Senate

Explanatory Memorandum

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

General outline and financial impact

Capital gains tax - exemption on the sale of a small business for retirement

Inserts new Division 17B of the Income Tax Assessment Act 1936 to provide small business taxpayer's with an exemption from tax on capital gains made on the disposal of some or all of their active assets if the proceeds are used for retirement.

Date of effect: This measure will apply to assets disposed of on or after 1 July 1997.

Proposal announced: 1996-97 Budget and Treasurers press release, 20 August 1996.

Financial impact: The estimated revenue cost for this measure in 1998-99 and 1999-2000 is $50million.

Compliance cost impact: It will be necessary for small business taxpayers electing for the CGT retirement exemption to keep records of capital gains deemed to be, or paid out as, eligible termination payments. Companies and trusts will also need to keep additional records to establish that an individual is a controlling individual. The retention of these extra records is likely to increase the compliance cost. In addition, there may be some additional costs involved for small business taxpayers who must roll-over the ETP.

Sale of mining rights

Amends the income tax law to ensure that the Senate amendment of 12December 1996 to paragraph 23(pa) of the Income Tax Assessment Act 1936 is given its intended effect. The amendments will also ensure that the Income Tax Assessment Act 1997 continues that effect from 1 July 1997.

Date of effect: The amendments will commence from Royal Assent and will apply to income derived from the sale, transfer or assignment of mining rights under a contract entered into after 20 August 1996.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: None.

Family tax initiative

Amends the Income Tax Assessment Act 1936 to allow taxpayers with exempt foreign earnings the proper amount of family tax assistance.

Date of effect: 1 January 1997.

Proposal announced: Not previously announced.

Financial impact: Negligible cost to revenue.

Compliance cost impact: No additional compliance costs as a result of these measures, over and above those already associated with family tax assistance.

Dividend imputation and tax exempt entities

Amends the income tax law to ensure that franking surpluses of taxable companies which are wholly owned by tax exempt entities are not able to be passed to third parties.

Date of effect: Applies to entities that cease to be wholly owned by tax exempt entities on or after 3 July 1995.

Proposal announced: Foreshadowed in the Government's 1996-97 Budget Statement. Most of the measures dealing with transitional issues of tax exempt entities which become taxable were introduced in Taxation Laws Amendment Bill (No. 3) 1996.

Financial impact: Difficult to quantify due to the generic nature of the legislation. Any revenue impact would need to be determined on a case by case basis.

Compliance cost impact: The amendments are not expected to impose any additional compliance costs on taxpayers as taxpayers will not be required to keep additional records.

Principal residence exemption from CGT

Amends the income tax law to extend the principal residence exemption to alleviate hardship associated with the disposal of a deceased's principal residence by beneficiaries and trustees of deceased estates, and to reduce the compliance costs associated with the principal residence exemption.

The amendments will:

•

extend the period beneficiaries and trustees of deceased estates have to dispose of a principal residence without affecting the principal residence exemption from 12 months to 2 years;

•

provide a partial CGT exemption for trustees and beneficiaries of deceased estates where the deceased never used the dwelling as a principal residence but beneficiaries of the deceased do so;

•

treat a beneficiary or trustee who acquires a dwelling as a result of a death as having acquired the dwelling at its market value on the date of death if it was (or is deemed to be) wholly the principal residence of the deceased at the time of death; and

•

require the use of market value as the cost base where a person's principal residence is first used for income producing purposes.

Date of effect: The amendments will apply as follows:

•

the extension of the 12 month period to 2 years applies to disposals after 7.30 pm, 20 August 1996 (by legal time in the Australian Capital Territory);

•

the new partial CGT exemption applying when a dwelling that was never used by the deceased as a principal residence, applies to dwellings disposed of after 7.30 pm, 20 August 1996 (by legal time in the Australian Capital Territory);

•

the new CGT rules treating beneficiaries and trustees of deceased estates as acquiring the deceased's principal residence at market value will apply when the deceased's principal residence was acquired by the beneficiary or trustee after 7.30pm, 20 August 1996 (by legal time in the Australian Capital Territory); and

•

the use of a market value as the cost base of a dwelling will apply to dwellings that are used for the first time by the taxpayer for income producing purposes after 7.30 pm, 20August 1996 (by legal time in the Australian Capital Territory).

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: Estimated revenue loss of $7 million in 1997-98, $8million in 1998-99 and $8 million in 1999-2000.

Compliance cost impact: Overall compliance costs will be reduced. Taxpayers who inherit principal residences will not have to inquire or rely on the deceased to have kept proper records. Taxpayers who first begin to use a principal residence for income producing purposes will not have to obtain records of costs and expenditures incurred before that use (eg. cost of improvements to the residence). This reduction in compliance costs may be partially offset by taxpayers having to obtain or compute their own market valuations of their principal residences.

Treatment of payments made under the firearms surrender arrangements

Amends the income tax laws to provide for the taxation treatment of compensation payments made under the firearms surrender arrangements.

Date of effect: The amendments will apply to assessments for the income years during which compensation payments are made under the firearms surrender arrangements, commencing in the 1996-97 year of income.

Proposal announced: The Compensation for the Surrender of Prohibited Firearms Guidelines issued by the Commonwealth Law Enforcement Board as a result of the meeting of State and Territory Police Ministers held on 10 May 1996. Treasurer's Press Release 24 July 1996.

Financial impact: The cost to revenue from surrendering firearms that are held as trading stock is estimated at $8 million for the 1997-98 income year and $2 million for the 1998-99 income year. The estimated cost to revenue from taxpayers for loss of business is $60 million and $10 million in the 1997-98 and 1998-99 income years respectively. It is expected that claims for loss of business will be made beyond 1998-99. The cost to revenue from exempting farmers and professional shooters is estimated at $4 million in 1997-98 and $1 million in 1998-99. The cost to revenue from exempting individuals and collectors from capital gains tax is expected to be negligible.

Compliance cost impact: There will be no compliance costs imposed on individual gun owners. Taxpayers who hold firearms as trading stock in the business will need to know the acquisition cost of trading stock in order to comply with the proposed amendments. It is expected that, in situations where stock has been revalued, this information should be available from business records.

Remote area housing

Amends the fringe benefits tax law to make housing fringe benefits provided by primary producers in remote areas exempt from FBT where the housing fringe benefit is provided in respect of primary production employment.

Date of effect: From 1 April 1997.

Proposal announced: This measure was announced in the 1996-97Budget.

Financial impact: The cost of this measure to the revenue is expected to be $10 million in 1997-98; $5 million in 1998-99 and $5 million in 1999-2000.

Compliance cost impact: This measure will reduce compliance costs for primary producers who provide remote area housing fringe benefits. They will no longer be required to keep records for these benefits. However, they will have to keep records for any free or subsidised residential fuel provided in connection with these benefits.

Depreciation of lessors' fixtures

Amends the income tax law to treat lessors of depreciable plant or articles under a chattel lease as retaining ownership notwithstanding that the leased equipment may be a fixture on another person's land. To be treated as an owner, the lessor must retain an effective right to recover the leased property.

Date of effect: Applies to depreciable plant and equipment first used for income producing purposes by a lessor on or after 1 July 1996.

Proposal announced: Treasurer's Press Release No 25 of 1996, dated 11June 1996.

Financial impact: The amendments are likely to have minimal revenue cost because, in general, lessors claim depreciation deductions in relation to leased chattels that may or may not become fixtures during the term of the lease.

Compliance cost impact: There will be only slight impact on compliance costs. By treating eligible fixtures in the same manner as chattels, the amendments will eliminate some existing administrative and compliance difficulties.

Increase in age limit for superannuation contributions

Amends the income tax law to increase the threshold for which employers are no longer required to provide superannuation support for their employees. The threshold will be increased from age 65 to age 70.

Date of effect : 1 July 1997.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: Estimated cost to the revenue of $9 million in 1998-99 and $7 million in 1999-2000.

Compliance cost impact: Employers will face compliance costs in providing superannuation support for employees who are over age 65 but under 70. These costs are the same as employers currently face in providing superannuation support for employees under 65 years. This measure is not expected to have any effect on compliance costs of individuals, since no additional obligations are imposed. Superannuation funds will face minor compliance costs in making the necessary changes to their trust deeds.

Rebate for superannuation contributions made on behalf of a low-income or non-working spouse

Amends the income tax laws to provide a rebate for a person contributing to superannuation on behalf of a low- income or non-working spouse.

Date of effect: The rebate will be available for contributions made on or after 1 July 1997.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: The cost to revenue for the 1998-99 year is $38million. The cost to revenue for the 1999-2000 year is $38 million. In each of the financial years, the cost to revenue to provide the rebate to taxpayers whose spouse's assessable income does not exceed $10,800 is $35 million. There is an additional revenue cost of $3 million associated with the shade-out of the rebate where the spouse's assessable income is greater than $10,800 but less than $13,800.

Compliance cost impact: The compliance costs imposed on taxpayers will be minimal. The taxpayer will be required to keep a record of superannuation contributions made on behalf of the spouse and to know the assessable income of the spouse.

Research and development

Amends the research and development (R & D) provisions of the income tax law to:

•

ensure the same limitations on core technology deductions apply to companies in partnership as apply to other companies;

•

disallow deductions for companies registered jointly under section 39P of the Industry Research and Development Act 1986 (syndicates) where an extension of the joint registration has been granted under section 39PB and the Industry Research and Development Board, having determined that the syndicate has breached a condition of that extension, issues a certificate to the Commissioner of Taxation under subsection 39PB(6);

•

ensure that, where a taxpayer conducts different R & D activities in one year, the formula used to calculate deductible 'residual feedstock expenditure' properly reflects the R & D activity to which the particular feedstock expenditure relates;

•

ensure a deduction for core technology expenditure is allowable in the year the expense was first incurred;

•

make provision for a balancing adjustment where post 23 July 1996 pilot plant is disposed of prior to the completion of the R & D activity;

•

change a heading in the depreciation table in subsection 73B(4H) for post 23 July 1996 pilot plant; and

•

correct a paragraph citation.

Date of effect: The amendment to the core technology provisions will apply to core technology expenditure incurred under contracts entered into on or after 8.30pm, by standard time in the Australian Capital Territory, on 13 December 1996. The remaining amendments will apply as originally intended and announced, from 5.00pm by standard time in the Australian Capital Territory on 23July1996.

Proposal announced: In the Parliament on 13 December 1996, the Treasurer foreshadowed amendments to prevent partnerships being used to recreate the effects of R & D syndication.

Financial impact: The amendments should largely restore the expected revenue gains from the R & D measures proposed in Taxation Laws Amendment Bill (No. 3) 1996.

Compliance cost impact: The extension of the deduction rules for core technology will require companies in partnership to do more computation and record keeping.

Sales tax - telecommunication and audio visual equipment

Amends the Sales Tax (Exemptions and Classifications) Act 1992 to ensure goods of a kind ordinarily used in the provision of telecommunication and audio visual services cannot be exempt from sales tax as electrical fittings.

Date of effect: 7.00 pm Australian Eastern Summer Time on 7November1996.

Proposal announced: Treasurer's Press Release No. 109 of 7November1996.

Financial impact: This measure will prevent possible decreases in revenue from sales tax as follows:

1996-97 - less than $5 million

1997-98 - less than $10 million

1998-99 - less than $10 million.

Compliance cost impact: This measure seeks to restore the tax base with respect to goods of a kind ordinarily used in the provision of telecommunication and audio visual services. Accordingly there will be no change in compliance costs for affected taxpayers; taxpayers' obligations to determine taxable values, keep accurate records and remit sales tax will remain the same as it was prior to 7 November 1996.

Subsidiary company liquidations and capital gains tax

Amends the CGT provisions to reduce a capital gain or loss realised on the cancellation of shares in a company on dissolution of the company where assets are distributed in specie to another company which owns all of the shares in the transferee.

Date of effect: The proposed amendments will extend CGT relief to share cancellations occurring after 7.30pm on 20 August 1996.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: The revenue impact is not quantifiable.

Compliance impact: Compliance costs are likely to be increased as a result of this measure as a consequence of the additional calculations required to determine any capital gain or loss reduction on cancellation of shares. However, these costs are unavoidable if the relief provided by this measure is to be granted.

Gains and losses

Amends the income tax law to allow companies to offset capital losses against capital gains realised in the same year of income in certain circumstances where there has been a change of majority ownership of the company in the particular year of income. The Bill also makes several related amendments to:

•

deal with the capital gains tax treatment of subvention payments;

•

rectify anomalies in the loss and bad debt write-off provisions;

•

include similar safeguards in the capital loss provisions as are currently contained in the revenue loss provisions to prevent manipulation of a business in order to benefit from the same business test relief; and

•

amend the capital loss transfer provisions to give the Commissioner of Taxation unlimited time to amend the assessment of a transferee company where the loss was not in fact incurred by the transferor company.

