assigned debt, the net forgiven amount when added to the net forgiven amount of the notional debt calculated under paragraph 245-35(4)(e) exceeded what would otherwise be the notional value of the assigned debt.

6.53 Accordingly, the notional value of the assigned debt is equal to the consideration which, under subsection 245-65(3) , has been taken into account in working out the net forgiven amount of the notional debt. [The notional value of any interest that accrued on the assigned debt after the assignment would be determined under the ordinary valuation rules contained in section 245-55 .]

6.54 If the assigned debt was not a moneylending debt, and the creditor and the new creditor were not dealing at arm's length in connection with the assignment, the notional value of the assigned debt is the market value of the debt at the time of the assignment. [Paragraph 245-61(a)]

6.55 In other cases, the notional value of the assigned debt is the sum of any consideration the debtor has paid or given the creditor for the assignment of the debt to the new creditor and of any consideration the new creditor has paid or given for the assignment. [Paragraph 245-61(b)]

Consideration

6.56 In the interests of consistency between the parties to a debt forgiveness transaction, the rules relating to consideration seek broadly to mirror those elsewhere in the Act, particularly those contained in the capital gains provisions of Part IIIA.

The general rules

6.57 The basic rules for valuing consideration are contained in subsection 245-65(1) . By and large, they reflect existing subsection 160ZD(1) in its application to capital gains. In summary, consideration is the sum of amounts of money the debtor is required to pay in respect of the forgiveness or, if property other than money is required to be given, the market value of the property. If both money and property are given, the consideration is the sum of the amounts of money and the market value of the property.

6.58 If the debt is a moneylending debt, ie, from a loan made by the creditor in the ordinary course of a moneylending business, consideration will include - in addition to any immediate money or property consideration - the market value of any obligation of the debtor to pay amounts in the future. This additional test will ensure that the value of consideration payable over a period of time appropriately reflects the time value of money and (in an appropriate case) the creditworthiness of the debtor.

Inadequate, excessive or no consideration

6.59 A specific rule, mirroring that in subsection 160ZD(2), applies in valuing consideration given in respect of the forgiveness of a non money lending debt where:

•

there is no consideration on the forgiveness of the debt;

•

the consideration given cannot be valued; or

•

the consideration given is not equal to the debt's value, and the debtor and creditor were not at arm's length in relation to the forgiveness.

6.60 If any of these criteria is met, for the purposes of calculating the gross forgiven amountthe debtor is deemed to have given consideration equal to the market value of the debt at the time of forgiveness [subsection 245-65(2)] .

Debt parking

6.61 Where a notional debt is taken to have been forgiven and a net forgiven amount of the notional debt is required to be calculated in accordance with paragraph 245-35(4)(e) (ie., the 'debt parking' rule), specific rules apply in determining the consideration given in respect of the forgiveness.

6.62 The first such rule applies where:

•

the debt is not a moneylending debt; and

•

the creditor and the new creditor were not dealing at arm's length in connection with the assignment.

In that case, the consideration is the market value of the debt at the time of the debt's assignment. [Paragraph 245-65(3)(a)]

6.63 In other cases, the consideration is the sum of any consideration the debtor has paid or given the creditor for the assignment of the debt to a new creditor and of any consideration the new creditor has paid or given for the assignment. [Paragraph 245-65(3)(b)]

Debt-for-equity swap

6.64 Subsection 245-35(5) describes circumstances of debt forgiveness where, effectively, a debt or part of a debt is forgiven in exchange for shares in the debtor company. In such a case, where money received by the debtor company in payment of the shares is applied towards payment of the debt, the consideration for the debt forgiven is the market value of the shares reduced in the proportion of the moneys applied in satisfaction of the debt over the whole amount of the money received. That is expressed by the formula in subsection 245-65(4) as:

amount applied / amount subscribed * market value of all shares subscribed for


Money or other property applied for the benefit of the creditor

6.65 Section 245-70 contains a specific rule, mirroring that in existing section 160D, to ensure that, for purposes of ascertaining the consideration in respect of the forgiveness of a debt, money or property that a debtor applies or is required to apply for the benefit, or in accordance with the directions, of the creditor, is regarded as having been paid or given to the creditor.

6.66 Section 245-75 specifies that, if no consideration is given for the forgiveness of a debt, the gross forgiven amount is equal to the notional value of the debt. If there is consideration and the notional value exceeds the consideration, the gross forgiven amount is the difference. Otherwise, there is no forgiven amount.

Calculation of net forgiven amount of a debt

6.67 The gross forgiven amountof the debt is to be reduced to the extent that the existing law already applies to it and, where applicable, that group companies agree that deductions in relation to the gross forgiven amount are forgone. The reduced amount is called the net forgiven amount . Subdivision 245-D sets out how to calculate the net forgiven amount.

Reduction factors

6.68 There are a number of ways in which the existing law may, either directly or indirectly, tax a debtor on the amount forgiven. Where, as a result of the forgiveness of the debt:

•

any amount has, is or will be included in the debtor's assessable income;

•

any amount by which a deduction would otherwise be allowable has been, or will be reduced; or

•

the cost base to the debtor of any asset has been or will be reduced,

the gross forgiven amount is reduced by that amount, to arrive at the net forgiven amount or provisional net forgiven amount [subsections 245-85(1) and (2)] . The provisional net forgiven amount is relevant only for the purpose of the intra group debt rules explained below.

Intra group debt

6.69 Where the debtor and creditor in a debt forgiveness are under common ownership throughout the term of the debt, section 245-90 provides for them to enter into an agreement under which the creditor forgoes an entitlement it would have to a capital loss under paragraph 160Z(1)(b) from forgiving the debt, or a deduction in the forgiveness year for a bad debt under subsection 51(1) or section 63.

6.70 If such an agreement is made, the creditor's capital loss or deduction is reduced to the extent of the amount agreed upon up to the provisional net forgiven amount. The provisional net forgiven amount is reduced by the same amount to arrive at the debtor's net forgiven amount. [Subsections 245-90(2) and (3)]

6.71 Item 2 of Part 2 of Schedule 2 of the Bill amends section 51 to ensure that a deduction otherwise allowable that the creditor has agreed to forgo is reduced to the extent of the amount forgone. Item 14 of Part 2 has similar effect in relation to a deduction otherwise allowable under section 63 some or all of which the creditor has agreed to forgo. Item 46 of Part 2 applies to reduce that part of the creditor's capital loss under paragraph 160Z(1)(b) that the creditor has agreed to forgo.

6.72 For the purposes of the debt forgiveness provisions, including the intra group debt rules in section 245-90 , the question of whether two or more companies are under common ownership is determined in the same way as in Division 19A of Part IIIA. That Division deals with the application of the capital gains provisions in the event of a transfer of assets between companies [section 245-250] . As discussed later at paragraphs 6.128 and 6.129 in relation to debt forgiveness of a company that is one of a group of related companies, section 160ZZRB of Division 19A of Part IIIA requires either that the companies be related companies within the meaning of section 160G - companies with 100% common beneficial ownership - or that they are companies the shares in which are held by the same natural persons in the same proportions.

6.73 In order for the intra group debt rule to apply, the relevant agreement between the debtor and creditor must be:

•

in writing;

•

signed by the public officer of the debtor and the public officer of the creditor; and

•

made before the earlier of the date of lodgment of the creditor's return of income for the forgiveness year of income, and of the debtor's return of income for that year. The Commissioner may determine a later date. [Subsection 245-90(4)]

Application of total net forgiven amount

6.74 When a debtor has a net forgiven amount in respect of the forgiveness of a debt, the commercial debt forgiveness provisions apply the amount in reduction of certain future tax deductions of the debtor. [Subdivision 245-E]

6.75 The first step in this process is to calculate the debtor's total net forgiven amount for the forgiveness year of income - the sum of all the net forgiven amounts in that year of income. [Subsection 245-105(1)]

6.76 By the time the debtor's return in respect of the forgiveness year of income is furnished to the Commissioner, the total net forgiven amount is to be applied, in order, in reduction of the following classes of future tax deductions:

•

deductible revenue losses;

•

deductible net capital losses;

•

deductible expenditure; and

•

cost bases of assets. [Section 245-105]

6.77 Within each class, the debtor may choose the relevant loss, item of expenditure or asset against which the total net forgiven amount is to be applied, subject to the proviso that it must be applied to the maximum extent possible within that class.

