House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Background

This package of Bills provides for the imposition of a franchise fee windfall tax to protect revenue collected prior to 5 August 1997 by the States and Territories which may be lost as a result of the High Court's decision in Ha & Anor. v. State of New South Wales & Ors. and Walter Hammond & Associates Pty Limited v. State of New South Wales & Ors. In its decision of 5 August 1997, the High Court held that business franchise fees on tobacco in New South Wales were invalid under section 90 of the Constitution. The franchise fees were held to be duties of excise which can only be imposed by the Commonwealth. The decision also cast doubt on the Constitutional validity of State and Territory franchise fees on petroleum and liquor.

At the request of the States and Territories, this package of Bills aims to protect revenue collected by the State and Territory franchise fees on tobacco, petroleum and liquor. The Bills only apply to revenue collected prior to 5 August 1997.

The package comprises:

Franchise Fees Windfall Tax (Collection) Bill 1997

Franchise Fees Windfall Tax (Imposition) Bill 1997

Franchise Fees Windfall Tax (Consequential Amendments) Bill 1997

FRANCHISE FEES WINDFALL TAX (COLLECTION) BILL 1997

Provides for the determination, collection, and administration of the franchise fees windfall tax which applies to claims for refunds of business franchise fees paid before 5 August 1997.

Date of effect: The Bill will apply from 5 August 1997.

Proposal announced: Announced by the Treasurer in a Press Release (No. 85) on 6August1997.

Financial impact: The measures will protect revenue already collected by the States and Territories. The revenue from the windfall tax depends on the number of claims for refunds which is unknown.

Compliance cost impact: The proposed windfall tax should not increase compliance costs. However, there may be increased administration costs for States and Territories in collecting the tax.

FRANCHISE FEES WINDFALL TAX (IMPOSITION) BILL 1997

Imposes the franchise fees windfall tax at a rate of 100%.

Date of effect: The Bill will apply from 5 August 1997.

Proposal announced: Announced by the Treasurer in a Press Release (No. 85) on 6August1997.

Financial impact: The measures will protect revenue already collected by the States and Territories. The revenue from the windfall tax depends on the number of claims for refunds which is unknown.

Compliance cost impact: The proposed windfall tax should not increase compliance costs.

FRANCHISE FEES WINDFALL TAX (CONSEQUENTIAL AMENDMENTS) BILL 1997

Makes consequential amendments to the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 to exempt from income tax refunded business franchise fees subject to the windfall tax. The Bill also denies an income tax deduction for the windfall tax.

Date of effect: The amendments will apply from the date of Royal Assent.

Proposal announced: Not previously announced.

Financial impact: No significant impact on revenue.

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

Chapter 1 Franchise Fees Windfall Tax (Collection) Bill 1997

Overview

1.1 The Franchise Fees Windfall Tax (Collection) Bill 1997 provides the framework for the franchise fees windfall tax. The Bill provides for the determination of the liability for windfall tax as well as the collection and administration of the tax.

Summary of the provisions

Purpose of the provisions

1.2 The purpose of the provisions is to:

•

establish the title, scope and commencement date of the Act;

•

define terms used in the Bill;

•

establish who is to administer the Act;

•

determine the amounts which are subject to the windfall tax;

•

establish who is liable for the tax;

•

describe the collection mechanism for the windfall tax;

•

allow a credit for windfall tax deducted;

•

provide for regulation making powers for collection of unpaid windfall tax;

•

provide for general regulation making powers.

Date of effect

1.3 The Bill will apply from 5 August 1997.

Background to the legislation

1.4 On 5 August 1997, the High Court in its decision in Ha & Anor. v. State of New South Wales & Ors. and Walter Hammond & Associates Pty Limited v. State of New South Wales & Ors. ruled that business franchise fees imposed by New South Wales on tobacco are invalid under section 90 of the Constitution. The franchise fees were held to be duties of excise which can only be imposed by the Commonwealth. The decision cast doubt, not only on tobacco franchise fees, but also on State and Territory franchise fees on petroleum and liquor.

1.5 As a result of the decision, States and Territories may lose billions of dollars in revenue. In order to protect the revenue which has already been collected by the States and Territories prior to the High Court decision on 5 August 1997, the Commonwealth has agreed, in response to a unanimous request from the States and Territories, to introduce a windfall tax.

Explanation of the provisions

PRELIMINARY

Title, commencement and scope of the Act

1.6 When the Bill is enacted, it will be called the Franchise Fees Windfall Tax (Collection) Act 1997 [Clause 1] .

1.7 The Act is to commence on 5 August 1997 [Clause 2] . This is the date of the High Court decision.

1.8 The Act will bind the Crown in all its capacities. [Clause 3] .

Definitions

1.9 The Bill includes provisions which give meanings to a number of terms used in the Bill [Clause 4] . For convenience, these terms are explained in the sections dealing with the provisions in which the terms are used. For the purposes of the Bill, a 'State' is defined to include the Australian Capital Territory and the Northern Territory. The references to a State in this explanatory memorandum will have a similar meaning.