Date of effect: The amendments relating to current year capital losses and subvention payments will effectively apply from the commencement of the 1996-97 year of income.

The amendments rectifying anomalies in the loss and bad debt write-off provisions will apply to the 1996-97 year of income and later years of income but only to events happening after the 26 March 1997. However, the amendment inserting safeguards into the same business test provisions amendment will apply to manipulations in the scope of a company's business activities that occur after 7.30pm EST 20 August 1996.

The amendment giving the Commissioner unlimited time to amend an assessment will apply from the 26 March 1997 to taxpayers whose assessments are capable of being amended by the Commissioner under the existing law at 26 March 1997.

Proposals announced: 1996-97 Budget (20 August 1996), except for the amendment giving the Commissioner unlimited time to amend an assessment. The latter amendment was not previously announced.

Financial impact: Increased revenue of $7.5 million in 1996-97, $40million in 1997-98 and $30 million in 1998-99 and 1999-2000 is expected.

Compliance cost impact: Where the majority underlying ownership of a company has changed in a year of income and the same business test is failed, a corporate taxpayer who has incurred a capital loss during the year will now be able to carry forward that loss to a future year of income. Thus, it will be necessary for such taxpayers to maintain a record of the amount of the loss and the year in which the loss was incurred.

Corporate taxpayers will also have to keep records of the beneficial ownership of shares and the nature of the business when the loss was incurred. This is to ensure that relevant recoupment tests are satisfied when the loss is subsequently sought to be recouped or transferred. Records relating to the nature of a taxpayer's business will also need to be kept for the purposes of justifying reliance on the same business test relief.

In addition, the amendment giving the Commissioner unlimited time to amend an assessment in certain circumstances means that corporate taxpayers who have had capital losses of group companies transferred to them will be required to keep records of transferred amounts for an unlimited period.

However, these requirements should not result in additional compliance costs because such records are already required to be kept under the existing law relating to the recoupment and transfer of revenue losses.

Taxpayers will also incur compliance costs in familiarising themselves with the new law. However, to the extent that the measures clarify the operation of the law, there will be a reduction in compliance costs.

Deductions for gifts

Amends the income tax law to allow income tax deductions for gifts made to certain funds and organisations.

Proposal announced: The Treasurer announced two of the measures during 1996 (one of which was announced jointly with the Minister for Communications and the Arts) and one in 1997.

Financial impact: The amendments do not have any significant impact on the revenue.

Compliance cost impact: There are no compliance cost impacts.

Chapter 1 - CGT exemption: disposing of small business retirement assets

Overview

1.1 Part 1 of Schedule 1 of the Bill will insert new Division17B into the Income Tax Assessment Act1936 (the Act) and will amend the superannuation related provisions of the Act to provide an exemption from tax on capital gains made on the sale of a small business where the proceeds are used for retirement.

1.2 Section 1 of this chapter explains the new Division 17B and section 2 of this chapter explains the amendments to the superannuation related provisions.

Section 1 - Amendment of CGT provisions

Summary of the amendments

Purpose of the amendments

1.3 New Division 17B will provide small business taxpayers with an exemption from tax on capital gains made on the disposal of some or all of their active assets if the proceeds are used for retirement.

Date of effect

1.4 The amendments will apply to assets disposed of on or after 1July1997.

[Item45 of Part3]

Background to the legislation

1.5 Currently, the capital gains tax (CGT) provisions apply where an asset that is acquired after 19September1985 is disposed of. A capital gain arises if the proceeds from a disposal exceed the cost base or indexed cost base of the asset. The capital gain (net of capital losses) must be included as assessable income of the taxpayer in respect of the disposal year of income.

1.6 New Division17B will allow taxpayers, in certain circumstances, to claim an exemption from tax on capital gains made on the sale of the assets of a small business if the proceeds are used for retirement. This measure was announced by the Treasurer in the 1996-97 Budget and in the Treasurers press release of 20August1996.

Explanation of the amendments

Which taxpayers are eligible for the CGT retirement exemption?

1.7 A taxpayer is only eligible for the CGT retirement exemption if the taxpayer is:

•

an individual;

•

a private company; or

•

a trust that is not a publicly traded unit trust.

Which assets could this exemption apply to?

1.8 Individuals, private companies and trusts can qualify for the CGT retirement exemption on both existing and new assets. For the purposes of this exemption an asset has the same meaning as in the small business CGT roll-over relief provisions [definition of asset in new section160ZZPZM] . That is, an 'asset' in relation to an entity is an asset as defined in section160A of PartIIIA of the Act but includes all types of motor vehicles and also part of an asset. However, where a taxpayer is an individual (not acting as trustee), assets will not include assets owned by the taxpayer that are being used solely for the personal use and enjoyment of the taxpayer or associates. Assets, in relation to an individual, will also not include a policy of life assurance of a person or a right to payments or assets of a superannuation fund or approved deposit fund (ADF). See definition of asset in subsection160ZZPL(1).

How to qualify for the CGT retirement exemption

1.9 To qualify for the CGT retirement exemption all taxpayers must satisfy the following requirements:

•

the asset must satisfy the criteria contained in paragraphs160ZZPQ(1)(a) to (d) of the small business CGT roll-over relief provisions (see discussion on what criteria an asset needs to satisfy in paragraphs1.20 to 1.29) [new paragraphs160ZZPZD(1)(a), 160ZZPZH(2)(a) and 160ZZPZI(2)(a)] ;

•

the taxpayer must elect that this exemption is to apply in respect of the asset (see discussion on elections in paragraphs1.30 to 1.33) [new paragraphs160ZZPZD(2)(a), 160ZZPZH(4)(a) and 160ZZPZI(4)(a)] ;

•

the amount for which the exemption is claimed must not exceed the amount of the capital gain concerned [new paragraphs160ZZPZD(2)(c), 160ZZPZH(4)(c) and 160ZZPZI(4)(c)] ; and

•

the taxpayer must not have previously made an election under section160ZZPQ to apply the Division 17A CGT roll-over relief provisions to the disposal [new paragraphs160ZZPZD(2)(e), 160ZZPZH(4)(e) and 160ZZPZI(4)(f)] .

1.10 In addition, a taxpayer also needs to satisfy other specific conditions. The specific conditions that a taxpayer needs to satisfy however will depend on whether the taxpayer is an individual (other than an individual who disposes of the asset acting as a trustee), a private company or a trust that is not a publicly traded unit trust.

Specific conditions that an individual taxpayer also needs to satisfy

1.11 If the taxpayer is an individual (other than an individual who disposes of the asset acting as a trustee) then, to qualify for the CGT retirement exemption, the following conditions must also be satisfied:

•

immediately before the election is made, the asset's CGT exempt amount must not exceed the individual's CGT retirement exemption limit (see discussions on what is an asset's CGT exempt amount in paragraphs1.34 to 1.43 and what is an individual's CGT retirement exemption limit in paragraphs1.47 and 1.48) [new paragraphs160ZZPZD(2)(d) and new section160ZZPZN] ; and

•

the individual must receive all of the actual consideration for the disposal of the asset within the period beginning one year before, and ending two years after, the disposal (see discussion on what is the actual consideration for the disposal of an asset in paragraphs1.61 to 1.63). However, the actual consideration can be received in instalments provided all of the instalments are paid by the end of the relevant period (ie. beginning 1year before, and ending 2years after, the disposal of the asset) [new paragraph160ZZPZD(1)(b)].

Specific conditions that a private company or a trust that is not a publicly traded unit trust also needs to satisfy

1.12 If the taxpayer is a private company or a trust that is not a publicly traded unit trust then, to qualify for the CGT retirement exemption, the following conditions must also be satisfied:

•

the company or trust must receive all of the actual consideration for the disposal of the asset within the period beginning one year before, and ending two years after, the disposal (see discussion on what is the actual consideration for the disposal of an asset in paragraphs1.61 to 1.63). However, the actual consideration can be received in instalments provided all of the instalments are made by the end of the relevant period (ie. beginning 1year before, and ending 2years after, the disposal of the asset) [new paragraphs160ZZPZH(2)(b) and 160ZZPZI(2)(b)] ; and

•

there must be either one or two controlling individuals of the company or trust immediately before the disposal of the asset (see discussion on who is a controlling individual in paragraphs 1.49 to 1.55) [new subsections160ZZPZH(3) and 160ZZPZI(3)] ; and

•

if there is only one controlling individual, the asset's CGT exempt amount must not exceed the controlling individual's CGT retirement exemption limit immediately before the election is made [new paragraph160ZZPZH(4)(d) and new section160ZZPZN] . (For a discussion on what is an asset's CGT exempt amount and what an individual's CGT retirement exemption limit see paragraphs1.34 to1.43 and paragraphs1.47 and 1.48 respectively); or

•

if there are two controlling individuals, then for each controlling individual, the individuals exemption percentage of the assets CGT exempt amount must not exceed that individual's CGT retirement exemption limit immediately before the election is made [new paragraph160ZZPZI(4)(e) and new section160ZZPZN]. An individuals exemption percentage is the percentage of the assets CGT exempt amount that is to be attributable to that individual. One of the percentages can be nil, but the two percentages must add up to 100% [new paragraph160ZZPZI(4)(d)].

1.13 In addition, a private company or trust must make an eligible termination payment (ETP) to the controlling individual(s) within 7days after making the election or within 7days after the taxpayer receives an amount of actual consideration.

1.14 The amount of the ETP that must be paid will depend on whether the company has one or two controlling individuals. If the company or trust has only one controlling individual, the amount of the ETP that must be paid must be at least equal to the amount received as actual consideration. If the company or trust has two controlling individuals, the amount of the ETP that must be paid to each of the two controlling individuals must be at least equal to each of the controlling individuals exemption percentage of the actual consideration. [New subsections160ZZPZH(5) and160ZZPZI(5)]

1.15 However, if the actual consideration to be paid out plus the total amount of actual consideration previously received exceeds the asset's CGT exempt amount, then the amount of the actual consideration that must be paid as an ETP to the controlling individual(s) is reduced by the amount of the excess. [New subsections160ZZPZH(8) and 160ZZPZI(5)]

1.16 Also, if a controlling individual of a taxpayer is under age 55 at the date of disposal of the asset, the company or trust must pay the CGT exempt amount of the ETP for that individual directly into a complying superannuation fund, a complying ADF or Retirement Savings Account (RSA) selected by that controlling individual. [New subsections 160ZZPZH(7) and 160ZZPZI(5)]

1.17 To qualify as an ETP, the amount must be paid to the controlling individual in consequence of the termination of his or her employment.

1.18 If the controlling individual is aged 55 or more at the date of disposal of the asset and wants to roll-over the ETP into a roll-over fund or an eligible annuity (including a deferred annuity), the amount must be paid into a roll-over fund immediately after the ETP is made. This is in accordance with the rules about rolling over ETPs which are contained in SubdivisionAA of Division2 of Part III of the Act.

1.19 Individuals aged under 55 immediately prior to the disposal of the asset are not eligible to roll-over the CGT exempt amount of the ETP component into a eligible annuity or deferred annuity because these products do not have a preservation requirement. However, life insurance companies will be able to receive the CGT exempt amount of the ETP through RSAs and indirectly, if rolled over from a complying superannuation fund, a complying ADF or an RSA.

What criteria does an asset need to satisfy?

1.20 To be eligible to claim the CGT retirement exemption, the asset must satisfy the criteria in paragraphs160ZZPQ(1)(a) to (d) which are explained in paragraph1.21. These criteria also need to be satisfied in order to claim the small business CGT roll-over relief included in new Division17A of PartIII of the Act (to be inserted by Part1 of Schedule5 of Taxation Laws Amendment Bill (No.1) 1997). For a full explanation of the criteria, refer to the explanations relating to the operation of paragraphs160ZZPQ(1)(a)-(d) in Chapter 7 of the Explanatory Memorandum that accompanied Bill No.1.

1.21 The relevant criteria contained in paragraphs160ZZPQ(1)(a) to (d) are as follows:

•

the asset must be a roll-over asset;

•

a capital gain must otherwise accrue to the taxpayer as a result of the disposal (notional capital gain);

•

the asset must be an active asset at the disposal test time;

•

if the asset was not an active asset at the disposal test time, it must have been an active asset immediately before the business (in respect of which the asset was used) ceased to be carried on. In addition, the cessation of the business must have occurred no more than twelve months before the disposal test time; and

•

the asset must have been an active asset during more than one half of the period in which it was owned by the taxpayer.

[New paragraphs160ZZPZD(1)(a), 160ZZPZH(2)(a) and 160ZZPZI(2)(a)]

1.22 In addition, the asset must be disposed of on or after 1July 1997. [Item45 of Part3]

1.23 The date of disposal of an asset is defined for the purposes of the CGT provisions in section 160U.

What is a roll-over asset?