6.78 Once the total net forgiven amount has been applied in this way against all the reducible amounts of a class, any excess is applied, in the above order, against the next class of reducible amounts.

6.79 If, after applying the total net forgiven amountto the maximum extent possible against the debtor's reducible amounts, there is an excess, the excess is to be disregarded. [Subsection 245-195(1)]

6.80 The total net forgiven amount is not applied as described in calculating attributable income of a non-resident trust estate for the purposes of Division 6AAA of Part III or attributable income of a controlled foreign corporation for the purposes of Part X. [Section 245-100]

Deductible revenue losses

6.81 The table in section 245-110 sets out the kind of losses that can be deductible revenue losses . They are:

•

general domestic losses (subsections 79E(3), 80(2));

•

film losses (subsections 79F(6), 80AAA(7));

•

pre-1990 primary production losses (subsection 80AA(4)); and

•

foreign losses (subsections 160AFD(1), (2)).

6.82 In order to be a deductible revenue loss, in addition to being a loss of that kind, a deduction in respect of the loss must otherwise have been allowable to the debtor in the forgiveness year of income or any later year of income if the debtor had derived sufficient income or, in a relevant case, income of a particular kind against which the loss would be deductible [section 245-110] . In effect, deductible revenue losses are those listed in the table in section 245-110 that were incurred by the debtor in a year of income earlier than the forgiveness year of income and are undeducted at the beginning of the forgiveness year.

6.83 Sections 245-115 and 245-120 require that the total net forgiven amount be applied to the maximum extent possible in reduction of the debtor's deductible revenue losses although the debtor may choose which of the losses are to be reduced and the amount by which each is reduced.

6.84 Where a debtor's total net forgiven amount is applied in accordance with sections 245-115 and 245-120 in reduction of one or more of the categories of deductible revenue losses listed in section 245-110 , the application rules contained in the Act in relation to those categories of losses are henceforth to be applied on the basis that they are so reduced. A series of consequential amendments contained in items 22 to 26 , and items 44 and 45 of Part 2 of Schedule 2 of the Bill, ensure that consequence.

Deductible net capital losses

6.85 Section 245-125 defines the next category of amounts against which the total net forgiven amount is to be applied. The category is deductible net capital loss and comprises a net capital loss or a net listed personal-use asset loss which, under subsection 160ZC(4) or subsection 160ZQ(6), is taken to have been incurred in the income year immediately before the forgiveness year.

6.86 More colloquially, they are undeducted net capital losses incurred prior to the forgiveness year which could be deducted from capital gains derived, or added to capital losses incurred, in the forgiveness year or later years of income.

6.87 Sections 245-130 and 245-135 require that any residual part of the total net forgiven amount that has not been applied against deductible revenue losses is to be applied to the maximum extent possible against the deductible net capital loss, although the debtor may choose the order in which they are reduced and the amount of reduction of each.

6.88 Where a debtor's total net forgiven amount is applied in accordance with sections 245-130 and 245-135 in reduction of a net capital loss or net listed personal-use asset loss, the amount of such loss that would be taken to have been incurred in the immediately preceding year under subsection 160ZC(4) or 160ZQ(6) is reduced to the extent of the amount applied. Consequential amendments contained in items 47 and 49 of Part 2 of Schedule 2 of the Bill ensure that consequence.

Deductible expenditure

6.89 The table of deductible expenditure in subsection 245-140(1) sets out the third category of amounts, called deductible expenditure , against which the total net forgiven amount is to be applied.

6.90 Deductible expenditure is expenditure described in the table and incurred before the forgiveness year in respect of which a deduction would be allowable to the debtor against the income of the forgiveness year of income or a later year of income, assuming that no event or circumstance (other than a recoupment of the expenditure) occurred that would affect the allowance of the deduction [subsection 245-140(1)] . That is, deductible expenditure is limited to expenditure incurred before the forgiveness year which remains undeducted but which, on conditions prevailing at the beginning of the forgiveness year, would be deductible in that year or future years.

6.91 The deductible expenditures, and the existing provisions of the Act under which deductions are allowable, are set out below:

6.92 There are several circumstances in which expenditure will not be included in deductible expenditure. They are:

•

if the expenditure relates to an asset disposed of in an arm's length transaction before the forgiveness of any debt of the debtor in a year of income, and the Act requires no balancing adjustments on the disposal [subsection 245-140(2)]

•

if the expenditure relates to an asset that was disposed of by the debtor, or was lost or destroyed, on or before the commencement day [subsection 245-140(3)]

•

if the expenditure was recouped on or before the commencement day [subsection 245-140(4)] .

6.93 Sections 245-145 and 245-150 require that any residual part of the total net forgiven amount that has not been applied against deductible revenue losses and deductible net capital losses is to be applied to the maximum extent possible against deductible expenditures. The debtor may choose the order in which they are reduced and the amount of reduction of each.

6.94 Section 245-155 explains how reductions of deductible expenditure are to be made. The two methods of reducing deductible expenditure accord with the two broad methods the Act adopts for working out deductions in respect of the various kinds of deductible expenditure.

6.95 Where the deduction is worked out as a percentage, fraction or proportion of an amount (called the base amount ) without regard to amounts previously allowed, eg under the 'prime cost method' of depreciation specified in paragraph 56(1)(b) of the Act , the reduction is to be made to the base amount. That means the deductions allowable in the forgiveness year and later years of income will be the relevant percentage, fraction or proportion of the base amount as reduced [paragraph 245-155(1)(a)] .

6.96 The amount by which the base amount is reduced is to be taken into account as if it had been allowed as a deduction to the debtor before the forgiveness year in working out any balancing adjustment required to be made under the Act because of:

•

the disposal, loss or destruction of an asset for which the deductible expenditure was incurred;

•

the recoupment of deductible expenditure; or

•

the termination of use of the asset for a particular purpose [paragraph 245-155(1)(b)] .

Without such a provision the reduction of the relevant deductible expenditure would be nullified by either including too little in assessable income or allowing too great a deduction upon the relevant asset disposal, expenditure recoupment etc.

6.97 On reduction of the base amount, the total amount of deductions allowable to the debtor in respect of the deductible expenditure is limited to the reduced base amount. This includes amounts allowed as deductions before the forgiveness year. [Paragraph 245-155(1)(c)]

Example:

6.98 XCO Ltd acquires depreciable plant on 1 July 1994 for $10,000. It elects to use the prime cost method of depreciation. The prime cost rate for this type of plant is 20%. It therefore claims a depreciation deduction of $2,000 in the 94/95 and 95/96 years of income.

6.99 In the 96/97 year of income, a debt of XCO Ltd is forgiven, resulting in a net forgiven amount of $2,000. The circumstances enable XCO Ltd to choose to reduce this particular item of deductible expenditure.

6.100 Subsection 245-155(1) applies, as the depreciation deduction is calculated by reference to a base amount - in this case $10,000. For the purposes of calculating future depreciation deductions, this base amount is reduced by the forgiven amount to $8,000 [paragraph 245-155(1)(a)] . The annual depreciation deductions for the 1996/97 and subsequent income years are thus reduced to $1,600 (ie., $8,000 x 20%).

6.101 However the total depreciation allowable to the debtor in respect of the plant is limited to this new base amount [paragraph 245-155(1)(c)] . Therefore, depreciation would be restricted to $800 in the 1998/99 year of income.

6.102 The depreciation deductions that would be allowed if XCO Ltd continued to hold the depreciable plant are summarised in the following table:

6.103 Where a deduction in respect of deductible expenditure is worked out after taking into account amounts previously allowed as a deduction, eg. the 'diminishing value method' of depreciation specified in paragraph 56(1)(a) of the Act , the reduction to the deductible expenditure is applied by treating the amount of the reduction as if it had been allowed as a deduction to the debtor before the forgiveness year [subsection 245-155(2)] . The effect is illustrated by the following example:

Example:

6.104 YCO Ltd acquires depreciable plant on 1 July 1994 for $10,000. It uses the 'diminishing value' method of depreciation. The diminishing value rate for this type of plant is 30%. It therefore claims a depreciation deduction of $3,000 in the 94/95 year of income (30% x $10,000) and $2,100 in the 95/96 year of income (30% x ($10,000 - $3,000)).