Administration of the Act

1.10 The Commissioner of Taxation will be responsible for the general administration of the Bill [Clause 5 and definition of 'Commissioner' in subclause 4(1)] . However, the Commissioner may make arrangements with the States about any matter in connection with the administration of the Act (see paragraph 1.27 below).

LIABILITY

Determination of the taxable amount

1.11 A taxpayer will be liable for the windfall tax where that person is liable to be repaid a taxable amount by a State. [Clause 8] A taxable amount is, in effect, an amount of business franchise fees paid prior to 5 August 1997 which a State is liable to repay because the franchise fee is invalid under section 90 of the Constitution. The Bill provides that a taxable amount arises where all the following conditions are met:

(a)

a State is liable to repay an amount to a person (the taxpayer) because a State franchise law is wholly or partly invalid because of section 90 of the Constitution;

(b)

the amount is a repayment of a State franchise fee paid before 5 August 1997 in respect of a licensing period which commenced before that date; and

(c)

the amount is claimed by the taxpayer from the State, or a court orders the State pay the amount to the taxpayer. [Subclause 6(1)]

1.12 The effect of the provisions is that a taxpayer will be liable for windfall tax whenever that person seeks to claim a refund from a State for franchise fees paid before 5 August 1997, provided the amount paid was in respect of a licensing period which commenced before that date.

1.13 It may be noted that it is not necessary for the High Court to have declared a particular law invalid before the windfall tax would apply. While the High Court is the final arbiter in any question of constitutional validity, its findings are ultimately whether a law is, and has always been, valid or invalid. A taxpayer may contest the application of the windfall tax on the basis that the law is in fact valid under section 90 of the Constitution. However, on this basis, no refund would be owing to the taxpayer.

1.14 The amount of franchise fees (i.e., the taxable amount) to which the windfall tax applies will be reduced to the extent to which the State would have been liable to repay the amount even if the State franchise fee were valid. For example, an overpayment of franchise fees due to a mistake in calculating the franchise fee paid before 5 August 1997 would not attract windfall tax. [Subclause 6(2)]

1.15 The amount of a liquor franchise fee (i.e., the taxable amount) will also be reduced to the extent to which it relates to a licensing period after 6 August 1997 (6 August is the date on which the increases in the rates of wholesales sales tax on alcoholic beverages are proposed to operate). The formula for apportioning the taxable amount is as follows:

Taxable amount x Days in licensing period after 6 August 1997/Total days in the licensing period [Subclause 7(1)]


Example

A franchisee pays $10,000 as a lump sum in January 1997 for a liquor licensing fee for the year ending 31 December 1997. As the licensing period to which the fee relates ends after 6 August 1997, the taxable amount relating to that period (i.e., $10,000) is reduced by:

$10,000 x 147/365 = $4,028 (rounded up)


1.16 In cases where a liquor licence fee for a licensing period is, or may be, payable in instalments and at least one of the instalments is payable after 6 August 1997, the term 'licensing period' has an altered meaning. For the purposes of the formula, the period between the due date for an instalment and the due date for the next instalment (or in the case of the last instalment the due date for that instalment and the end of the actual licensing period) is treated as a separate licensing period. This ensures the reduction of a taxable amount only occurs in respect of the instalment which straddles 6 August 1997. [Subclause7(2)]

Example

A franchisee is required to pay $10,000 for a liquor licence for the 12 months to 31 December 1997. The franchisee pays $2,500 on each of 1 January, 1 April and 1 July. The final instalment due on 1 October 1997 is not paid following the High Court decision. The relevant licensing period for the formula in clause 7 is the three months between 1 July and 30 September. The taxable amount relating to that period ($2,500) is reduced by:

$2,500 x 55/92 = $1,495 (rounded up)


1.17 A taxable amount may arise even if a refund of franchise fees may be applied for another purpose. A State is liable to repay an amount if either of the following conditions are met:

•

the State is liable to repay the amount to the person; or

•

the State is required or permitted to:

•

offset the amount against other amounts that are owing or may become owing to the State by the person; or

•

apply the amount in any other way for the benefit of the person. [Subclause 4(3)]

1.18 The franchise fees covered by the windfall tax are those paid under a State franchise law for petroleum, tobacco and liquor. A State franchise law is defined to mean the following State enactments:

(a)

Business Franchise (Liquor) Act 1993 of the Australian Capital Territory;