1.24 A roll-over asset is an asset disposed of by a taxpayer who has assets (including assets of entities connected with the taxpayer) with a net value that does not exceed $5million (subsection160ZZPL(7); section160ZZPP).

1.25 The net value of assets is the sum of the market values of the assets of an entity less the sum of the liabilities of the entity that relate to those assets. Specifically excluded are liabilities that relate to an asset that is excluded for the purposes of the $5million threshold by paragraphs160ZZPL(1)(a), (b), (c) and (d) (subsection160ZZPP(5)).

What is an active asset?

1.26 The CGT retirement exemption and the small business roll-over relief measure are only available for assets that are active assets at the disposal test time. The disposal test time is the time immediately before the disposal of the relevant asset (section160ZZPK).

1.27 An active asset is one which, at a particular point in time, is used by the taxpayer in carrying on a business, for example, plant, machinery and a factory of a manufacturing business. An active asset also includes an asset which is held ready for use in that business or an intangible asset which is inherently connected with the business, such as goodwill (subsection160ZZPL(3)).

1.28 Active assets do not include shares in a company and interests in trusts. Assets whose predominant use is to derive interest income, annuities, rent, royalties or foreign exchange gains are also not active assets (subsection 160ZZPL(4)). However, this exclusion will not apply to an asset disposed of by the taxpayer where the market value of the asset substantially appreciated because of the taxpayer's efforts in substantially developing, altering or improving the asset (subsection160ZZPL(5)).

1.29 Active assets also do not include financial instruments such as loans, debenture stock, futures contracts, forward contracts, currency swap contracts and promissory notes (paragraph160ZZPL(4)(d)).

Elections

1.30 To claim the CGT retirement exemption, the taxpayer must elect in writing that this exemption is to apply in respect of the disposal of the asset. The election must be made on or before the date the taxpayer lodges a return for the year of income in which the asset was disposed of [new paragraphs160ZZPZD(2)(a), 160ZZPZH(4)(a) and 160ZZPZI(4)(a)] . The election must also specify an amount, not greater than the amount of the capital gain, as the asset's CGT exempt amount [new paragraphs160ZZPZD(2)(b), 160ZZPZH(4)(b) and 160ZZPZI(4)(b)] .

1.31 Further, if the taxpayer is a company or trust and there are two controlling individuals of the company or trust, the election must also specify the percentage of the asset's CGT exempt amount that is attributable to each of the controlling individuals (ie. the exemption percentage). [New paragraph160ZZPZI(4)(d)]

1.32 It is not necessary for the taxpayer to include the election in his or her return. The taxpayer simply needs to prepare the election on or before the date of lodgement of the return and then retain the election so it can be made available to the Commissioner if he requests it.

1.33 The taxpayer cannot make an election for the purposes of this Division in respect of the disposal of an asset if the taxpayer has previously elected for the Division17A CGT roll-over relief provisions to apply to the disposal. [New paragraphs160ZZPZD(2)(e), 160ZZPZH(4)(e) and 160ZZPZI(4)(f)]

What is an assets CGT exempt amount?

1.34 An assets CGT exempt amount is the amount of the capital gain that would, but for these amendments have accrued to the taxpayer on the disposal of an asset and which the taxpayer elects to be exempt under new Division17B [new paragraphs160ZZPZD(2)(b), 160ZZPZH(4)(b) and 160ZZPZI(4)(b)] . However, before the CGT exempt amount is calculated, the capital gain on the asset must be reduced by the taxpayer's prior year net capital losses in the order in which those losses were incurred (see discussion of net capital losses in paragraphs1.44 to1.46) [new paragraphs160ZZPZD(2)(c), 160ZZPZH(4)(c) and 160ZZPZI(4)(c)] .

1.35 The CGT exempt amount must also satisfy the following criteria:

•

it must not be greater than the amount of the capital gain concerned [new paragraphs160ZZPZD(2)(c), 160ZZPZH(4)(c) and 160ZZPZI(4)(c)] ;

•

if the taxpayer is an individual then, immediately before the election is made, the assets CGT exempt amount must not exceed the individuals CGT retirement exemption limit (see discussion on an individuals CGT retirement exemption limit in paragraphs 1.47 and 1.48) [new paragraph160ZZPZD(2)(d)] ;

•

if the taxpayer is a company or trust that has only one controlling individual (see discussion on who is a controlling individual in paragraphs 1.49 to 1.55) then, immediately before the election is made, the assets CGT exempt amount must not exceed the controlling individuals CGT retirement exemption limit [new paragraph160ZZPZH(4)(d)] .

1.36 If the taxpayer is a company or trust that has two controlling individuals then, immediately before the election is made, the individuals exemption percentage of the assets CGT exempt amount must not exceed that individuals CGT retirement exemption limit. [New paragraph160ZZPZI(4)(e)]

1.37 In addition, the assets CGT exempt amount may be reduced if the taxpayer is a company or trust and for the period the taxpayer owned the asset, the controlling individual(s) did not control the taxpayer. The amount of the reduction will depend on whether the taxpayer has one or two controlling individuals.

1.38 If the company or trust has only one controlling individual immediately before the disposal of the asset concerned, the assets CGT exempt amount is reduced by the following amount:

1.39 In working out the period the taxpayer owned the asset, years of income prior to 1992-93 can be ignored. However, if the taxpayer has records to establish that the individual was a controlling individual of the company or trust during years prior to the 1992-93 year of income then these years can be taken into account.

1.40 If these prior years are taken into account, then the asset's CGT exempt amount is reduced by the lesser of the two reduction amounts calculated.

[New subsections 160ZZPZK(1) and (2)]

Example 1

A company acquires an asset on 1 July 1986 and sells the asset on 30June1998 (ie,12years later). The asset's CGT exempt amount is $300. Melissa was a controlling individual of the company at the time of disposal and was a controlling individual of the company from 1July1989 to 30June1995 and again from 1July1996 to 30June1998 (ie,a total of 8years).

As Melissa was not a controlling individual of the company for the full period the asset was owned, the assets CGT exempt amount must be reduced. The amount of the reduction is the lesser of the following two amounts:

•

the amount of the reduction if all the relevant years of income are taken into account which is $100 (ie,$300 x4/12); and

•

the amount of the reduction if the years of income prior to 1992-93 are ignored which is $50 (ie,$300 X 1/6).

That is, the amount of the reduction will be $50. As a consequence, the assets CGT exempt amount will be $250 (ie,$300-$50).

1.41 If the company or trust has two controlling individuals immediately before the disposal of the asset concerned, the amount the assets CGT exempt amount is reduced by the sum of the amount calculated for each individual using the following formula:

1.42 In working out the period the taxpayer owned the asset, years of income prior to 1992-93 can be ignored. However, if the taxpayer has records to establish that the individual was a controlling individual of the company or trust during years prior to the 1992-93 year of income then these years can be taken into account.

1.43 If these prior years are taken into account, then the amount the asset's CGT exempt amount will be reduced by for each controlling individual is the lesser of the two amounts calculated.

[New subsection160ZZPZK(3)]

Example 2

Assume in example1, Louise was also a controlling individual of the company at the time of disposal and was a controlling individual of the company from 1July1986 to 30June1991 and again from 1July1995 to 30June1998 (ie,also for a total of 8years). In addition, Melissas and Louises exemption percentage is 50% each.

As both Melissa and Louise were not controlling individuals of the company for the full period the asset was owned, the assets CGT exempt amount must be reduced. The amount of the reduction is the sum of Melissas and Louises exemption percentage of the reduction amounts that would otherwise be required if Melissa or Louise was the only controlling individual.

That is, the reduction required in relation to Melissa will be $25 (ie,50%x$50).

The reduction required in relation to Louise will be 50% of the lesser of the following two amounts:

•

the amount of the reduction if all the relevant years of income are taken into account which is $100 (ie,$300 X 4/12); and

•

the amount of the reduction if the years of income prior to 1992-93 are ignored which is $150 (ie, $300 X 3/6).

That is, the amount of the reduction required for Louise will be $50 (ie,50%x$100).

Therefore, the total amount of the reduction will be $75 (ie,$25+$50). As a consequence, the assets CGT exempt amount will be $225 (ie,$300-$75).

Net capital losses

1.44 New section160ZZPZL reduces the amount of the CGT retirement exemption available to the taxpayer to the extent to which net capital losses are available from previous years. Where a taxpayer elects for the CGT retirement exemption to apply to a disposal of an asset and the taxpayer has incurred net capital losses in respect of earlier years of income which have not previously been recouped, then the capital gain in respect of the disposal is reduced by the prior year net capital losses [new subsection160ZZPZL(2)] . However, the capital gain is only reduced if these losses would otherwise be available to offset against capital gains under PartIIIA of the Act [new paragraph160ZZPZL(1)(c)] . Prior year net capital losses must first be offset against new Division17B capital gains before being applied under section160ZC and Division17A [new subsection160ZZPZL(5)] .

1.45 Prior year net capital losses must be offset in the order that they are incurred [new subsection160ZZPZL(3)] . (However, a net capital loss in respect of a year of income before 1995-96, to the extent it has not been recouped, will be reflected in the amount of a net capital loss in respect of the 1995-96 year of income.) Further, capital gains made on the disposal of an asset must be reduced by prior year net capital losses in the order in which the taxpayer made the elections to have new Division17B apply to the disposal of the assets [new subsection160ZZPZL(4)] .

1.46 An example of how prior year net capital losses reduce the capital gain on the disposal of an asset is set out in new subsection160ZZPZL(6) .

What is an individuals CGT retirement exemption limit?

1.47 An individuals CGT retirement exemption limit is subject to a maximum of $500000. This is the total amount an individual can be exempt on as a consequence of this Division. This amount is a life time limit applicable to each individual taxpayer. [New subsection160ZZPZB(3)]

1.48 An individuals CGT retirement exemption limit at a particular time is $500000 less the total of CGT exempt amounts specified in previous elections that relate to the individual [new subsection160ZZPZN(1)] . For the purposes of this calculation, if an individual was one of two controlling individuals in a company or trust, only that individuals exemption percentage of the CGT exempt amount is included in the total of CGT exempt amounts [new subsection160ZZPZN(2)] .

Who is a controlling individual?

1.49 An individual will be a controlling individual of a private company at a point in time if:

•

the individual is an employee of the company at that time; and

•

the individual holds the legal and equitable interests in shares that carry the following rights:

•

the right to exercise 50% or more of the voting power in the company; and

•

the right to receive 50% or more of the dividends that the company may pay; and

•

the right to receive 50% or more of any distribution of capital of the company.

[New subsection 160ZZPZP(2)]

1.50 In determining who holds the legal and equitable interest in the shares of a company, redeemable shares are ignored. [New subsection160ZZPZP(7)]

1.51 An individual will be a controlling individual in a fixed trust at a point in time if, at that time:

•

the individual is an employee of the trust; and

•

the individual has entitlements to a 50% or more share of the income and capital of the trust.

[New subsection160ZZPZP(3)]

1.52 A trust is a fixed trust if persons have entitlements to all of the income and capital of the trust. [New subsection160ZZPZP(5)]

1.53 An individual will be a controlling individual in a trust that is not a fixed trust at a particular time (the test time) if:

•

the individual is an employee of the trust at the test time; and

•

the trust passes the pattern of distributions test, for the test year in relation to the individual (see discussion on pattern of distributions test and test year in paragraphs 1.56 to 1.60).

[New subsection160ZZPZP(4)]

Who is an employee?

1.54 For the purposes of these definitions, a taxpayer will be an employee if the person is treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act1992, assuming that subsection12(11) of that Act had not been enacted [new subsection160ZZPZP(6)] . By assuming subsection12(11) had not been enacted, domestic workers covered by that provision can be employees for the purposes of the CGT retirement exemption.

When must an individual be a controlling individual?

1.55 The taxpayer must be a controlling individual immediately before the time of disposal of the asset in order to qualify for the CGT retirement exemption in respect of that disposal. [New subsections160ZZPZH(3) and 160ZZPZI(3)]

Pattern of distributions test

1.56 The pattern of distributions test concept is used in determining whether a trust that is not a fixed trust has a controlling individual at any point in time.

1.57 The pattern of distributions test is passed for the test year in relation to an individual if:

•

the trust has made a distribution of income or capital during the test year; and

•

the trust has distributed 50% or more of all distributions of income during the test year to the individual for his or her own benefit; and

•

the trust has distributed 50% or more of all distributions of capital during the test year to the individual for his or her own benefit.

[New subsection 160ZZPZQ(1)]

1.58 A person is distributed something for his or her own benefit if the person is distributed the thing otherwise than in the capacity of a trustee.

1.59 The percentage of any distribution of income or capital for any income year distributed by a trust to an individual is the total income or capital distributed to the individual as a percentage of the total income or capital for that year distributed by the trust.

What is a 'test year'?