6.105 In the 96/97 year of income, a debt of YCO Ltd is forgiven, resulting in a net forgiven amount of $2,000. The circumstances enable YCO Ltd to choose to reduce this particular item of deductible expenditure.

6.106 Subsection 245-155(2) applies, as under the 'diminishing value' method depreciation deductions are calculated by reference to the cost of the plant less depreciation previously allowed or allowable (the 'depreciated value' - see existing subsection 62(1)). Consequently, the forgiven amount is to be taken as having been allowed as a depreciation deduction, effectively reducing the 'depreciated value' to $2,900 (ie., $10,000 - ($3,000 + $2,100 + $2,000)).

6.107 Thus, depreciation in the 96/97 year of income would be $870 (ie. 30% of $2,900). The depreciation deductions that would be allowed if YCO Ltd continued to hold the depreciable plant are summarised in the following table:

6.108 Some provisions of the Act relating to deductible expenditure, eg. s.75AA(8), s.82BE and s.122T, require previous deductions to be disallowed to the extent that deductible expenditure is recouped. Section 245-160 will apply in such a case if recoupment occurs after a forgiven amount has been applied to reduce the deductible expenditure. To the extent of any such reduction, the recoupment will be treated as assessable income of the debtor in the year the expenditure is recouped. This will ensure that such expenditure recoupment provisions do not nullify the effect of the debt forgiveness provisions.

6.109 Where a debtor's total net forgiven amount is applied in accordance with sections 245-145 and 245-150 in reduction of one or more of the categories of deductible expenditure listed in subsection 245-140(1), deductions in respect of that expenditure henceforth are to be calculated on the basis that the expenditure had been so reduced. A series of consequential amendments contained in items 3 to 13, 15 to 21 and 27 to 43 of Part 2 of Schedule 2 of the Bill ensures that consequence.

Cost bases of reducible assets

6.110 The final category of amounts that may be reduced by a debtor's total net forgiven amount is the cost base of assets owned by the debtor at the beginning of the forgiveness year of income. These are called reducible assets . The amount to be applied in reduction of the cost bases of reducible assets is the residual part of total net forgiven amount that has not been applied to reduce the debtor's deductible revenue losses, deductible net capital losses and deductible expenditures. (Refer to the definitions of reducible asset and residual forgiven amount in subsection 245-165(1) .)

6.111 Section 245-170 contains a list of assets, called excluded assets , that are not to be treated as reducible assets. One group of excluded assets is assets the disposal of which will not, or is unlikely to, result in a capital gain or loss to the debtor, including:

•

assets acquired before 20 September 1985;

•

non-listed personal-use assets;

•

a dwelling that was the sole or principal residence of the debtor at any time before the forgiveness year of income;

•

goodwill;

•

a right to, or to any part of, an allowance, annuity or capital amount payable out of an asset of a superannuation fund or an approved deposit fund or a right to, or to a part of, an asset of such a fund;

•

an asset that was trading stock of the debtor at all times prior to the forgiveness year of income;

•

where the debtor is a non-resident - an asset that is not a taxable Australian asset.

6.112 Cost bases of assets disposed of on or before the commencement day are also to be excluded assets. [Paragraph 245-170(b)]

6.113 Another category of excluded asset is an asset expenditure in relation to which is deductible expenditure, and in respect of which there would be a balancing adjustment on the disposal of that asset [paragraph 245-170(h)] , eg. depreciable plant or articles within the meaning of subsection 54(1) of the Act.

6.114 Sections 245-175 and 245-180 require that any residual part of the total net forgiven amount that has not been applied against deductible revenue losses, deductible net capital losses and deductible expenditure is to be applied to the maximum extent possible to reduce relevant cost bases of reducible assets. (By the definition in subsection 245-165(1) , relevant cost bases mean cost bases, indexed cost bases or reduced cost bases of assets as those terms are defined in the capital gains provisions of Part IIIA.) The debtor may choose the reducible assets to be reduced and the extent of the reduction.

6.115 However, the cost bases of reducible assets that constitute investments in associates of the debtor must be reduced last, ie., after the residual forgiven amount has been applied to the maximum extent possible in reduction of the cost bases of other reducible assets of the debtor [section 245-185] . For this purpose, associates can be natural persons, partnerships or trustees of a trust or company that are associates (as defined in section 245-245 ) of the debtor. Relevant associate investments would include an interest in a partnership, a beneficial interest under a trust, a share in a company and a debt owed to the debtor.

6.116 When a debtor chooses to apply an amount in reduction of the relevant cost bases of a particular asset, section 245-190 stipulates that, as at any time after the beginning of the forgiveness year, each of those cost bases is taken to be reduced accordingly. Ordinarily, the reduction of an asset's cost bases cannot exceed the amount that would have been the reduced cost base of the asset calculated as at the first day of the forgiveness year, ie., as if it had been disposed of on that day. However, if an event occurred after the beginning of the forgiveness year of income that would cause the reduced cost base of the asset to be reduced, the reduction of the asset's cost bases under the debt forgiveness provisions cannot exceed the amount that would have been the reduced cost base of the asset calculated as if the asset had been disposed of on the day that the event occurred. Division 19A of Part IIIA and section 160ZP(13) are examples of provisions in the law that could cause the reduced cost base of an asset to be reduced.

6.117 The reduction of relevant cost bases of an asset will affect the calculation of a capital gain or capital loss on the subsequent disposal of the asset because the relevant cost base that would be taken into account in determining the capital gain or loss must reflect that reduction.

Example:

(i)

Assume debtor A has applied residual forgiven amount of $1,000 to reduce the cost bases of an asset owned on 1 July 1997. The asset is disposed of subsequently for $10,000 at a time when its indexed cost base is $8,000. Under ordinary capital gains calculations, the capital gain is $2,000 ($10,000 - $8,000). However, the indexed cost base must be reduced by $1,000 in accordance with subsection 245-190(1) . The capital gain becomes $3,000 ($10,000 - $7,000).

(ii)

Assume, as in example (i), debtor A has applied the residual forgiven amount of $1,000 to reduce the cost bases of an asset. The asset is disposed of subsequently for $800 at a time when its indexed cost base is $1,100 and its reduced cost base is $1,000.

Under ordinary capital gains calculations, there would be a capital loss of $200 ($1,000 - $800). However, both the indexed cost base and the reduced cost base must be reduced by $1,000 (in accordance with subsection 245-190(1) ) to $100 ($1,100 - $1,000) and nil ($1,000 - $1,000) respectively. Consequently, the debtor realises a capital gain of $700 ($800 - $100).

6.118 Where a debtor's total net forgiven amount is applied in accordance with sections 245-175 and 245-180 in reduction of the relevant cost bases of a reducible asset, the cost base, indexed cost base and reduced cost base of the asset for capital gains purposes in accordance with section 160ZH are to be reduced accordingly. [Item 48 of Part 2 of Schedule 2]

Unapplied total net forgiven amount

6.119 Section 245-195 operates to ensure that any part of a debtor's total net forgiven amount of a forgiveness year that is not able to be applied in reduction of deductible revenue losses, deductible net capital losses, deductible expenditures and relevant cost bases of assets is disregarded for purposes of the debt forgiveness provisions.

Partnerships

6.120 Subdivision 245-F sets out special rules relating to partnerships. Section 245-210 has the effect that if there is a total net forgiven amount of a partnership in respect of the partnership debts, that amount is required to be applied in reduction of the categories of amounts specified in subsections 245-105(5), (6), (7) and (8) - to the extent that a partnership would have entitlements to those amounts - in the same manner as for other taxpayers.

6.121 If any part of the total net forgiven amount is unable to be so applied, that part is allocated to the partners in the proportion that they share in the net income of the partnership or, as the case requires, the partnership loss of the forgiveness year. The formula in subsections 245-215 (3) and (4) reflect that allocation. The amount so allocated to each partner is added to any net forgiven amounts of the debts of the partner in calculating the partner's total net forgiven amount.