(b)

Business Franchise (Tobacco and Petroleum Products) Act 1984 of the Australian Capital Territory;

(c)

Business Franchise Licenses (Petroleum Products) Act 1987 of New South Wales:

(d)

Business Franchise Licences (Tobacco) Act 1987 of New South Wales:

(e)

Liquor Act 1982 of New South Wales:

(f)

Business Franchise Act 1978 of the Northern Territory

(g)

Liquor Act 1978 of the Northern Territory

(h)

Liquor Act 1992 of Queensland

(i)

Tobacco Products (Licensing) Act 1988 of Queensland

(j)

Business Franchises (Petroleum Products) Act 1979 of South Australia

(k)

Liquor Licensing Act 1985 of South Australia

(l)

Petroleum Products Regulation Act 1995 of South Australia;

(m)

Tobacco Products (Licensing) Act 1986 of South Australia

(n)

Tobacco Products Regulation Act 1997 of South Australia;

(o)

Liquor and Accommodation Act 1990 of Tasmania

(p)

Tobacco Business Franchises Licences Act 1980 of Tasmania

(q)

Petroleum Products Business Franchise Licences Act 1981 of Tasmania

(r)

Business Franchise (Petroleum Products) Act 1979 of Victoria

(s)

Business Franchise (Tobacco) Act 1974 of Victoria

(t)

Liquor Control Act 1987 of Victoria

(u)

Business Franchise (Tobacco) Act 1975 of Western Australia

(v)

Liquor Licensing Act 1988 of Western Australia

(w)

Transport Co-ordination Act 1966 of Western Australia

[Subclause 4(2)]

COLLECTION

Windfall tax to be withheld by the State

1.19 A State will be required to withhold windfall tax from refunds of franchise fees (i.e., taxable amounts) which it is liable to repay to a taxpayer. A refund cannot be paid to a taxpayer until the windfall tax is withheld. [Subclause 9(1)]

1.20 Once windfall tax is withheld, the State must notify the taxpayer that the tax has been withheld. The notice must be in writing and made as soon as practicable after the tax is withheld. [Subclause 9(2)]

1.21 The tax collected by the State must be remitted to the Commissioner within 21 days of the end of the month in which it is deducted. The remitted tax is to be accompanied by a statement from the State setting out the amount deducted and identifying the taxpayer to whom the amount deducted relates. [Subclause 9(3)]

1.22 In order to protect the State from further claims for a refund, when the State withholds (or purportedly withholds) the windfall tax, the State is discharged from any liability to pay or account for the amount to any person other than the Commissioner of Taxation. [Subclause 9(4)]

Taxpayer credit for the amount withheld

1.23 When a State makes a deduction (or purportedly makes a deduction) from a refund for franchise fees (i.e., a taxable amount), the taxpayer is entitled to a credit equal to the amount deducted. The credit is a debt due to the taxpayer by the Commissioner on behalf of the Commonwealth. The Commissioner may apply the credit against any liability the taxpayer has for windfall tax. If a portion of the credit is not applied against the taxpayer's liability for windfall tax, then the Commissioner must refund that portion. [Clause 10]

1.24 However, no credit is available for an amount of windfall tax that is found to have been incorrectly deducted because a State franchise law is in fact valid. A credit entitlement in such a case is inappropriate as it would leave the taxpayer effectively having paid nothing despite the validity of the State law. [Subclause 10(2)]

Regulation power for collection of unpaid windfall tax

1.25 The Bill provides for a regulation making power to cover the collection of unpaid windfall tax. This may be necessary if a State refunds a business franchise fee paid before 5 August 1997 directly to a taxpayer. In these cases the withholding of the tax by the State is not possible. The regulations may provide for the collection and recovery of unpaid windfall tax and include power to:

•

determine the time when windfall tax is due for payment; and

•

prescribe penalties for late payment of windfall tax as long as it is not greater than a rate of 20% per annum. [Clause 11]

MISCELLANEOUS

Annual Report

1.26 The Commissioner of Taxation must prepare a report for the Minister, for presentation to Parliament, on the operation of the Act. [Clause 12]

Arrangements with the States

1.27 Although it is proposed the Commissioner of Taxation will have the general administration of the Act, the Commissioner may enter into arrangements with the States about any matter for the administration of the Act. In particular, the arrangement may relate to the Commissioner's delegation of powers or functions under the Act or regulations. The Commissioner may use section 8 of the Taxation Administration Act 1953 to delegate some or all of his powers or functions under the Act or regulations to an officer or authority of a State. [Clause13]

Regulations

1.28 The Governor General is authorised to make regulations prescribing matters required or permitted to be prescribed, or necessary or convenient to be prescribed, for administering the Act. [Subclause 14(1)]