1.60 The pattern of distributions test is a yearly test to determine if the trust has a controlling individual. In the year that the disposal of the asset takes place, an individual is taken to be a controlling individual of a trust that is not a fixed trust if he or she was a controlling individual in the year of income immediately before the year in which the disposal occurred (ie. the test year). In a year of income other than the disposal year, an individual is taken to be a controlling individual of a trust that is not a fixed trust if he or she was a controlling individual for that year of income (ie. the test year). [New subsection160ZZPZQ(2)]

What is the actual consideration for the disposal of an asset

1.61 In working out the actual consideration received for the disposal of an asset under new Division17B subsection160ZD(2) is ignored. Subsection160ZD(2) provides that in certain circumstances a taxpayer is deemed to have received consideration for the disposal of an asset equal to the market value of that asset. For example, where a taxpayer gifts an asset to another person and receives no consideration for the disposal, subsection160ZD(2) deems consideration equal to the asset's market value to have been received. [New subsection160ZZPZO(1)]

1.62 The effect of new subsection 160ZZPZO(1) is that a taxpayer must actually receive consideration for the disposal of an asset in order to claim the CGT retirement exemption. This is consistent with the Government's policy of providing a CGT exemption on disposal of the assets of a small business where the proceeds are used for retirement.

1.63 Where the consideration for the disposal of an asset is an obligation to pay money (such as a promissory note) or to do some other thing (such as discharging a mortgage) the actual consideration is not taken to be received until the money is actually paid or the other thing is actually done [new subsection160ZZPZO(2)] . This provision only applies for the purposes of new Division17B.

What happens to the capital gain accrued in respect of the asset if the disposal is exempt?

1.64 If all of the relevant conditions that apply to the taxpayer are satisfied, the amount of the capital gain that would otherwise have accrued to the taxpayer in respect of the disposal concerned is reduced (but not below nil) by the asset's CGT exempt amount (explained in paragraphs1.34 and1.43). Any capital gain in excess of the CGT exempt amount will be included as assessable income of the taxpayer as a capital gain in the year of income in which the asset was disposed of. [New subsections160ZZPZE(2) and 160ZZPZJ(2)]

1.65 In addition, if any part of the actual consideration from the disposal of an asset is exempt under this Division, then any exemptions or roll-overs provided under Divisions15, 17, 17A, 18 and 19 of PartIIIA of the Act cannot apply in respect of the disposal of the asset. [New subsections160ZZPZE(3) and 160ZZPZJ(3)]

1.66 Other consequences that apply to a taxpayer that satisfies all of the relevant conditions depends on whether the taxpayer is an individual (other than an individual who disposes of the asset acting as a trustee), a private company or a trust that is not a publicly traded unit trust.

Other consequences that will apply to an individual taxpayer that satisfies all of the relevant conditions

1.67 If a taxpayer operates his or her business as a sole trader or in a partnership and the taxpayer receives an amount as actual consideration in respect of the disposal, an amount equal to the actual consideration is initially taken to be an ETP made in relation to the taxpayer for the purposes of SubdivisionAA of Division2 of PartIII of the Act. However, if the amount that is taken to be an ETP exceeds the asset's CGT exempt amount, then the amount of the ETP is reduced so that it equals the CGT exempt amount [new subsections160ZZPZE(4) and160ZZPZE(5)] . Although an amount equal to the actual consideration is taken to be an ETP made in relation to the taxpayer no expenditure has actually been incurred. Consequently, the taxpayer cannot claim a tax deduction for this amount.

1.68 If the taxpayer is under age 55 at the date of disposal of the asset, the ETP must be rolled over into a complying superannuation fund, a complying ADF or a RSA immediately after the actual consideration for the disposal is received and then preserved until the superannuation preservation age (currently age 55) [new subsection160ZZPZF(1)] . If a taxpayer is under age 55 immediately prior to the disposal and does not roll-over the deemed ETP, the taxpayer does not qualify for the CGT retirement exemption in respect of the asset disposed of and the election for the exemption is taken never to have been made [new subsection160ZZPZF(2)] .

1.69 If the taxpayer is aged 55 or more at the date of disposal of the asset and wants to roll-over the ETP into a roll-over fund or an eligible annuity (including a deferred annuity) then the taxpayer must pay the proceeds into a roll-over fund immediately after the proceeds are received. This is in accordance with the rules about rolling over ETPs which are contained in SubdivisionAA of Division2 of Part III of the Act.

1.70 Individuals aged under 55 immediately prior to the disposal of the asset are not eligible to roll-over the ETP into an eligible annuity or deferred annuity because these products do not have a preservation requirement. However, life insurance companies will be able to receive the CGT exempt amount of the ETP through RSAs and indirectly, if rolled over from a complying superannuation fund, a complying ADF or an RSA.

Other consequences that will apply to a private company or trust that satisfies all of the previous relevant conditions

1.71 The CGT exempt amount of an ETP is not an allowable deduction of the taxpayer. [New paragraph160ZZPZJ(4)(b)]

Section 2 - Amendment of superannuation related provisions

ETP provisions

1.72 The CGT exempt amount calculated under new Division17B will be deemed to be an ETP if the taxpayer is operating a business as a sole trader or partner in a partnership. If the taxpayer is a private company or trust the CGT exempt amount will be paid out to the controlling individual as an ETP and taxed under SubdivisionAA of Division2 of PartIII of the Act.

1.73 CGT exempt amounts paid as ETPs because of new Division17B will not be subject to taxation in the hands of the individual unless they are in excess of the recipient's reasonable benefit limit (RBL). They will not be included in taxable contributions when rolled over to a roll-over fund. Nor will they be surchargeable contributions for superannuation contributions surcharge purposes [Item 44 of Part 2] .

1.74 If the CGT exempt amount is paid to an employee of a company or a trust, the payment will be an ETP under paragraph(a) of the definition of 'eligible termination payment' in subsection27A(1). If the amount arises because of the operation of new subsection160ZZPZE(4) , the amount will be an ETP under new paragraph(jaa) of that definition. [Items5 and6 of Part1]

Components of ETPs

1.75 Subsection 27AA(1) of the Act breaks ETPs into one or more components. An ETP is split into components because each component is taxed differently. The tax treatment of the CGT exempt amount is different from the tax treatment of the other ETP components. Therefore a new component is created, namely the CGT exempt component.

1.76 The CGT exempt component is defined in subsection 27A(1) to be:

•

if the ETP is covered by new subsection 160ZZPZE(4) , the amount of the ETP; or

•

if the whole or part of an ETP is taken by new subsection160ZZPZJ(4) to consist solely of a CGT exempt component, the amount of that component.

[Item4 of Part1]

1.77 Subsection 27AA(1) sets out the components of an ETP and is amended to identify the CGT exempt component [Item7 of Part 1] . Also, the formulae used to calculate the pre-July83 component in subparagraphs27AA(1)(d)(i) and (ii) are amended to recognise the CGT exempt component [Items 8 to 10 of Part 1] . For this purpose, the CGT exempt component is treated in the same way as the concessional component and the post-June1994 invalidity component. Consequently, the pre-July83 component will be the lesser of the following amounts:

•

the amount of the ETP reduced by the concessional component, the post-June 1994 invalidity component, the non-qualifying component, the excessive component and the CGT exempt component, multiplied by the proportion of the number of days in the eligible service period that occurred before 1July1983 to the total number of days in the eligible service period; and

•

the amount of the ETP reduced by the concessional component, the post-June 1994 invalidity component, the non-qualifying component, the excessive component, the CGT exempt component and the undeducted contributions.

1.78 Subsection 27AA(3) applies to effectively treat the pre-July83 and post-June83 components of an ETP as an excessive component if the ETP is reportable for RBL purposes and the Commissioner does not make an RBL determination in relation to the ETP. Subsection27AA(3) will apply to treat the CGT exempt component as an excessive component in the same circumstances. [Item11 of Part1]

1.79 Section 27AB identifies the taxed and untaxed elements of the post-June83 component of an ETP. A new paragraph(jaa) ETP will not contain a post-June83 component. However, as all the paragraphs in the definition of 'eligible termination payment' in subsection27A(1) are listed in the Table of Taxed Elements in subsection27AB(1), new paragraph(jaa) is being listed so that no part of the amount is a taxed element. [Item12 of Part1]

1.80 To work out the amount of an ETP to be included in a taxpayers assessable income it is necessary to calculate:

•

the amount of each component of an ETP not rolled over (referred to as 'the retained amount of the ETP'); and

•

the amount or amounts of each component rolled over (referred to as the 'applied amount').

1.81 These amounts are calculated in sections27AC and 27D respectively. Amendments similar to those outlined in paragraph1.77 will be made to subsections27AC(2), 27D(2) and 27D(5) to appropriately recognise the CGT exempt component [Items 13 to 18 and 20 to 25 of Part 1] .

Exclusion of the CGT exempt component from assessable income

1.82 To ensure the retained amount of the CGTexempt component is not assessable under any provision of the Act, subsection27CB(1) will be amended to exempt the component in the same way that the tax-free amount of bona fide redundancy payments, approved early retirement scheme payments and the post-June 1994 invalidity component are exempted [Item19 of Part1] . That is, the CGT exempt component is excluded from assessable income and is ignored when calculating whether a capital gain accrues to a taxpayer.

Reasonable benefit limits

1.83 The retained amount of the CGT exempt component will be assessed against the taxpayers RBL. A taxpayers RBL refers to the amount of concessionally taxed superannuation benefits he or she can receive. The provisions that relate to RBLs are contained in Division14 of PartIII of the Act.

1.84 Division 14 is being amended to ensure that the retained amount of the CGTexempt component is counted towards a taxpayers RBL. The CGT exempt component will be defined in section140C to have the same meaning as in section27A. [Item26 of Part1]

1.85 Section 140F applies so that the retained amount of the CGTexempt component of the ETP will be appropriately worked out under section27AC.

RBL notification requirements

1.86 Subject to certain exceptions, SubdivisionC of Division14 requires the payer of a benefit to notify the Commissioner of the payment of the benefit. A 'payer' is defined in section140C as a person or other entity that makes, or is liable to make, a payment of a benefit. The definition of 'payer' is amended to include an individual who receives a benefit that is an ETP because of new subsection160ZZPZE(4) . This amendment is necessary to ensure that Division14 will apply appropriately if the payer and the person receiving the benefit are the same taxpayer, as will be the case of a sole proprietor or a partner who receives a CGT exempt component of an ETP. [Item27 of Part1]

1.87 Section 140D provides that a payer is not taken to have made an ETP to the extent that it is rolled-over. In these circumstances the ETP does not have to be reported, and consequently is not counted, for RBL purposes. Section140ZH defines when a particular component of an ETP has been rolled-over and is being amended so that it applies appropriately to the amount of the CGT exempt component that is rolled-over. [Item28 of Part1]

1.88 To the extent that the CGT exempt component is not rolled over the payer must, regardless of the amount, notify the Commissioner. Subsection140M(1)(a) is amended to include any ETPs that include a CGTexempt component [Items29 and 30 of Part 1] .

1.89 In addition, new subsection140M(6) will be inserted to apply to an ETP that is taken to have been made to a person under new subsection160ZZPZE(4) . In these circumstances the payer and the recipient are the same person. New subsection140M(6) provides that:

•

the person is taken to be the payer of the ETP; and

•

the notice to be given in subsection 140M(1) must be given to the Commissioner before the end of the 14th day of the month after the payment month, or before the end of such further period as the Commissioner allows.

[Item 31 of Part 1]

1.90 Section 140N is amended to provide for the automatic quotation of the person's tax file number if the CGT exempt amount is made to a person under new subsection160ZZPZE(4) . This is because the payer and the recipient are the same person. [Item32 of Part1]

1.91 Section 140P requires a payer of a benefit to provide a copy of a notice to the recipient. This section will not apply if the benefit is an ETP made to a person under new subsection160ZZPZE(4) . This is because the payer and the recipient are the same person. [Item33 of Part1] How much of the CGT exempt component is counted towards the person's RBL?

1.92 SubdivisionH of Division14 applies to work out the RBL amount of an ETP, superannuation pension or annuity. The RBL amount of an ETP, superannuation pension or annuity is the amount of the benefit that is counted for RBL purposes.

1.93 The RBL amount is worked out under:

•

if the benefit is an ETP paid by a superannuation fund, RSA or ADF section 140ZH;

•

if the benefit is an ETP paid by a life assurance company or registered organisation - section 140ZI;

•

if the benefit is an ETP paid by an employer section 140ZJ;

•

if the benefit is a superannuation pension other than a disability superannuation pension - section140ZK;

•

if the benefit is a disability superannuation pension - section 140ZL;

•

if the benefit is an annuity - section 140ZM.