6.122 Those partnership rules do not apply to corporate limited partnerships, as defined in section 94D of the Act, but the debt forgiveness rules apply generally to a corporate limited partnership as if it was a company. [Section 245-205]

Related companies

6.123 If a debt of a company is forgiven, Subdivision 245-G will apply if the company is one of a group of related companies at the time of debt forgiveness and any non-debtor companies in the group have deductible revenue losses. It will also apply if none of the companies in the group have deductible revenue losses but any non-debtor companies in the group have deductible net capital losses.

6.124 Subdivision 245-G apportions the net forgiven amount of a company's debt firstly among those companies in the group which have deductible revenue losses as at the end of the income year immediately preceding the forgiveness year (calculated as if each of those companies were the debtor company which incurred the forgiven debt [subsection 245-245(2)] . The relevant proportion is the proportion of each company's deductible revenue losses to the total revenue losses of the group. For example, if the net forgiven amount of a debt was $6m and the debtor company itself had deductible revenue losses of $2 million and there were two other group companies with deductible revenue losses of $3 million and $4 million respectively, they will be treated respectively as having had a net forgiven amount calculated as follows:

Debtor company: 2 / 9 x 6 = $1.33m Group company 1: 3 / 9 x 6 = $2.00m Group company 2: 4 / 9 x 6 = $2.67m


6.125 That is, applying the formula in subsection 245-230(3) , each 'loss' company in the group is treated as if it had a debt forgiven equal to the relevant proportion of the actual debt forgiven. The amount of any such 'deemed' net forgiven amount will be taken into account in working out each company's total net forgiven amount under subsection 245-105(1) and applied in the usual way to reduce each company's deductible revenue losses, deductible net capital losses, deductible expenditure and cost bases of reducible assets. If the debtor company is one of the 'loss' companies, its net forgiven amount is the proportionate 'deemed' net forgiven amount instead of the actual net forgiven amount - see subsection 245-230(2) .

6.126 If none of the companies in the group of related companies has deductible revenue losses, but one or more of the non-debtor companies in the group has deductible net capital losses, section 245-235 will apply an equivalent formula to that in section 245-230 to apportion the net forgiven amount of a group company among the group companies with deductible net capital losses. Each of those companies will be treated as having a debt forgiven equal to the relevant proportion of the actual debt forgiven for the purpose of working out its total net forgiven amount under subsection 245-105(1).

6.127 If none of the non-debtor companies in the group of related companies has deductible revenue losses nor net capital losses as at the end of the income year preceding the forgiveness year Subdivision 245-G does not apply. In that case, any actual net forgiven amount of a debtor company is not apportionable. [Section 245-240]

Determining the existence of a group of related companies

6.128 For purposes of Subdivision 245-G, it is necessary to determine at the time when a debt incurred by a company is forgiven whether or not there is a group of related companies in respect of the debt, [subsections 245-225(1) and (2)] . There will be such a group if the debtor company and another company or companies are under common ownership at the time the debt is forgiven and on the last day of the immediately preceding year of income.

6.129 That is, a group comprises the debtor company and any other company with which it is under common ownership at the end of the previous income year and on the day on which the debtor company's debt is forgiven. Whether or not companies are under common ownership is determined, under section 245-250 , in the same way as is would be under section 160ZZRB. That section requires either that the companies be related companies within the meaning of section 160G - companies with 100% common beneficial ownership - or that they are companies the shares in which are held by the same natural persons in the same proportions.

6.130 In the ordinary course of events, those rules mean that the apportionment arrangements described above will not affect a company which ceases to be under common ownership with the debtor company before the debt forgiveness. In certain circumstances, however, a company that was not under common ownership with the debtor company at the times specified by subsection 245-225(2) - the day of forgiveness and the last day of the previous income year - will nevertheless be included in the relevant group of related companies. Subsection 245-225(3) will require such an outcome where -

•

the company had been under common ownership with the debtor company at any time from the beginning of the second last income year before the forgiveness year of income up to the time of forgiveness; and

•

they were under common control immediately before and after they ceased to be under common ownership, and at the time when the debt was forgiven.

6.131 Under those conditions, the company that had ceased to be under common ownership with the debtor company will be included in the group of related companies for the purposes of apportioning the net forgiven amount of the debtor company's debt in the manner specified in sections 245-230 and 245-235.

6.132 The test for companies being under common control is whether a taxpayer who is a 'controller' of one company is also a 'controller' of the other company. Section 245-255 requires that the question whether a taxpayer was a 'controller' of a company at a particular time be determined in the same way as under section 160ZZRN.

6.133 Section 160ZZRN applies for the purposes of the capital gains share value shifting provisions (Division 19B) of Part IIIA. Under those provisions, a taxpayer will be a controller of a company if one of 3 tests is satisfied -

(i)

the taxpayer has an 'associate - inclusive control interests' in the company of not less than 50%. Broadly, that means that the taxpayer and/or associates of the taxpayer hold or are entitled to acquire at least 50% of the control of a company through direct share-holder interests or indirect interests traced through interposed entities;

(ii)

the taxpayer has an 'associate - inclusive control interest' in the company of not less than 40% and the company is not controlled by a group of entities that do not include the taxpayer or the taxpayer's associates; or

(iii)

the taxpayer controls the company alone or with associates.

6.134 In applying section 160ZZRN to determine whether or not a taxpayer is a controller of a company, the terms 'associate', 'entity', 'group' and 'associate - inclusive control interest' derive from similar terms that are contained in Division 1 of Part X relating to the attribution of income to controlled foreign corporations. By its reference to section 160ZZRN, section 245-255 adopts those terms and the three alternative tests for determining whether or not a taxpayer is a controller of a company at any time.

General

6.135 Subdivision 245-H provides definitions of terms used in new Division 245. These are included in section 245-245 . The Subdivision also contains rules relating to record keeping (discussed below).

Time of incurring debt

6.136 In some cases it may be difficult to establish a particular time when a debt is incurred, eg. the amount owing on a bank overdraft. To make the application of the debt forgiveness provisions more certain, section 245-260 specifies that, where a debt results from the debtor's drawing down on an established line of credit, the debt is taken to have been incurred at the time when the debtor first drew on the line of credit. In the case of a bank overdraft that would be the initial draw down.

6.137 However, where a debt is repaid, such that there is no longer an amount owing, the time of incurrence will be that of the next draw down under the line of credit.

Record keeping

6.138 To facilitate compliance with and administration of the debt forgiveness rules, section 245-265 contains record keeping rules which supplement other record keeping requirements under the Act (eg section 262A).

6.139 The records are required to be kept in writing in the English language or in a form that is readily accessible and convertible into writing in the English language. For example, records kept on computer disks are acceptable as long as the information can readily be printed out in the English language [subsection 245-265(3)] .

6.140 Subsection 245-265(1) requires a person who incurs a commercial debt (as defined in section 245-25) to keep any records that are necessary to enable the following information to be readily ascertained:

•

the date on which the debt was incurred;

•

the identity of the creditor;

•

the amount of the debt;

•

the terms of repayment of the debt;

•

at the time the debt was incurred, the debtor's capacity to pay the debt when it falls due ( this is required only if the debt is not a moneylending debt and the debtor and creditor were not dealing with each other at arm's length in respect of the incurring of the debt); and

•

if the debtor's obligation to pay the debt is forgiven - the date of forgiveness, and the consideration in respect of forgiveness.

6.141 Where a debt is forgiven, those records are required to be kept until the end of 5 years after the debt is forgiven. However, if the period for amending an assessment of an income year records are relevant is extended by existing subsection 170(4A) or (4B), the records must be kept for the extended period. [Subsection 245-265(4)]

6.142 If, however, the whole of the debt is paid in cash, the records are not required to be kept after the payment is made [subsection 245-265(5)] .

Companies

6.143 Subsection 245-265(2) requires a company which ceases to be under common ownership (as specified in section 245-250) with another company or other companies to keep any records that are necessary to enable the following information to be readily ascertained:

•

the date on which the company ceased to be under common ownership;

•

the identity of each person who was a controller of the company immediately before the company ceased to be under common ownership; and

•

the identity of each person who was a controller of the company immediately after the company ceased to be under common ownership.

6.144 A company is required to keep the necessary records until the end of the second year of income after the year of income in which the company ceased to be under common ownership with another company or other companies [subsection 245-265(6)] .