1.29 The Bill also provides for regulations to prescribe penalties by way of fines not exceeding 10 penalty points (approximately $1,000 at present) for offences against the regulations. [Subclause 14(2)]

Chapter 2 Franchise Fees Windfall Tax (Imposition) Bill 1997

Overview

2.1 The Franchise Fees Windfall Tax (Imposition) Bill 1997 imposes the windfall tax at a rate of 100%.

Summary of the provisions

Purpose of the provisions

2.2 The purpose of the Franchise Fees Windfall Tax (Imposition) Bill 1997 is to impose the windfall tax.

Date of effect

2.3 The Bill will apply from the same date as the Franchise Fees Windfall Tax (Collection) Bill 1997 which is proposed to commence on 5 August 1997. [Clause 2]

Explanation of the provisions

Title and scope of the Act

2.4 When the Bill is enacted, it will be called the Franchise Fees Windfall Tax (Imposition) Act 1997 [Clause 1] .

2.5 The Act will bind the Crown in all its capacities [Clause 3] .

Imposition of franchise fees windfall tax

2.6 The franchise fees windfall tax will be imposed at a rate of 100%. That is, the tax imposed is 100% of the taxable amount as described in the Franchise Fees Windfall Tax (Collection ) Act 1997. [Clause 4]

Chapter 3 Consequential amendments to the Income Tax Assessment Acts

Overview

3.1 The Franchise Fees Windfall Tax (Consequential Amendments) Bill 1997 sets out consequential amendments to the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 as a result of the proposed windfall tax.

Summary of the provisions

Purpose of the provisions

3.2 The purpose of the Franchise Fees Windfall Tax (Consequential Amendments) Bill 1997 is to make amendments to the Income Tax Assessment Acts as a result of the windfall tax.

Date of effect

3.3 The proposed amendments to the Income Tax Assessment Acts will apply from the date of Royal Assent. The amendments of the Income Tax Assessment Act 1936 (ITAA 1936) are to apply to the 1996-97 year of income. The amendments of the Income Tax Assessment Act 1997 (ITAA 1997) are to apply for the 1997-98 year of income and all subsequent years. It is necessary to amend both Income Tax Assessment Acts because the ITAA 1997 only applies to the 1997-98 year and subsequent years. The ITAA 1936 needs to be amended to cover amounts which may arise for a late balancing company whose balancing date for the 1996-97 year is after 5 August 1997. [Clause 4]

Explanation of the provisions

Title and application

3.4 When the Bill is enacted, it will be called the Franchise Fees Windfall Tax (Consequential Amendments) Act 1997 [Clause 1] .

3.5 The Act is to commence on the day it receives Royal Assent [Clause 2] .

3.6 Schedule 1 of the Bill sets out the amendments to the two Income Tax Assessment Acts. The references in this explanatory memorandum to particular items are references to items in that Schedule. [Clause 3] .

Amendments to the Income Tax Assessment Act 1936

3.7 Section 23 of the ITAA 1936 sets out amounts which are exempt from income tax. Section 23 is to be amended to exempt taxable amounts, within the meaning of the Franchise Fees Windfall Tax (Collection) Act 1997, which are derived by a taxpayer. Therefore, if a taxpayer is subject to windfall tax on a refund of franchise fees from a State, the refund will be exempt from tax to the extent to which the refund is subject to windfall tax. [Item 1 - new paragraph 23(kf)]

3.8 Section 51 of the ITAA 1936 allows a deduction for losses or outgoings incurred in deriving assessable income or in carrying on a business for the purpose of gaining or producing assessable income. The section also sets out specific amounts which are not allowable as a deduction. Section 51 is to be amended to deny a deduction for payments of windfall tax imposed under the Franchise Fees Windfall Tax (Imposition) Act 1997. [Item 2 - new subsection 51(10)]

Amendments to the Income Tax Assessment Act 1997

3.9 Section 11-10 of the ITAA 1997 lists the amounts of income which are exempt, no matter who derives the income. Taxable amounts subject to the franchise fees windfall tax are to be added to the list. [Item3] These amounts will be specifically exempt from income tax. Therefore, if a taxpayer is subject to windfall tax on a refund of franchise fees from a State, the refund will be exempt from tax to the extent to which the refund is subject to windfall tax. [Item 6 - new section 51-48]

3.10 Section 12-5 of the ITAA 1997 lists the provisions in the ITAA 1997 which contain rules about specific types of deductions. Franchise fees windfall tax will be added to the list. [Item 4] The ITAA 1997 is to be amended to deny a deduction for payments of windfall tax imposed under the Franchise Fees Windfall Tax (Imposition) Act 1997. [Item 5 - new section 26-15]