1.94 If the CGT exempt component is paid out as an ETP or is included in the purchase price of an annuity, the RBL amount will include 100% of the retained amount of the CGT exempt component. [Items 34 to 37 and 39 to 41 of Part1]

1.95 If the CGT exempt component is paid out as an ETP that arises because of new subsection160ZZPZE(4) , new section140ZJA will apply so that the RBL amount of the ETP is 100% of the retained amount of the CGT component of the ETP. [Item 38 of Part 1]

1.96 The RBL amount of a superannuation pension worked out under section140ZK and section140ZL is based on the capital value of the pension worked out under section140ZO. The capital value of a pension is, broadly, the present value of the pension reduced by the undeducted purchase price (UPP).

1.97 The CGT exempt component of an ETP that is used to purchase a superannuation pension will be part of the UPP of the pension under the definition of 'undeducted purchase price' in subsection27A(1). Therefore, the definitions of 'Undeducted purchase price' in subsection140ZO(1) and 'Excess undeducted purchase price' in subsection140ZO(3) will be amended so that the CGT exempt component is included in the capital value of the pension under section140ZO. [Items42 and43 of Part1]

Chapter 2 - Sale of mining rights

Overview

2.1 Schedule 2 of the Bill will ensure that, where income is derived from the sale, transfer or assignment (referred to as "sale") of rights to mine for gold or for any prescribed metal or prescribed mineral, and those rights were acquired before 7.30 pm by legal time in the Australian Capital Territory on 20 August 1996 (referred to as 20 August 1996 in this Chapter), the income will be exempt from income tax under paragraph 23(pa) of the Income Tax Assessment Act 1936 (36 Act) and section 330-60 of the Income Tax Assessment Act 1997 (97 Act):

•

to the extent to which it would have been exempt, had those rights been sold for their market value on 20 August 1996;

•

provided the income is derived before 20 August 2001; and

•

provided that the person to whom the exemption applies was a bona fide prospector on or before 20 August 1996 and also when the income was derived.

Summary of the amendments

Purpose of the amendments

2.2 The purpose of the amendments is to ensure that:

•

the Senate amendment on 12 December 1996 to paragraph 23(pa) of the 36 Act is given its intended effect; and

•

the 97 Act continues that effect from 1 July 1997.

Date of effect

2.3 The amendments will commence from Royal Assent and will apply to income derived by a bona fide prospector under a contract for sale entered into after 20 August 1996.

Background to the legislation

2.4 Before 20 August 1996, paragraph 23(pa) exempted income derived from the sale of rights to mine for gold or for any prescribed metal or prescribed mineral. This exemption only applied to sales by 'bona-fide' prospectors, as defined in the law.

2.5 On 20 August 1996, the Government announced the removal of the paragraph 23(pa) exemption in respect of income derived under a contract for sale entered into after that time. The Senate amended the Bill which was to implement the Government's proposal. The Senate's amendment purported to:

•

completely remove the paragraph 23(pa) exemption for income derived after 19 August 2001; and

•

exempt from tax, until 19 August 2001 inclusive, the income that would have been derived if the rights, which had been purchased before 20 August 1996, had been sold for their market value at 20 August 1996.

2.6 This exemption was made subject to the proviso that the person to whom the exemption applies, was a bona fide prospector on or before 20 August 1996 and also when the income was derived. The proviso that the person is a bona fide prospector when deriving the income has always existed.

2.7 The words used in the Senate amendment did not produce the intended result. The effect of the amendment is that, where a bona fide prospector sells a right to mine for even $1 above the market value at 20 August 1996, then the whole of the income derived is subject to income tax.

2.8 The 97 Act, which applies from 1 July 1997, contains a rewrite of the provisions dealing with this exemption. This provision is in section 330-60. An amendment to the 97 Act is therefore required to give the same outcome for the 1997-98 and later income years as is being proposed in the amendments to the 36 Act.

Explanation of the amendments

2.9 The amendments will ensure that income that would have been exempt if the rights to mine had been sold for market value on 20 August 1996 will remain exempt provided those rights are sold and the income is derived before 20 August 2001. This exemption is subject to the proviso that the person, to whom the exemption applies, was a bona fide prospector on or before 20 August 1996 and also when the income is derived. [Items 1, 3 and 4]

2.10 The amendments will only apply to income derived under contracts for sale entered into after 20 August 1996.

2.11 Income derived under contracts entered into on or before 20 August 1996 is not affected by these amendments. [Item 5]

2.12 The amendments also limit the reduction of exempt income from the sale of mining rights where any exploration and prospecting expenditure (EPE) was incurred in relation to general mining and quarrying. [Item 4]

Reduction of exempt income

2.13 The 97 Act at paragraph 330-60(2)(b) requires the exempt income to be reduced by general mining EPE that was, or can be, deducted from other income under section 122J of the 36 Act. Without an amendment to the 97 Act, exempt income derived up to 20 August 1996 would be reduced by the amount of:

•

general mining EPE incurred both before and after 20 August 1996; and

•

only the amount of quarrying EPE incurred up to 30 June 1997.

This framework does not properly cater for contracts for the sale of mining rights both up to and after 20 August 1996.

2.14 The amendments to the 97 Act will ensure that, for contracts for sale after 20 August 1996, the exempt income is only reduced by general mining and quarrying EPE incurred before 20 August 1996 [items 3 and4] . This amendment recognises that, as income derived after 20 August 1996 is assessable, EPE incurred after that time should be deductible.

2.15 The same principle will be adopted in applying paragraph 23(pa) of the 36 Act to determine the amount of exempt income from the sale of a mining right. Namely, the exempt income will only be reduced by general mining and quarrying EPE incurred before 20 August 1996.

2.16 Paragraph 330-60(2)(b) as enacted reduces the exempt income by only general mining EPE that is deductible under section 122J of the 36 Act. The 36 Act however, reduces the exempt income by general mining and quarrying EPE incurred under Division 10 of Part III of the 36 Act. The amendments will provide consistency in the operation of the law contained in the 36 and 97 Acts. The exempt income under the 97 Act, for contracts for sale up to 20 August 1996, will be reduced by EPE that has been or can be deducted under Division 10 of Part III of the 36 Act. This includes EPE within the meaning of both sections 122J (general mining) and 122JF (quarrying). [Items 6 & 7]

2.17 Both paragraph 23(pa) of the 36 Act and section 330-60 of the 97 Act are not repealed. References to these provisions in other parts of those Acts will have continuing operation, such as provisions calculating the amount of undeducted EPE or unrecouped capital expenditure.

Chapter 3 - Family tax initiative

Overview

3.1 Schedule 3 of the Bill will make amendments to sections 23AF and 23AG of the Income Tax Assessment Act 1936 (the Act), which are consequential upon the introduction of family tax assistance. Other amendments in relation to family tax assistance are contained in the Income Tax Rates Amendment Bill (No. 1) 1997.

Summary of the amendments

Purpose of the amendments

3.2 The purpose of these amendments is to give taxpayers covered by sections 23AF and 23AG of the Act the proper amount of family tax assistance (FTA) entitlements.

Date of effect

3.3 1 January 1997.

Background to the legislation

3.4 The family tax initiative commenced on 1 January 1997. It has two components - FTA which is delivered through the tax system, usually in the form of an increase in the tax-free threshold; and family tax payments, which are cash payments delivered by the Department of Social Security.

3.5 The main provisions for FTA are contained in Division 5 of Part II of the Income Tax Rates Act 1986 (the Rates Act).

3.6 Broadly speaking, section 23AF of the Act exempts "eligible foreign remuneration" derived by a natural person from employment on an approved overseas project. To qualify for the exemption, a person must be an Australian resident and work on the approved project continuously for a period of at least 91 days.

3.7 Section 23AG of the Act exempts certain foreign earnings derived by a natural person from foreign service, when the person has been engaged in the foreign service for a continuous period of at least 91 days and is an Australian resident.

3.8 If section 23AF or 23AG applies to a taxpayer, the amount of tax payable on the taxpayer's other (non-exempt) taxable income is calculated according to formulae contained in subsections 23AF(17A) and 23AG(3) respectively. The formulae apply to the taxpayer's other taxable income, the rate that would have been the average rate of tax of the taxpayer if the foreign earnings were not exempt. The average rate is calculated as "notional gross tax" divided by "notional gross taxable income".

3.9 As the law stands, FTA is taken into account in the calculation of "notional gross tax". Allowing FTA at this point in the calculation means that taxpayers covered by sections 23AF and 23AG receive any FTA benefits at an average rate, instead of at the lowest marginal rate.

Explanation of the amendments

3.10 Items 1 and 2 of Schedule 4 will amend section 23AF of the Act. Items 3 and 4 will amend section 23AG. The amendments to each section will be identical.

3.11 Firstly, "notional gross tax" will be calculated on the basis that the taxpayer is not entitled to any FTA benefits . [Items 1 and 3]

3.12 Then, if the taxpayer would otherwise be eligible for FTA, the amount of tax payable will be reduced by an amount calculated according to the following formula:

tax-free threshold increase x lowest marginal rate


where:

•

"tax-free threshold increase" is the amount by which the taxpayer's threshold would have been increased under Division 5 of Part II of the Rates Act, if the taxpayer had been liable to tax at normal marginal rates; and

•

"lowest marginal rate", currently 20%, is the lowest rate in the table of marginal rates in clause 1, Part I, Schedule 7 to the Rates Act. [New subsections 23AF(17D), 23AF(17E), 23AG(5A) and 23AG(5B)]

3.13 For example, a qualifying taxpayer who had 2 dependent children both over 5 years old would normally be entitled to an increase in the tax-free threshold of $2,000. If the taxpayer fell within section 23AF or 23AG, the amount of tax payable by the taxpayer would be reduced by

$2,000 x 20%


i.e. $400. This is the same amount of benefit that the taxpayer would receive in respect of 2 dependent children, if the taxpayer paid tax at normal marginal rates.

Chapter 4 - Dividend imputation and tax exempt entities

Overview

4.1 Part 1 of Schedule 4 of the Bill will amend Schedule 2D, Division 57 of the Income Tax Assessment Act 1936 (the Act) and will insert section 160AQCO into the Act. The provisions will:

•

cancel the franking surpluses of taxable wholly owned subsidiaries of a tax exempt entity when that tax exempt entity becomes subject to tax on any part of its income [item 2] ; and

•

cancel the franking surplus when a taxable subsidiary company ceases to be wholly owned by a tax exempt entity [item 1] .

Summary of the amendments

Purpose of the amendments

4.2 The purpose of the amendments is to ensure that franking credits which have accumulated in companies and which are related to a period during which they were wholly owned by tax exempt entities, are not able to be passed to third parties.

Date of effect

4.3 The amendments will apply to entities which cease to be wholly owned by tax exempt entities on or after 3 July 1995.

Background to the legislation

4.4 The imputation system aims to ensure that only one layer of tax is paid by a shareholder on company profits. Where a taxable company is, directly or through other entities, wholly owned by a tax exempt entity there will only be one layer of tax borne by that shareholder on the company profits. Franking credits are not required in these cases to relieve against double taxation.

4.5 In the 1996-97 Budget the Government announced its intention to introduce provisions to deal with transition issues of tax exempt entities which become taxable. Those amendments were introduced in Taxation Laws Amendment Bill (No. 3) 1996. These amendments were foreshadowed when those provisions were introduced.

Explanation of the amendments

Exempt entity which becomes taxable

4.6 Item 2 inserts new Subdivision 57-M into Schedule 2D, Division 57 of the Act. Division 57 deals with the transition issues of tax exempt entities which become, to any extent, subject to income tax.

4.7 The point of transition from exempt to taxable status is referred to as the 'transition time' and an entity is known as the 'transition taxpayer' (see paragraphs 57-5(c) and (d) of the Act).

4.8 The amendments will ensure that, where the transition taxpayer, or a subsidiary of the transition taxpayer, has a franking surplus immediately before the transition time, that surplus will be reduced to nil at the transition time. [New subsection 57-120(1)]

4.9 New section 57-125 defines what a subsidiary is for the purposes of the Subdivision.

4.10 New subsection 57-120(2) will ensure that only those franking credits that relate to the period after the transition time can be used by a company after its transition time. As a result, any franking credits that arise after the transition time that are attributable to any extent to the period before the transition time are taken not to have arisen.

4.11 New subsections 57-120(2), (3) and (4) will have the effect of cancelling a franking debit that arises after a company's transition time where:

•

that debit is attributable to the period before the transition time; and

•

the company's franking surplus at the transition time is more than the amount of the franking debit.

4.12 Conversely, if a franking surplus of a transition taxpayer or its subsidiary at transition time is less than the amount of a franking debit that arises after transition time and is attributable to the period before transition time, the franking surplus is not reduced to nil at the transition time. Rather, it is used to offset the amount of the franking debit. [New subsections 57-120(3) and (4)]

4.13 These provisions recognise that, had the franking debit arisen immediately before the transition time, the company would have been able to use its available franking surplus to absorb the effect of the franking debit.