6.145 That period is extended if any of the companies previously under common ownership is forgiven a debt before the end of that second year of income. In that case, the records must be kept until the end of 5 years after the debt was forgiven. It is further extended if the period for amending an assessment of a relevant income year is extended by existing subsection 170(4A) or (4B). [Subsection 245-265(7)]

Penalty

6.146 Failure to keep records as required by a provision of section 245-265 is punishable by a fine of up to 30 penalty units [subsection 245-265(8)] . As defined in section 4AA of the Crimes Act 1914, each 'penalty unit' is $100.

6.147 Part 2 of Schedule 2 of the Bill will make amendments to provisions of the Act that are consequential upon the amendments relating to the forgiveness of commercial debts discussed above. The consequential amendments are referred to in paragraphs 6.71, 6.84, 6.88, 6.109 and 6.118 above.

Chapter 7 - Amendments of the Superannuation Guarantee (Administration) Act 1992

Overview

7.1 The amendments contained in Schedule 3 of the Bill will ensure that the earnings base specified in the Aberfoyle Limited (Superannuation) Award is a valid notional earnings base for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA). The amendments also make some minor technical changes to section 23 of the SGAA.

Summary of the amendments

Purpose of the amendments

7.2 The amendments make the earnings base specified in the Aberfoyle Limited (Superannuation) Award a valid notional earnings base for the purpose of calculating the superannuation guarantee charge liability of employers who contribute to the Aberfoyle Award Superannuation Fund. The amendments will also make minor technical amendments to subsections 23(4B) and 23(4C) to ensure that employers using subsection 23(4B) to calculate the reduction of their superannuation guarantee charge liability can reduce this liability to the extent which was intended.

Date of effect

7.3 The amendments relating to the Aberfoyle Superannuation Award Fund will apply for the 1995-96 financial year and all previous years where the SGAA was in force (ie. back to the 1992-93 financial year). It will have no effect after the 1995-96 financial year. [Subitem 9(1)]

7.4 The minor technical amendments to subsections 23(4B) and 23(4C) will apply to assessments of superannuation guarantee shortfall for the year beginning on 1 July 1994 and for all later years. [Subitem 9(2)]

Background to the legislation

7.5 The SGAA potentially imposes a liability (the superannuation guarantee charge or SGC) on all employers. Under the SGAA, if an employer does not make a minimum level of superannuation contributions into a complying superannuation fund on behalf of non-exempt employees, the employer has a superannuation guarantee shortfall and is required to pay the SGC.

7.6 In order to determine if an employer has a superannuation guarantee shortfall in respect of an employee, it is necessary to determine:

•

the percentage level of superannuation support the employer is expected to provide for the employee (the charge percentage which is specified in sections 20 and 21 of the SGAA); and

•

the percentage level of superannuation support actually provided for the employee (calculated in accordance with sections 22 and 23 of the SGAA).

7.7 If the actual percentage level of superannuation support is less than the legislated level of support a shortfall will arise. If the actual level of support is equal to or exceeds the legislated level then the charge percentage is reduced to zero and no shortfall arises.

7.8 In broad terms, the charge percentage is reduced by an amount equal to the employer's contributions to the fund as a proportion of the employee's notional earnings base.

What is a notional earnings base?

7.9 The notional earnings base of an employee depends on the circumstances surrounding the making of a contribution on the employee's behalf. For example, where an employer was contributing to a fund under an industrial award immediately prior to 21 August 1991 that specifies the contributions to be made by reference to the earnings of a member of a class of employees, the notional earnings base is the amount of those earnings (paragraph 13(5)(a) of the SGAA). In other cases, the notional earnings base may be the actual earnings or ordinary time earnings of the employee (paragraph 13(5)(b) and subsection 14(3) of the SGAA).

7.10 For contributions made under 'flat dollar' schemes (where a specified dollar amount is required to be contributed in respect of employees), the earnings by reference to which the contributions are tied only qualify as a notional earnings base under the SGAA in certain circumstances. For example, the amount of the required contribution must be adjusted by reference to any increase in the earnings of a class of employees, and the award containing this requirement must have been in place before 21 August 1991.

Reason for the amendment in relation to the Aberfoyle Award Superannuation Fund

7.11 The Aberfoyle Limited (Superannuation) Award is a flat dollar scheme, but the earnings base specified in the Award does not qualify as a notional earnings base under the SGAA. The adjustment provision required in flat dollar schemes was inserted into the Award after 21 August 1991 and referred to the average earnings of a range of employees and not to the earnings of a class of employees. Accordingly, employers contributing under that Award would be required to calculate their potential liability to pay the super guarantee charge by reference to each employee's ordinary time earnings.

Minor technical amendments

7.12 Subsections 23(4A), (4B) and (4C) were inserted into the SGAA by Act No. 169 of 1995. These subsections commenced on 16 December 1995 (which was the date of Royal Assent for the Taxation Laws Amendment Bill (No. 2) 1995) and applied in relation to assessments of superannuation guarantee shortfall for the year beginning on 1 July 1994 and for all later years.

7.13 The provisions have a minor technical deficiency. The deficiency arises due to an employee's notional earnings base not being apportioned where the employee's employer contributes for the benefit of the employee for only a portion of a particular contribution period (eg. where the employee is employed for only a portion of the contribution period). In such cases, even if the employer contributed the legislated amount in respect of that employee, they could incur a superannuation guarantee charge liability because their contribution would be measured over the whole contribution period.

Explanation of the amendments

7.14 Schedule 3 of the Bill recognises the notional earnings base used in the Aberfoyle Limited (Superannuation) Award as a valid notional earnings base for the purposes of the SGAA. It does this by providing that where an employer is contributing for the benefit of an employee into the Aberfoyle Award Superannuation Fund, then the notional earnings base is the amount that is specified as the earnings base in the Aberfoyle Limited (Superannuation) Award 1987. [Items 1 and 2 - new paragraph 13(5)(ab) and new section 13B]

7.15 New subsections 23(4D), (4E) and (4F) will ensure that where an employer contributes to the Aberfoyle Award Superannuation Fund the employer's charge percentage is reduced by an amount in accordance with the formula in new subsection 23(4E) . [Item 7]

7.16 The formula in new subsection 23(4E) is in two parts. The first part focuses on the rate of contributions, as a proportion of the employee's notional earnings base, during the period within the contribution period in which the employer is making those contributions. For example, if the employer contributes for the benefit of the employee for only a part of the contribution period, then the first part of the formula will reflect this by reducing the denominator by the proportion of the period for which contributions were made over the whole contribution period. This is achieved by multiplying the notional earnings base by the 'contribution period factor.' Of course, if the employer contributes for the benefit of the employee for the whole of the contribution period, then the 'contribution period factor' will simply be '1'. [Item 7]

7.17 The second part of the formula is the 'employment factor.' This reduces the amount by which the charge percentage would otherwise be reduced, by reference to any period during the period of employment that contributions were not made on behalf of the employee.

7.18 In new subsection 23(4F) the notional earnings base is defined for both full-time employees and part-time employees. For full-time employees, it is simply the amount that is the earnings base for the purposes of the Aberfoyle Limited (Superannuation) Award 1987. For part-time employees, it is that amount multiplied by the number of hours the part-time employee was employed as a proportion of the hours that a full time employee would have worked if he or she were employed for the same period. This ensures that where a part-time employee is only employed for a part of a contribution period, his or her notional earnings base is calculated according to the hours actually worked compared with a full-time worker working for the same period.

7.19 Provided the percentage obtained by the calculation in new subsection 23(4E) is equal to or greater than the legislated level of superannuation support required by section 20 or 21 (depending on which is relevant), then the employer can reduce their liability to the SGC to zero.

7.20 A cross-referencing amendment is necessary to subsection 14(1A) to ensure that where an employer is contributing for the benefit of an employee to the Aberfoyle Award Superannuation Fund, then section 14 will not apply to determine the notional earnings base of the employee. [Item 3]

7.21 A further cross-referencing amendment is necessary to paragraph 23(5)(b) to ensure that if the reduction of the charge percentage can take place under new subsection 23(4D) then the employer does not need to calculate the reduction using an earnings base of ordinary time earnings. [Item 8]

Minor technical amendments

7.22 The formula currently in subsection 23(4B) is replaced by a similar formula to that in new subsection 23(4E) . [Item 4]

7.23 The new formula is the same as the current formula except, as with new subsection 23(4E) , it includes the 'contribution period factor' to ensure that where an employee's employer contributes for the benefit of the employee for only a portion of the contribution period, the notional earnings base is appropriately adjusted. [Items 4 and 5]

7.24 In the absence of the insertion of the 'contribution period factor' into the formula, employers might not be able to reduce their superannuation guarantee charge liability to the extent which was intended. An example is where an employee was only employed for a part of a contribution period and during that time the employer made the correct contributions on the employee's behalf. The formula currently in subsection 23(4B) would result in the employer being able to only reduce their charge percentage by the percentage of what they have actually contributed as a proportion of the notional earnings base of the entire contribution period. That is, there is no facility currently in subsections 23(4B) or 23(4C) to enable the employer to apportion the notional earnings base so it relates to the period for which contributions are actually made. This deficiency is remedied by the insertion of the 'contribution period factor' in the formula.

7.25 A further minor technical amendment is necessary to the definition of 'Full-time employee's hours' in the definition of 'notional earnings base' of a part-time employee in subsection 23(4C). This amendment ensures that a part-time employee's notional earnings base is worked out according to the number of hours the part-time employee was employed as a proportion of the hours that a full time employee would have worked if they were employed for the same period. [Item 6]

Chapter 8 - Tax file numbers

Overview

8.1 The amendments contained in Schedule 4 of the Bill will expand the use of tax file numbers (TFNs) by allowing the TFNs of beneficiaries of eligible superannuation entities and regulated exempt public sector superannuation schemes to be used to assist in streamlining, and reducing the costs of, the administration of superannuation.

8.2 The amendments will also allow the Insurance and Superannuation Commissioner (ISC) to obtain superannuation entities' TFNs and provide those TFNs to the Commissioner of Taxation (ATO).

8.3 Section references in this chapter are to the Superannuation Industry (Supervision) Act 1993 (the SIS Act) unless otherwise indicated.

Summary of the amendments

Purpose of the amendments

8.4 The amendments are intended to:

•

reduce the numbers of lost beneficiaries and small amounts (which because of their size do not grow into retirement savings) in the superannuation system;

•

facilitate the efficient administration of superannuation; and

•

assist the ISC and ATO to properly supervise the superannuation industry (eg. enable the ATO to use funds' TFNs to ensure that funds pay the correct amount of tax).

8.5 To achieve these broader purposes, the Bill will amend the SIS Act and the Income Tax Assessment Act 1936 (the Act) to:

•

enable a beneficiary of a fund or scheme to quote his or her TFN to the fund or scheme, either directly or through his or her employer [item 15 - new sections 299A - 299D] ;

•

require trustees of funds to seek beneficiaries' TFNs where beneficiaries have not already quoted them [item 15 - new sections 299F and 299G] ;

•

allow funds and schemes to use TFNs to identify and amalgamate beneficiary benefits [item 15 - new sections 299H, 299J, 299K and 299L] ;

•

require funds to provide TFNs when transferring beneficiary benefits to other funds or schemes unless the beneficiary requests otherwise [item 15 - new section 299M] ;

•

allow the ISC to require superannuation entities' TFNs in certain circumstances and pass them on to the ATO [items 2, 3, 4, 13, 14 and 15 - new section 299U] ;

•

allow the ATO to use the TFNs of individuals held by the ATO for the purpose of processing reasonable benefit limits forms not already containing the individual's TFN [items 19, 20, 21 and 22] ; and

•

deem TFNs of beneficiaries quoted for superannuation purposes to be also quoted for certain taxation purposes [item 24 - new section 202DH of the Act] .

Date of effect

8.6 These amendments will apply from the 60th day after Royal Assent except for amendments requiring funds to seek TFNs from existing beneficiaries, which commences with either the first member or fund statement (as chosen by the fund) that is sent to the beneficiary on or after that 60th day. [Subclause 2(4) and item 15 - new section 299F]

Background to the legislation

8.7 On 28 June 1994, the Labor Government announced measures allowing for greater use of TFNs in the superannuation industry. The greater use of TFNs will:

•

enable the administration of the superannuation system to be streamlined;

•

enable superannuation trustees to locate amounts for beneficiaries;

•

assist in specifically identifying beneficiaries when transferring amounts between funds and schemes and enable funds and schemes to internally identify beneficiaries; and

•

allow superannuation trustees to amalgamate multiple contributions on behalf of the same individual.

8.8 In addition to the use of beneficiaries' TFNs, there are administrative benefits if the ISC can use superannuation entities' TFNs in monitoring superannuation entities' activities. For example, under the SIS Act the ISC provides superannuation entity information including details of a superannuation entity's complying status (eligibility for concessional tax treatment) to the ATO which, amongst other data matching activities, matches superannuation entities' complying status with their income tax returns. This will be greatly assisted if the ISC can use superannuation entities' TFNs as a means of identifying them and referring data to the ATO.

8.9 Eligible superannuation entities (including excluded funds - see below) are required to participate in the expanded use of TFNs by being required to seek, record and pass on TFNs in certain circumstances. Regulated exempt public sector superannuation schemes, consistent with their exemption from existing requirements in the SIS Act, will be allowed, rather than required, to seek, record and pass on TFNs.

Explanation of the amendments

Definition of terms

8.10 The term 'eligible superannuation entity' is defined to mean a regulated superannuation fund or an approved deposit fund [item 15 - new section 299W] . This includes excluded funds and covers most superannuation funds. For ease of reference, the explanation in the rest of this chapter refers simply to 'funds'.

8.11 The term 'regulated exempt public sector superannuation scheme' is defined to mean an exempt public sector superannuation scheme (defined in section 10 of the SIS Act) which either has a constitutional corporation as a trustee or has the sole or primary purpose of the provision of old age pensions [item 15 - new section 299W] . For ease of reference, the explanation in the rest of this chapter refers simply to 'exempt schemes'.

8.12 The term 'superannuation entity' is defined by section 10 of the SIS Act to mean a regulated superannuation fund, approved deposit fund or pooled superannuation trust.

8.13 The term 'excluded fund' is defined by section 10 of the SIS Act to mean a regulated superannuation fund with less than 5 members or an approved deposit fund that meets certain conditions specified in the Superannuation Industry (Supervision) Regulations (the SIS Regulations) and has only one beneficiary.

Quotation of TFNs

8.14 A beneficiary, or potential beneficiary, of a fund or an exempt scheme has two avenues for providing his or her TFN so that it may be used by the fund or exempt scheme in identifying his or her benefits:

•

by quoting to his or her employer who then passes the TFN on to the trustee of the fund or scheme [item 15 - new sections 299A, 299B and 299C] ; or

•

by quoting directly to the trustee of the fund or scheme [item 15 - new section 299D] .

8.15 Quotation is not compulsory and there are no sanctions for not providing a TFN. However, provision of a TFN will help to ensure a beneficiary's benefits do not become 'lost' to that beneficiary and to consolidate different amounts which are accumulated on behalf of the beneficiary during the beneficiary's working life.

8.16 The manner of quoting a TFN must be approved by the ISC [item 15 - new section 299P] . This allows the ISC to ensure that, prior to quoting, beneficiaries and potential beneficiaries are properly informed:

•

of the legal basis for the collection of their TFNs;

•

that declining to quote their TFNs is not an offence; and

•

of the consequences of not quoting their TFNs.

Quotation through employer

8.17 The usual entry point into the superannuation system is when an employer makes superannuation contributions on behalf of its employees. In order to ensure that TFNs are attached to his or her benefits the employee may quote his or her TFN to the employer for superannuation purposes. [Item 15 - new section 299A]

8.18 Quotation to an employer places an obligation on an employer contributing to a fund for the employee to pass on the TFN to the trustee of the fund, generally when the next contribution is made [item 15 - new section 299C] . The exception is where the TFN is provided less than 14 days before the contribution is made, in which case the employer must pass the TFN to the trustee within 14 days of it being quoted. In either case the employer may pass on the TFN sooner, if this is more convenient [item 15 - new section 299B] .