4.14 New subsections 57-120(3) and (4) will not, however, cancel franking debits that are attributable to the period before the transition time where a company did not have a franking surplus immediately before its transition time (ie. the company's franking account balance was nil or in deficit). This means that a company cannot avoid liability to fra nking deficit tax by ensuring that a franking debit attributable to the period before its transition time does not arise until after its transition time.

4.15 New subsection 57-120(5) ensures that certain terms used in new section 57-120 have the same meaning as in Part IIIAA of the Act.

Disposal of a subsidiary by an exempt company

4.16 Item 1 inserts new Subdivision D into Division 2 of Part IIIAA of the Act. New section 160AQCO applies to a situation where a company which is wholly exempt from income tax (the 'exempt company' [new paragraph 160AQCO(1)(a)] ) disposes of a taxable subsidiary company (the 'former subsidiary' [new paragraph 160AQCO(1)(b)] ).

4.17 In that situation, any franking surplus of the former subsidiary is reduced to nil at the time it ceases to be a subsidiary [new subsection 160AQCO(2)] . The time at which the company ceases to be a subsidiary of the exempt company is the 'transition time' [new paragraphs 160AQCO(1)(a) and (b)] .

4.18 The term 'exempt company' is defined to include a State or Territory [new subsection 160AQCO(5)] . This ensures the application of the provisions to situations where, for example, a State Government sells any of the shares in a taxable company which it directly (wholly) owns.

4.19 An exempt company (A) may have a wholly owned taxable subsidiary (B) which itself has a wholly owned taxable subsidiary (C) and C has a franking surplus. If the shares in C are disposed of to a third (taxable) party, the franking surplus of C will not be reduced to nil. This is because immediately before the transition time, all of the shares in C were not beneficially owned by companies which were wholly exempt from income tax as required in new paragraph 160AQCO(1)(d) .

4.20 Apart from those aspects mentioned above, new section 160AQCO operates in the same way as new section 57-120 . For instance, new subsection 160AQCO(2) operates in the same way as new subsection 57-120(1), new subsection 160AQCO(3) operates in the same way as new subsection 57-120(2) and new subsection 160AQCO(4) operates in the same way as new subsections 57-120(3) and (4) .

Chapter 5 - Principal residence exemption from CGT

Overview

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

•

extend the qualifying period for the capital gains tax (CGT) exemption on disposal of an inherited house from 12 months to 2 years;

•

provide a partial CGT exemption for trustees and beneficiaries of deceased estates where the deceased never used the dwelling as a principal residence but beneficiaries of the deceased do so;

•

treat a beneficiary or trustee who acquires a dwelling as a result of a death as having acquired the dwelling at its market value on the date of death if it was (or is deemed to be) wholly the principal residence of the deceased at the time of death; and

•

require the use of market value as the cost base where a person's principal residence is first used for income producing purposes.

Summary of the amendments

Purpose of the amendments

5.2 The amendments contained in Schedule 5 of the Bill:

•

extend from 12 months to 2 years the period in which a beneficiary or trustee of a deceased estate can dispose of the deceased's principal residence and still claim a full or part CGT exemption without the dwelling having been used as a principal residence after death [Division 1 of Part 1] ;

•

provide a new partial CGT exemption to beneficiaries and trustees of deceased estates for the period that the dwelling was used as a principal residence after the death of the deceased where the deceased never used the dwelling as a principal residence [Division 2 of Part 1] ;

•

provide a new CGT exemption to beneficiaries and trustees of deceased estates for the period before death where the dwelling was or was taken to be the deceased's principal residence at death and was not regarded as then being used for income producing purposes [Division 3 of Part 1] ; and

•

provide a market value cost base at the first time a principal residence is used for income producing purposes [Division 4 of Part 1] .

Date of effect

5.3 The amendments will:

•

extend the 12 month period to 2 years for disposals after 7.30 pm, 20 August 1996 (by legal time in the Australian Capital Territory) [item 34(1), Part 2] ;

•

provide a new partial CGT exemption applying when a dwelling that was never used by the deceased as a principal residence is disposed of after 7.30 pm, 20 August 1996 (by legal time in the Australian Capital Territory) [item 34(1), Part 2] ;

•

provide a new CGT exemption to beneficiaries and trustees of deceased estates for the pre-death period where the deceased's principal residence was acquired by the beneficiary or trustee after 7.30 pm, 20 August 1996 (by legal time in the Australian Capital Territory) [item 34(2), Part 2] ; and

•

provide a market value cost base at the first time a principal residence is used by the taxpayer for income producing purposes after 7.30 pm, 20 August 1996 (by legal time in the Australian Capital Territory) [item 34(3), Part 2] .

Background to the principal residence exemption

5.4 Part IIIA of the Act brings to tax real gains realised on the disposal of certain assets acquired on or after 20 September 1985.

5.5 Section 160ZZQ of the Act, among other things, fully exempts from CGT a capital gain (or loss) on the disposal of a dwelling owned and used by a taxpayer as his or her principal residence (subsection 160ZZQ(12)).

5.6 Section 160ZZQ also:

•

provides a partial exemption from capital gains (and losses) on the disposal of a dwelling owned and partly used by a taxpayer as his or her principal residence (subsection 160ZZQ(16)); and

•

contains special provisions dealing with income producing principal residences (subsections 160ZZQ(11) and (21)) and inherited principal residences (subsections 160ZZQ(13), (13A), (14), (15), (17), (17A), (18), (19), (20) and (20C)).

Income producing principal residences

5.7 The principal residence exemption generally only applies to the extent that a dwelling was a taxpayer's principal residence (other than temporary absences - see subsections 160ZZQ(8) and (11)). The CGT provisions contain rules to apportion a capital gain or loss if the dwelling was partly used for income producing purposes (subsection 160ZZQ(21)).

Inherited principal residences

5.8 In most cases, death of a taxpayer will not attract CGT.

5.9 If, however, the deceased died on or after 20 September 1985 the dwelling will be taken to have been acquired by the beneficiary or legal personal representative at the time of death (see subsection 160X(5)). As a result, the beneficiary or legal personal representative may become liable to CGT if the dwelling is ultimately disposed of.

5.10 Broadly, if the dwelling was acquired by the deceased taxpayer before 20 September 1985, it will be taken to have been acquired by the beneficiary or legal personal representative at its market value at death (see paragraph 160X(5)(a)). If the dwelling was acquired by the deceased on or after 20 September 1985, the beneficiary or legal personal representative will be taken to have acquired the dwelling for its cost base, indexed cost base or reduced cost base (as appropriate) in the hand s of the deceased.

Full CGT exemption

5.11 Section 160ZZQ currently fully exempts a capital gain (or loss) on the disposal by a beneficiary or trustee of a deceased estate, of a dwelling that was the principal residence of the deceased person or was a pre-CGT dwelling if either:

•

the dwelling is disposed of within 12 months of the deceased's death (subsections 160ZZQ(14) and (15)); or

•

the dwelling is not disposed of within 12 months of the deceased's death but is used after the deceased's death as a principal residence by the beneficiary, another person entitled to do so under the deceased's will or the spouse of the deceased (subsections 160ZZQ(13), (13A) and (15)).

5.12 Unless the dwelling was acquired by the deceased person before 20 September 1985, a full exemption will usually only be available if the dwelling was the deceased person's principal residence for the entire time he or she owned it.

5.13 Subsection 160ZZQ(20C) also contains a full exemption in respect of a disposal of a principal residence by a trustee of a deceased estate where the dwelling was acquired by the trustee pursuant to the will of the deceased for occupation by another person and it is disposed of otherwise than to that person for no consideration.

Partial CGT exemption

5.14 A partial exemption from CGT is available if the deceased did not use the dwelling as his or her principal residence for the entire time he or she owned it. Similarly, a partial exemption is available if the dwelling is bequeathed to someone who does not use it as a principal residence and it is disposed of more than 12 months after the date of death. The partial exemption is available to the extent that the dwelling was a principal residence of the deceased, the beneficiary, another person entitled to occupy the dwelling under the deceased's will or the spouse of the deceased.

5.15 The partial exemptions are contained in subsections 160ZZQ(17), (17A), (18), (19), (20) and (20C).

Background to the amendments

The 12 month to 2 year extension

5.16 Beneficiaries and trustees of deceased estates may have difficulty arranging the orderly sale of the deceased's principal residence within the current 12 month period. These amendments will give beneficiaries and trustees more time to make appropriate arrangements by extending the current time limit by 12 months. [Division 1 of Part 1]

Deceased never used the dwelling as a principal residence

5.17 The partial exemptions in subsections 160ZZQ(17), (17A) and (19) currently do not apply if the deceased person did not use a post-CGT dwelling as a principal residence but after death the dwelling was used as a principal residence for the period until disposal. As a result, if the dwelling is passed to a beneficiary or trustee of the person's estate and is used as a principal residence by the beneficiary, another person entitled to do so under the deceased's will or the spouse of the deceased, that use as a principal residence will not attract any CGT exemption.

5.18 Any capital gain accruing during the period that the dwelling is used as a principal residence is subject to CGT. This CGT result is the same irrespective of whether the beneficiary or trustee sells the dwelling within or outside the (current) 12 month exemption period.

5.19 The proposed amendments will ensure that the use of the dwelling as principal residence will be recognised and will attract a partial exemption from CGT. [Division 2 of Part 1]

Market value at death

5.20 Section 160X of the Act currently requires the beneficiary or trustee of a deceased estate to calculate the relevant cost base for the purposes of the CGT provisions:

•

if the dwelling is a pre-CGT asset, it will be taken to have been acquired for its market value at the time of death;

•

if the dwelling is a post-CGT asset, it will be taken to have been acquired for the relevant cost base that would arise if the deceased had disposed of the dwelling immediately before death:

•

when working out if a capital gain has accrued, the cost base or indexed cost base; or

•

when working out if a capital loss has accrued, the reduced cost base.

5.21 This current law imposes two major compliance burdens on the beneficiary or trustee:

•

the beneficiary or trustee must obtain records of the cost of acquiring the dwelling, of any improvements, and of incidental costs for expenses such as rates and interest, that were incurred over the time since the dwelling was acquired; and

•

the beneficiary or trustee must be able work out the period that the dwelling was used as the principal residence of the deceased (and if necessary, previous owners, where the dwelling was inherited by the deceased).

5.22 The deceased may have kept no records because it would (in the case where the dwelling was the principal residence of the deceased) have been exempt if the deceased had disposed of the dwelling or the deceased may not have anticipated that the dwelling would cease to be their principal residence.

5.23 The amendments will alleviate these difficulties by removing the need to work out the relevant cost base of the dwelling. Trustees and beneficiaries who acquire a dwelling, which at the time of death was the deceased's principal residence and was not then used for income producing purposes, will be treated as having acquired it at its market value at the time of death. In addition, any periods prior to death where the dwelling was not used as a principal residence, or where it was used for income producing purposes will be ignored for the purposes of working out whether a CGT exemption applies and the extent of the exemption. [Division 3 of Part 1]

Market value at first income time

5.24 Where a tax payer starts using a principal residence (which is subject to a full CGT exemption) for income producing purposes, the taxpayer requires appropriate records of expenses that form part of the cost base of the dwelling so they can work out their CGT liability (if any).

5.25 Often the taxpayer would not have contemplated that the dwelling would be used for income producing purposes and would not have retained the necessary records. In particular, costs of improvements (such as extensions, pergolas and fencing) and other incidental costs (such as rates, land taxes and repairs) which also form part of the cost base may not be readily obtainable especially if the dwelling is disposed of some time after the expenses were incurred.

5.26 The amendments will remove the requirement to retain these records. Under the proposed new rules, taxpayers who first use their principal residence for income producing purposes will be required to calculate any CGT liability on the basis that they acquired the dwelling at the time it was first used for income production for a consideration equal to its market value at that time. [Division 4 of Part 1]

Explanation of the amendments

The 12 month to 2 year extension

5.27 If a trustee of a deceased estate or a beneficiary acquires (inherits) a deceased's principal residence, the trustee or beneficiary currently has 12 months to dispose of that dwelling without attracting CGT (see paragraph 160ZZQ(14)(b) and subparagraph 160ZZQ(15)(b)(i)).

5.28 In addition, a partial exemption is available where the dwelling is disposed of inside the current 12 month limit, but the dwelling was not used by the deceased for the whole period as a principal residence (see paragraphs 160ZZQ(18)(b) and (20)(b)).

5.29 The amendments will extend the time in which the dwelling must be disposed of from 12 months to 2 years. [Item 1]

5.30 The extension from 12 months to 2 years applies only to disposals after 7.30 pm, 20 August 1996 (by legal time in the Australian Capital Territory) [item 34(1)] . Disposals before this time are subject to the current 12 month period.

5.31 Because the amendment applies to disposals by trustees and beneficiaries after 20 August 1996, beneficiaries and trustees of deceased estates who acquired a principal residence after 7.30 pm, 20 August 1994 (by legal time in the Australian Capital Territory) may be able to take advantage of the new time limit.

Deceased never used the dwelling as a principal residence

5.32 This amendment will expand the available CGT principal residence exemptions by introducing a new partial exemption. [Items 2 to 14]

5.33 The new partial CGT exemption will apply to the disposal of a post-CGT dwelling by a beneficiary or trustee of a deceased estate where the deceased never used the dwelling as a principal residence but the beneficiary, another person entitled to do so under the deceased's will or the spouse of the deceased does. Under the current law, no exemption is available to recognise this use.

5.34 The new partial CGT exemption is only available for disposals after 7.30 pm, 20 August 1996 (by legal time in the Australian Capital Territory). [Item 34(1)]

5.35 The exemption is not necessary for disposals of pre-CGT dwellings as currently a full or part CGT exemption may apply to a beneficiary or trustee of a deceased estate who disposes of such a dwelling depending on the use made of the dwelling after death (see paragraph 160X(5)(a) and the inherited exemptions in subsections 160ZZQ(13), (13A), (17), (17A), (19), subparagraph 160ZZQ(15)(b)(ii) and paragraph 160ZZQ(20C)(b)).

5.36 The period that the dwelling is used as a principal residence is pro-rated over the period since the deceased acquired the dwelling (eg. the number of days the dwelling was used as a principal residence by the beneficiary divided by the number of days combined ownership of the deceased and the beneficiary).

5.37 Subject to special rules governing income producing use made of a principal residence, there are currently two general principles behind the principal residence exemptions set out in section 160ZZQ of the Act:

•

use made of a dwelling as a principal residence by a living owner, a deceased owner, a beneficiary of a deceased estate, a person entitled to occupy the dwelling under the deceased's will or the spouse of the deceased (as appropriate) will be recognised for the purposes of working out whether a full or part CGT exemption applies. A full exemption will apply where this use spans the whole of the ownership period, otherwise only a part exemption will apply ("the pro-rata rule") .

•

where an inherited principal residence is disposed of within 2 years of the death of the deceased, the period after death is ignored for the purposes of working out whether a full or part CGT exemption applies. A full exemption will apply where the deceased used the dwelling as a principal residence for the whole of their ownership period, otherwise a part exemption will apply if their use was for only part of the ownership period ( "the 2 year rule" ).

The pro-rata rule

5.38 Subsections 160ZZQ(12), (13), (13A) and subparagraphs 160ZZQ(15)(b)(ii) and (20C)(b)(i) provide full CGT exemptions for principal residence use covered by the pro-rata rule.

5.39 Subsections 160ZZQ(16), (17), (17A), (19) and subparagraph 160ZZQ(20C)(b)(ii) provide part CGT exemptions for principal residence use covered by the pro-rata rule.

The 2 year rule

5.40 Subsections 160ZZQ(14) and subparagraph 160ZZQ(15)(b)(i) provide full CGT exemptions under the 2 year rule.

5.41 Subsections 160ZZQ(18) and (20) provide part CGT exemptions under the 2 year rule.

5.42 Currently, there is some ambiguity concerning whether subsections 160ZZQ(17), (17A) and (19) reflect completely the pro-rata rule in circumstances where a dwel ling is inherited. The amendments remove this ambiguity. [Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13]

5.43 Subsection 160ZZQ(20A) provides that where a part exemption under the pro-rata rule and a part exemption under the 2 year rule both apply to a disposal of a dwelling, only that part exemption which deems the smaller capital gain or larger capital loss applies. The subsection is amended to recognise that the part exemption in subsection 160ZZQ(17) and the part exemption in subsection 160ZZQ(18) may now apply to the same disposal. [Items 2 and 14]

Market value at death

5.44 The amendments in items 15 to 30 will remove the need for beneficiaries and trustees to work out the cost base of the deceased person's principal residence for CGT purposes.

5.45 If a beneficiary or trustee of a deceased estate disposes of a post-CGT dwelling that was the deceased's principal residence at death and was not regarded (at time of death) as being used for income producing purposes, a new CGT exemption will apply for the period before death. The dwelling will be taken to have been acquired at death for its market value. [Items 15 to 30]

5.46 Any future capital gain or loss would be calculated by reference to this market value.

5.47 When working out if the deceased's principal residence will qualify for this new exemption, a dwelling will not be regarded as being used at death for income producing purposes where the dwelling was rented out for less than 6 years in accordance with subsection 160ZZQ(11). However a dwelling will be regarded as being used at death for income producing purposes where the dwelling is being lived in by the deceased and also being used for business purposes (eg. as a doctor's surgery) in accordance with subsection 160ZZQ(21).

5.48 The new exemption will only apply to principal residences that have passed to the beneficiary or trustee of the deceased estate after 7.30 pm, 20 August 1996 (by legal time in t he Australian Capital Territory). [Item 34(3)]

5.49 Under the current CGT exemption, the dwelling must have always been (or taken to have been) the deceased's principal residence during their ownership of the dwelling and must never have been regarded as being used for income producing purposes. Also the dwelling was taken to have been acquired at death for the indexed cost base in the hands of the deceased (rather than the market value of the dwelling at death).

5.50 The new CGT exemption is not necessary for acquisitions of pre-CGT dwellings as currently a full CGT exemption for the period before death (with a market value cost base at death) applies.

5.51 Depending on the use made of the dwelling after death, a full or part CGT exemption will apply in respect of the dwelling. A market valuation will not be necessary if a full CGT exemption applies.

5.52 The amendments also address an existing anomaly in section 160ZZQ of the Act. Under the current law, the period when a dwelling was the principal residence of the deceased is subject to capital gains tax if the dwelling was bequeathed to someone who does not use it as a principal residence and it is disposed of more than 12 months after the death of the deceased (the full CGT exemptions in subsections 160ZZQ(13), (13A) and (15) do not address this situation).

5.53 As a result of the amendments made by items 5, 6, 9 and 12 , this result will no longer arise. Subsections 160ZZQ(17), (17A) and (19) will now cover the situation where the deceased's principal residence was not used after death and disposed of more than 2 years after death. The effect will be that only the capital gain relating to the period after death will be subject to CGT. This approach is consistent with the underlying policy of only bringing to tax the component of a capital gain on a dwelling that relates to its non principal residence or income producing use.

5.54 The amendments remove the need for beneficiaries and trustees to work out the cost base of the deceased person's principal residence for CGT purposes by:

•

inserting a new market value acquisition date at death into paragraph 160X(5)(a) of the Act [items 15, 16 and 17] ;

•

providing that where the new market value acquisition date at death applies:

•

any income producing use made of the dwelling in the period before death is ignored for the purposes of subsection 160ZZQ(21) but that where the new market value acquisition date at death does not apply, subsection 160ZZQ(21) applies at it applied before these amendments [new paragraph 160ZZQ(21)(f) - item 29, new subsection 160ZZQ(22) - item 30] ;

•

any period that the dwelling was not used as a sole or principal residence before death is ignored for the purposes of the partial CGT exemptions in subsections 160ZZQ(17), (17A) and (19) [new subsection 160ZZQ(20AA) - items 20, 22, 25 and 27] ; and

•

subsection 160ZZQ(20B), which allows the Commissioner to increase or reduce capital gains or losses (as appropriate) to take account of the use made of a dwelling before the deceased acquired the dwelling, does not apply [item 28] ; and

•

replacing the condition in paragraphs 160ZZQ(13)(c), (13A)(c), (14)(c) and (15)(c) (full CGT exemptions) that the dwelling was during the deceased's ownership of the dwelling the sole or principal residence of the deceased, with a new less strict condition that the dwelling was immediately before the death of the deceased the sole or principal residence of the deceased. [Items 18, 19, 21, 23, 24 and 26]

Market value at first income time

5.55 When a taxpayer first uses a principal residence for income producing purposes in a way which immediately does or may detract from a full CGT exemption, the taxpayer will be taken to have acquired the dwelling at that time for its market value. [New paragraph 160ZZQ(20D)(f ) - item 33]

5.56 This new rule will apply when a taxpayer disposes of a post-CGT dwelling (whether the taxpayer purchased the dwelling or inherited the dwelling as a beneficiary or trustee of a deceased estate) that:

•

was first used for income producing purposes by the taxpayer;

•

that first use occurred after 7.30 pm, 20 August 1996 (by legal time in the Australian Capital Territory) [item 34(4)] ;

•

a full CGT exemption would have applied if the taxpayer had disposed of the dwelling immediately before the taxpayer first used it for income producing purposes; and

•

the eventual disposal is not covered by a full CGT exemption as set out in subsection 160ZZQ(14) or subparagraph 160ZZQ(15)(b)(i).

5.57 If this new rule applies, then the dwelling will be taken to have been acquired by the taxpayer at that first income time for its market value. The period before that time (including any time when a deceased person owned the dwelling) is to be disregarded. [New paragraph 160ZZQ(20D)(f) - item 33]

5.58 Any future capital gain or loss will be calculated by reference to this market value.

5.59 The market value cost base is not necessary for disposals of pre-CGT dwellings as currently a full CGT exemption for the period before disposal of the dwelling applies.

5.60 Depending on the nature and length of the income producing use, a full or part CGT exemption will apply in respect of the principal residence. For example if the income producing use is the rental of the principal residence for 2 years, then subsection 160ZZQ(11) may have the effect that a full CGT exemption is maintained. If the income producing use is a doctor's surgery on part of the principal residence, then subsection 160ZZQ(21) may have the effect that only a part CGT exemption applies.

5.61 If this new rule applies to a principal residence that has been inherited, the inherited exemptions in subsections 160ZZQ(13), (13A), (14), (15), (17), (17A), (18), (19), (20) and (20C) will be unavailable but instead the non-inherited exemptions set out in subsections 160ZZQ(12) and (16) will be available. This is because the taxpayer is deemed to have re-acquired the dwelling at the first income time other than as a beneficiary or trustee of the deceased's estate. [New paragraph 160ZZQ(20D)(g) - item 33]

5.62 Which of subsections 160ZZQ(12) and (16) will apply (if any), will depend on the use made of the dwelling after the first income time and the nature of the income producing use (ie. whether it falls within subsections 160ZZQ(11) or (21)).

5.63 The new rule does not apply to disposals covered by a full CGT exemption as set out in subsection 160ZZQ(14) or subparagraph 160ZZQ(15)(b)(i). [New paragraph 160ZZQ(20D)(e) - item 33]

5.64 Subsection 160ZZQ(14) and subparagraph (15)(b)(i) exempt any period that the dwelling was not a sole or principal residence of the taxpayer in the 12 month period (or 2 year period after these amendments are made) mentioned in those subsections whereas the new rule would subject this period to capital gains tax. The exclusion is necessary to ensure that this period remains exempt from CGT.

Consequential amendments

5.65 Paragraph (a) of subsection 160ZZQ(11) is amended to ensure that a reference to a dwelling ceasing to be the sole or principal residence of the taxpayer in subsection 160ZZQ(11) applies regardless of new subsection 160ZZQ(20D) deeming the taxpayer to have acquired the dwelling at the same time. [Item 31]

5.66 Subsection 160ZZQ(11) is amended to ensure that the subsection does not apply to new subsection 160ZZQ(20D) which deems the taxpayer to have acquired a dwelling at the first income producing use time, a time which may otherwise be disregarded by the effect of paragraph 160ZZQ(11)(g). [Item 32]

Chapter 6 - Treatment of payments made under firearms surrender arrangements

Overview

6.1 Schedule 6 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) to provide for the taxation treatment of payments made under the firearms surrender arrangements. The Bill will also make consequential amendments to the Income Tax Assessment Act 1997.

Summary of the amendments

Purpose of the amendments

6.2 The amendments will provide that those taxpayers who are not gun dealers and who use firearms either in their business (for example, a farmer or professional shooter) or for private purposes will be exempt from any tax which may arise from the payments received.

6.3 In the case of gun dealers, the effect of the amendments will be that during the income years a firearm is held as trading stock, the taxable income in respect of that firearm will be zero. Compensation payments received by gun dealers for business lost as a result of the firearms surrender arrangements will be exempt from tax.

Date of effect

6.4 The amendments will apply to the income years during which compensation payments are made under the firearms surrender arrangements. [Items 9 and 13]

Background to the legislation

6.5 At a meeting on 10 May 1996, State and Territory Police Ministers resolved to specify common standards for the control of firearms in their respective jurisdictions. The resolutions were issued on 29 July 1996 by the Commonwealth Law Enforcement Board as the Compensation for the Surrender of Prohibited Firearms Guidelines (the guidelines). Meetings were also held on 17 July 1996 and 15 November 1996.

6.6 The central features of the guidelines are the prohibition of possession and use of all automatic and self-loading rifles and shotguns and pump-action shotguns except in special circumstances and the provision for compensation in respect of, and an amnesty period to enable the surrender of, certain prohibited firearms. Compensation payments may be made to firearms dealers, individual owners and collectors. As an alternative to receiving compensation from the State or Territory governments, individual owners and collectors have the option of consigning their prohibited firearm(s) with a nominated dealer for sale overseas.