8.19 In the case where the employer is contributing to an exempt scheme for the employee, the employer is not required to pass on the TFN but may do so. [Item 15 - new section 299B]

8.20 An employer is only obliged to pass on the TFN to the trustee once, in respect of the first time an employee quotes his or her TFN to the employer after the commencement of the amendments. [Item 15 - new paragraph 299C(1)(a), 'quotes or first quotes']

Quotation direct to trustee

8.21 A beneficiary, or an applicant to become a beneficiary may quote his or her TFN directly to the fund or exempt scheme. [Item 15 - new section 299D]

Deemed quotation of TFNs

8.22 There are also certain circumstances in which a beneficiary is deemed to have quoted his or her TFN to a trustee of a fund or an exempt scheme for superannuation purposes [item 15 - new sections 299Q, 299R, 299S and 299T] . The effect of the deeming is to enable the trustee to use the TFN as if it had been quoted directly by the beneficiary for superannuation purposes.

8.23 The circumstances in which a beneficiary is deemed to have quoted his or her TFN to a trustee for superannuation purposes are:

•

where an employee quotes his or her TFN to an employer and the employer subsequently informs the trustee [item 15 - new section 299Q] ;

•

where one trustee informs another trustee in accordance with new sections 299M and 299N [item 15 - new section 299R] ;

•

where the beneficiary has provided his or her TFN to a trustee in applying for a benefit from a fund or exempt scheme [item 15 - new section 299S] ;

•

where the beneficiary has quoted his or her TFN to the trustee for taxation purposes [item 15 - new section 299T] ;

•

where the beneficiary has quoted his or her TFN for the purposes of Parts 22 or 24 of the SIS Act prior to their amendment by this Bill [item 15 - new section 299T] ; or

•

where the beneficiary has quoted his or her TFN for the purposes of the repealed Part IIIA of the Occupational Superannuation Standards Act 1987 [item 15 - new section 299T] .

Obligation of trustees to seek TFNs

8.24 Trustees of funds are obliged to request the TFNs of existing beneficiaries (where they do not already have them) within these time limits:

•

within 7 days of the first member or fund report (as chosen by the fund) as required to be sent out to the beneficiary after commencement of the amendments (if no choice is made it is the first report sent out after commencement); or

•

within 7 days of the end of 12 months from commencement;

whichever is earlier. [Subclause 2(4) and item 15 - new subsections 299F(2) and 299F(6)]

8.25 Where the trustee is not required to send a member or fund report to the existing beneficiary, the trustee is obliged to request the TFN of the existing beneficiary, where they do not already have them, within 7 days after the commencement of the amendments. [Subclause 2(4) and item 15 - new subsections 299F(2) and 299F(7)]

8.26 The requirement on superannuation trustees to send member and fund reports is set out respectively in Subdivisions 2.4.2 and 2.4.3 of Part 2 of the SIS Regulations.

8.27 As indicated earlier, a beneficiary is not obliged to provide his or her TFN if requested by the trustee. [Item 15 - new subsection 299F(5)]

8.28 If a person becomes a beneficiary of a fund after commencement of the amendments the trustee must request the person's TFN, within 7 days of him or her becoming a beneficiary, unless the trustee already has the TFN [subclause 2(4) and item 15 - new section 299G] . Trustees may satisfy this requirement by seeking a TFN from people when they apply to become a beneficiary [item 15 - new section 299E] .

8.29 In the case of an exempt scheme, the trustee is not required to seek the TFNs of beneficiaries but may do so. [Item 15 - new section 299E]

Purposes for which TFNs can be used by trustees

8.30 Once a trustee has been, or is taken to have been, quoted a beneficiary's TFN, subject to certain exceptions, the trustee may use it to locate and identify amounts held for a particular person and, where appropriate, to consolidate those amounts. [Item 15 - new sections 299H, 299J, 299K and 299L]

8.31 The exceptions are that the TFN may only be used to identify amounts held for a particular person where other information is insufficient to identify the amounts or if that other information is sufficient, to confirm the identification of the amounts resulting from the use of that information. [Item 15 - new subsections 299H(5), 299J(5), 299K(5) and 299L(5)]

8.32 The effect of this amendment is that after the trustee uses the TFN to locate the benefits, other information must be used, in priority to the TFN, to identify as necessary the benefits of a particular beneficiary. This means that, for general administration purposes, items like a member number, name and address or other identification must be used rather than the TFN. Accordingly, it should not be the norm for a beneficiary to quote his or her TFN in ordinary dealings with a fund. The level of non-TFN information required will depend on the circumstances although the beneficiary should normally be asked to provide two or more non-TFN forms of identification .

8.33 This is further explained in an example given below.

Example of use by trustee of TFN

8.34 A trustee of a fund uses a TFN to locate two accounts of $100 of a beneficiary, John Smith with a birthdate of 28/12/1939 and amalgamates those accounts into $200.

8.35 Once location is achieved, on-going identification of benefits in the general administration of the fund becomes relevant (eg. identification of benefits of persons claiming to be beneficiaries who ask for details about their benefits).

8.36 A reasonable checklist of non-TFN forms of identification should be used (before any TFN form of identification) to link the benefits to the correct John Smith for the purposes of on-going identification.

8.37 Non-TFN forms of identification include the beneficiary's address, the beneficiary's birthdate, the beneficiary's membership number and the beneficiary's name.

8.38 Accordingly, if a person claiming to be John Smith rings the fund to inquire about his benefits they should first be asked to provide non-TFN forms of identification. Likewise in preparing member statements, the transactions for the relevant period should normally be linked to the beneficiary only by using non-TFN forms of identification. It is not expected that a beneficiary's TFN would appear on general correspondence from the fund to the beneficiary.

8.39 This is consistent with the general principle that a TFN must not be used as a primary identifier.

8.40 However if those non-TFN forms of identification are not sufficient (eg. there are two or more John Smiths with the same birthdate), then the person may be asked to provide his or her TFN.

Other purposes - eligible termination payments

8.41 The Bill amends the current law to provide that TFNs quoted for superannuation purposes are taken to be quoted for the purpose of calculating the tax to be deducted from an eligible termination payment (ETP). Currently, to avoid adverse tax consequences a beneficiary of a fund or exempt scheme must quote his or her TFN to the fund or scheme before the payment of an ETP (eg. a superannuation payment made on termination of employment). If the TFN is not quoted for taxation purposes in the prescribed manner, tax is deducted from the payment at the rate of 48.5% (being the current top marginal tax rate plus the medicare levy) despite the beneficiary having previously quoted his or her TFN to the fund or scheme for superannuation purposes.

8.42 The Bill changes this position by amending the Act so that where a beneficiary has quoted his or her TFN to the fund or scheme under new Part 25A of the SIS Act (ie. for superannuation purposes), the TFN will also be taken to have been quoted for the purpose of calculating the tax to be deducted from an ETP. The effect of this will be that the fund or scheme will deduct tax from the beneficiary's ETP at the normal concessional rates of tax [item 24 - new section 202DH of the Act] . Where appropriate, the TFN will also be disclosed on the beneficiary's group certificate and to the ATO for RBL purposes.

Retaining TFNs

8.43 A trustee may only retain a record of a person's TFN for as long as the person is a beneficiary or applicant to become a beneficiary of the fund or exempt scheme. If the person ceases to be a beneficiary or applicant of the fund or exempt scheme, the trustee must destroy all records of the person's TFN within a reasonable time. [Item 15 - new subsections 299H(3), 299J(3), 299K(3) and 299L(3)]

8.44 Also the trustee of an exempt public sector superannuation scheme may only retain TFNs for as long as the scheme is an exempt scheme for the purposes of new Part 25A [item 15 - new section 299Y]. This amendment is required to ensure that if schemes fall outside the constitutional coverage of the SIS Act, they dispose of the TFNs, as they are no longer allowed to use them.

Transfer of TFNs to other funds and exempt schemes

8.45 Where a beneficiary has quoted his or her TFN to the trustee of a fund and an amount held for the benefit of the beneficiary is transferred from the fund to another fund or exempt scheme, the transferor trustee must inform the transferee trustee of the beneficiary's TFN [item 15 - new section 299M] . However, if the beneficiary has requested that the trustee not pass on his or her TFN, the trustee must not pass on the TFN [item 15 - new subsection 299M(3)] . If the trustee transfers the TFN when the beneficiary has requested this not be done the trustee is guilty of an offence [item 15 - new subsection 299M(4)] . When the TFN is passed to the transferee trustee, the beneficiary is taken to have quoted his or her TFN to the transferee trustee at the time it was passed [item 15 - new section 299R] .

8.46 This same position applies to exempt schemes except that such schemes are not required to pass TFNs on to other exempt schemes and funds but may do so [item 15 - new section 299N] . However, if the trustee of an exempt scheme does pass on the TFN when the beneficiary has requested this not be done the trustee will be guilty of an offence [item 15 - new subsection 299N(4)] .

ISC may obtain superannuation entity TFNs

8.47 The amendments allow the ISC to collect superannuation entity TFNs. The forms or notices that may require a superannuation entity's TFN include:

•

a notice electing to become a regulated superannuation fund [items 2 and 15 - new subsection 299U(1)] ;

•

the annual return provided to the ISC by superannuation entities [items 3 and 15 - new subsection 299U(2)] ;

•

a notice to provide information to the ISC within a specified period of the establishment of a superannuation entity [items 13 and 15 - new subsection 299U(8)] ; and

•

a notice to provide information to the ISC within a specified period set out by the ISC [items 14 and 15 - new subsection 299U(9)] .

Purposes for which TFNs can be used by the ISC and ATO

Data matching

8.48 The ISC and the ATO presently match financial data of superannuation entities to determine superannuation entities' compliance with taxation law. The amendments will enable the ISC and ATO to use superannuation entities' TFNs (whether collected under the Superannuation Entities (Taxation) Act 1987 or the SIS Act) for this purpose to increase the integrity of such data matching. [Items 4 and 15 - new subsection 299U(3)]

Reasonable benefit limits

8.49 The amendments also allow the ATO to use the TFNs of individuals held by the ATO for the purpose of processing reasonable benefits limits forms not containing the individual's TFN. This will ensure that the individual is subject to normal concessional rates of tax rather than the top marginal tax rate, without the need for the ATO to separately seek from the individual TFN information which the ATO already has. [Items 19, 20, 21 and 22]

Authorisation of use of TFNs

8.50 The use of TFNs is strictly controlled under taxation law. There are penalties of up to $10,000 or 2 years in prison for unauthorised requesting, recording, use or communication of a person's TFN (sections 8WA and 8WB of the Taxation Administration Act 1953). Certain uses of TFNs are authorised under Commonwealth laws including the SIS Act. The Bill amends the Act and the SIS Act to reflect the new purposes for which TFNs quoted under the SIS Act may be used [item 23] . In recognition of TFN privacy considerations, the wording of new paragraph 202(i) of the Act indicates that the use of individuals' TFNs for superannuation purposes is restricted to the listed Parts of the SIS Act. Superannuation entities' TFNs may be used more broadly in administering the SIS Act.

Consolidation of TFN provisions into one Part of the SIS Act

8.51 Previously, provisions relating to TFNs in the SIS Act were spread throughout that Act. The opportunity has been taken in these amendments to combine the provisions in one Part of the SIS Act [item 15 - new Part 25A] . Accordingly, a number of provisions have been repealed or amended to reflect their consolidation into the new Part. Also, where appropriate, a note has been added after certain provisions to flag the relevance of the new Part to those provisions. [Items 1 to 14, 16 and 17]

State insurance

8.52 The Bill provides that new Part 25A does not apply with respect to State insurance that does not extend beyond the limits of the State concerned. This amendment recognises that the Commonwealth lacks power to legislate with respect to State insurance (section 51(xiv) of the Commonwealth Constitution). [Item 15 - new section 299X]

Chapter 9 - Fringe benefits tax - minor benefits exemption

Overview

9.1 The amendment in Schedule 5 of the Bill will amend section 58P of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to ensure that benefits with a value less than $100 can qualify for the exemption from fringe benefits tax (FBT) for minor benefits.

Summary of the amendment

Purpose of the amendment

9.2 The purpose of this amendment is to remove the present uncertainty as to what is the upper limit of the value of a benefit that can qualify for the exemption for minor benefits. This will result in a small reduction in compliance costs for employers who provide minor benefits to employees.

Date of effect

9.3 This amendment will apply to benefits provided on or after the day that this Bill receives Royal Assent. [Subclause 2(1)]

Background to the legislation

9.4 Certain benefits can qualify for exemption from FBT as minor benefits if the value of the benefit is small and, having regard to several factors described in paragraph 58P(1)(f), such as the frequency and total value of identical and similar benefits, it would be unreasonable to tax the benefit.

9.5 The Australian Taxation Office has issued advice that a benefit with a notional taxable value in excess of $50 in most circumstances is unlikely to be considered small for the purposes of section 58P (Taxation Determination 93/197). The practical effect of the amendment, therefore, will be to increase the upper monetary limit for minor benefits that can qualify for exemption.

Explanation of the amendment

9.6 Item 1 will amend paragraph 58P(1)(e) so that a minor benefit will qualify for exemption if the notional taxable value of the benefit is less than $100 where the other conditions set out in section 58P are satisfied. This condition will replace the existing requirement that the notional taxable value of a minor benefit must be 'small'.

Chapter 10 - Capital gains tax - technical correction

Overview

10.1 The amendments contained in Schedule 6 of the Bill will correct minor technical deficiencies in the Taxation Laws Amendment Act (No. 4) 1995.

Summary of the amendments

Purpose of the amendments

10.2 The purpose of the amendments is to restore certain application dates and section references to those originally intended by Parliament.

Date of effect

10.3 These amendments will apply from 16 December 1995, that is immediately after the commencement of Schedules 1 and 2 of Taxation Laws Amendments Act (No.4) 1995. [Subclauses 2(5) and 2(6)]

Background to the legislation

10.4 Taxation Laws Amendment Act (No.3) 1995 and Taxation Laws Amendment Act (No.4) 1995 contained measures relating to capital gains tax (CGT) and dividend imputation arrangements. During passage of the Acts through Parliament a number of amendments were made to the measures. Those changes resulted in the renumbering of sections and items in the Acts.

10.5 Consequently, amendments in Taxation Laws Amendment Act (No.4) 1995 that were based upon Taxation Laws Amendment Act (No.3) 1995 are now incorrect. Further, additional legislative changes made in the Senate to the Taxation Laws Amendment Act (No.4) 1995 were based on the incorrect item numbers, as the Act had been amended in the House of Representatives.

Explanation of the amendments

Capital gains tax

10.6 The Taxation Laws Amendment Act (No.4) 1995 contains a measure designed to ensure that assets which are taxable Australian assets for the purposes of the CGT provisions and which are used to produce franked dividends or income subject to withholding tax, will be subject to CGT on disposal. The amendment was originally proposed to apply to disposals of taxable Australian assets taking place on or after 20 September 1985, which is the date from which the CGT provisions generally apply.

10.7 An amendment was passed by the Senate so that the provision would apply to disposals taking place after 7:30pm 9 May 1995, which is the time of the announcement of the changes.

10.8 The Senate amendment as drafted related to an incorrect item number of the Act. The number was taken from the Bill as presented and read the first time in the House of Representatives (schedule 1, item 34) rather than the item number from the Bill as read a third time in the House of Representatives (schedule 1, item 35). There were a number of amendments to the Bill as read the first time which resulted in the renumbering of the items in the Bill.

10.9 As a result, the Senate amendment relates to a different item in the Bill. Items 1, 2 and 3 correct these deficiencies.

Dividend imputation

10.10 Items 1 and 2 of schedule 2 of Taxation Laws Amendment Act (No.4) 1995 purport to amend section 46L of the Income Tax Assessment Act 1936. That section was introduced by Taxation Laws Amendment Act (No.3) 1995. Following amendments to that Act during its passage through Parliament, a renumbering of the provisions occurred so that the original section 46L became 46M.

10.11 Therefore the references to section 46L in Taxation Laws Amendment Act (No.4) 1995 need to be amended to refer to section 46M. These references are corrected by items 4 and 5 .