6.7 The guidelines state that firearms dealers will be compensated for:

•

prohibited firearms and unusable ammunition, spares, maintenance equipment and manuals held in stock which are specific to those firearms; and

•

any loss in business caused by the prohibition of certain firearms.

The guidelines also state that surrender values for firearms will be the published selling price as at 1 March 1996.

6.8 The legislation to implement the firearms surrender arrangements in the States and Territories is listed below. In some jurisdictions, regulations have also been made in relation to the surrender scheme. Whether provision is made for compensation in legislation or regulations, or whether it is dealt with administratively, will depend on the particular State or Territory.

How does the current tax legislation apply to gun dealers?

6.9 The current provisions of the Act that may affect dealers who receive compensation payments for firearms surrendered are:

•

section 25 - assessable income;

•

sections 28 and 36 - trading stock;

•

section 51 - deductions;

•

sections 54 and 59 - depreciable items; and

•

section 79E - prior year losses.

Assessable income

6.10 Under the existing legislation, a dealer is assessed on sales income under section 25 of the Act and on the disposal of trading stock under section 36 where the disposal is not in the ordinary course of business. Section 25 may also apply to include in assessable income the compensation received for loss of business caused by the prohibition of certain firearms.

Trading stock and allowable deductions

6.11 Subsection 51(1) of the Act allows a deduction for losses and outgoings necessarily incurred in carrying on a business except to the extent that they are losses of a capital, private or domestic nature or are incurred in producing exempt income. Subsection 51(2) provides a deduction for trading stock, for example a firearm, by deeming the expenditure not to be an outgoing of a capital nature.

6.12 The value of a dealer's trading stock on hand at the beginning and end of a year of income are taken into account to determine whether assessable income or an allowable deduction arises under section 28. Where the value of closing stock exceeds the value of opening stock, subsection 28(2) applies to include the excess in assessable income. Where the value of opening stock exceeds the value of closing stock, subsection 28(3) applies to treat the excess as an allowable deduction.

6.13 The effect of sections 28 and 51 is to match the cost of goods sold with the sales income for those goods. Therefore, a deduction is allowed for the cost of guns in the year of disposal. Where guns are purchased and sold in the same year of income, section 28 does not apply while section 51 provides a deduction for the purchase cost against the sale proceeds. Where the guns are sold in a different year to their purchase, sections 28 and 51 apply to have a nil effect on taxable income in the year of acquisition. For the year of disposal, the opening balance of the trading stock account exceeds the closing balance and subsection 28(3) operates to allow a deduction for the excess amount. The deduction is for the cost of the goods sold in that year (see example 1 at paragraph 6.35). Where there is a revaluation of trading stock, the examples at paragraphs 6.39 and 6.44 illustrate how the trading stock account is affected.

Prior year losses

6.14 Under the existing law, section 79E provides that a domestic tax loss incurred in one income year may be carried forward as an allowable deduction against assessable income in succeeding income years. Further, where the taxpayer has derived exempt income in a year, paragraph 79E(3)(b) provides that prior year losses are to be deducted from net exempt income before being allowed as a deduction against assessable income of that year.

How does the current tax legislation apply to non gun dealers?

6.15 Professional farmers and shooters may be affected by the depreciation provisions in sections 54 and 59 and the capital gains tax (CGT) provisions in Part IIIA of the Act. As explained below, the CGT provisions may also impact on other individual gun owners.

Depreciation

6.16 A taxpayer who owns and uses assets, such as firearms, to produce assessable income is entitled to a deduction under section 54 for the depreciation of those assets during the income year. Where the asset is disposed of, lost or destroyed, section 59 provides for a balancing adjustment. The appropriate adjustment is determined after having regard to the consideration received and the depreciated value of the asset at the time of disposal. Where the depreciated value exceeds the consideration received, a deduction for the excess is allowed under subsection 59(1). Where the consideration received exceeds the depreciated value of the firearm, subsection 59(2) operates to include the excess in assess able income.

Capital gains and losses

6.17 For CGT purposes, assets such as firearms may be classified as follows:

6.18 The CGT provisions can currently apply if there is a disposal of an asset that was acquired after 19 September 1985. The asset disposal may result in either a capital gain or a capital loss. A capital gain is included in assessable income and a capital loss may be used to offset a capital gain made in the same or a future year of income.

6.19 Personal-use assets (see table above) are assets that are used primarily for the personal-use of the taxpayer and receive special treatment. Personal-use assets are divided into 'listed personal-use assets' and 'non-listed personal-use assets'.

6.20 Listed personal-use assets are personal-use assets of the types specified in subsection 160B(2) (for example, an antique), where the acquisition cost exceeds $500. A loss arising on disposal of a listed personal-use asset can only be offset against a gain arising from another listed personal-use asset (section 160ZQ).

6.21 Non-listed personal-use assets are deemed to have a minimum cost base or indexed cost base of $10,000 (section 160ZG). Therefore, a capital gain can only arise on disposal of a non-listed personal-use asset if the consideration exceeds $10,000. A capital loss cannot arise in respect of a non-listed personal-use asset (section 160Z).

Explanation of the amendments

6.22 The amendments are in two Parts. Part 1 of Schedule 6 will amend the Income Tax Assessment Act 1936. Part 2 of Schedule 6 will make consequential amendments to the Income Tax Assessment Act 1997.

Interpretative issues

6.23 'Firearms surrender arrangements' is the term used in the proposed amendments to describe:

•

any Commonwealth, State or Territory legislation; or

•

any administrative arrangements of a State or a Territory;

which implement the agreement of Police Ministers to uniform gun laws in Australia, including the surrender of prohibited firearms. A meeting of police ministers was held on 10 May 1996. [Subsection 6(1) - item 1]

Which income will be exempt from tax under the firearms surrender arrangements?

6.24 Under the amendments proposed, those taxpayers (other than taxpayers such as gun dealers) who use firearms in their business or for their private use will be exempt from both income tax and capital gains tax in respect of payments received under the firearms surrender arrangements. The exemption applies whether the payment is a compensation payment made by a State or Territory government or the proceeds of an overseas sale by consignment. [Items 4, 5 and 8]

6.25 An amendment to the general exemption provisions in section 23 of the Act is also proposed to ensure that the compensation payments received by gun dealers for loss of business aretreated as exempt income [new paragraph 23(jd)) - item 2] . In the case of gun dealers who hold firearms as trading stock, the amendments will ensure that during the income years a firearm is held as trading stock, the taxable income in respect of that firearm will be zero [item 3].

How will the taxable income in respect of a firearm be zero?

6.26 Under the current law, over the period for which a firearm is held as trading stock, a dealer's taxable income in relation to the firearm will be the difference between the proceeds of sale and the acquisition cost of the firearm. The income years in which the taxable income arises in relation to a firearm depends on whether the firearm is revalued whilst it is held as trading stock. As demonstrated in the examples below, where the firearm is not revalued, taxable income in relation to the firearm only arises in the year of disposal. On the other hand, where the firearm is revalued as trading stock and is held for more than one year of income, taxable income may arise prior to the year in which the firearm is disposed of.

6.27 The amendments proposed will ensure that during the income years a firearm is held as trading stock, the taxable income in respect of that firearm will be zero. This will be achieved by allowing an additional deduction against assessable income in the year of income that the compensation is derived. The additional deduction will be the difference between the amount included in assessable income as a result of the surrender of the firearm and the acquisition cost of that firearm. [New subsection 51(2B) - item 3]

6.28 In the case where revaluation has not occurred the additional deduction will reduce to nil any tax liability that would have arisen in the income year that assessable income was derived as a result of surrendering the firearm. Where revaluation has occurred giving rise to taxable income in an earlier year, the effect of the proposed amendment is to ensure that during the income years the firearm is held as trading stock, the taxable income in respect of that firearm will be zero.

How will the depreciation provisions be amended?

6.29 A taxpayer who owns and uses a firearm to produce assessable income is currently entitled to a deduction for depreciation during an income year. Where the firearm is disposed of, lost or destroyed, the existing legislation provides for a balancing adjustment having regard to the compensation received and the depreciated value of the asset. The adjustments may result in either an additional amount being included in assessable income or being allowed as a deduction and are explained in paragraph 6.16 above.

6.30 An amendment to section 59 of the Act is proposed so that the amount, if any, by w hich the compensation payment exceeds the depreciated value is not included in assessable income. Allowable deductions which are currently available when the compensation payment is less than the depreciated value will not be affected by these amendments [new subsection 59(2AAA) - item 5] . A further amendment is proposed to ensure that new subsection 59(2AAA) will continue to apply under the Act rather than the Income Tax Assessment Act 1997 for the income years during which payments are received under the firearms surrender arrangements [item 4].

Will existing deductions for prior year losses be affected?

6.31 As explained in paragraph 6.14 above, the existing legislation currently operates to deny a deduction for prior year losses equal to the amount of exempt income. Under the amendments proposed, the compensation payments received by gun dealers for loss of business are to be treated as exempt income.

6.32 In order to protect the amount deductible for prior year losses, amendments are proposed to section 79Eof the Act. The proposed amendments will ensure that the following amounts are excluded from the definition of 'exempt income' in subsection 79E(12) for the purposes of section 79E:

•

compensation payments received for loss of business [item 6] ; and

•

in the case of taxpayers who use firearms to produce assessable income, the amount, if any, by which the consideration received under the firearms surrender arrangements exceeds the depreciated value of those firearms (see paragraphs 6.29 and 6.30) [item 7] .

How will the amendments affect the capital gains tax provisions?

6.33 The capital gains tax (CGT) provisions currently operate to include a capital gain in assessable income upon disposal of an asset which was acquired after 19 September 1985. Depending on the value of the firearm surrendered, firearm owners may be subject to the CGT prov isions unless they are amended.

6.34 An amendment to the CGT provisions is, therefore, proposed to ensure that taxpayers are not assessed on capital gains realised as a result of compensation being received under the firearms surrender arrangements. [New subsection 160Z(6A) - item 8]

Examples illustrating how the new provisions will work

Example 1

6.35 A Gun Shop (Harry's Pty Ltd) sells and repairs firearms and related merchandise. On 1 August 1995, the company purchases a Browning .22 rimfire self-loading rifle as stock-in-trade for $700 with a retail price of $1000. Following the introduction of the firearms surrender arrangements, the company surrenders the weapon on 30 November 1996 and receives $1000 compensation from the New South Wales Government.

6.36 The company's trading stock account, valued at cost price, would reflect the following values for the gun surrendered:

6.37 The tax treatment under the existing law (sections referred to are sections in the Act) would be:

6.38 The tax treatment that would result from the proposed amendments in the 1996-97 year of income is shown in the table below. Under the amendments proposed, the taxable income of $300 that would have arisen in the 1996-97 year of income will be zero, as shown below:

Example 2

6.39 On 1 August 1995, a Gun Shop (Arnie's Pty Ltd) purchases a Browning .22 rimfire self-loading rifle for $700 as trading stock but instead of valuing it at cost price, the company values the gun at the market selling value at the end of 1995-96. On 30 November 1996, the company surrenders the weapon and receives $1000 compensation from the Victorian Government.

6.40 The company's trading stock account, assuming a market selling value of $1000 for the gun, would reflect the following values:

6.41 The tax treatment under the existing law (sections referred to are sections in the Act) would be:

6.42 The tax treatment that would result from the proposed amendments in the 1996-97 year of income is shown in the table below:

6.43 The amendments proposed will result in an additional tax deduction of $300 (compensation received of $1000 less acquisition cost of $700) for 1996-97. The outcome will be that during the income years the gun is held the taxable income in respect of that gun will be zero. This is because the additional deduction of $300 in 1996-97 will offset the taxable income of $300 which arose in the 1995-96 year when the gun was valued above its acquisition cost.

Example 3

6.44 On 1 August 1995, a Gun Shop (Capone and Son Pty Ltd) purchases a Browning .22 rimfire self-loading rifle for $700 as trading stock. The company values the weapon at $650 in the trading stock account at the end of 1995-96. On 30 November 1996, the company surrenders the gun and receives $1000 compensation from the Tasmanian Government.

6.45 The company's trading stock account, assuming a market selling value of $650 for the gun, would reflect the following values:

6.46 The tax treatment under the existing law (sections referred to are sections in the Act) would be:

6.47 The tax treatment that would result from the proposed amendments in the 1996-97 year of income is shown in the table below:

6.48 The amendments proposed will result in an additional tax deduction of $300 (compensation received of $1000 less acquisition cost of $700) for 1996-97. The outcome will be that during the income years the gun is held the taxable income in respect of that gun will be zero. This is because the additional deduction of $300 in 1996-97 will offset the net effect of the taxable income of $350 which would have arisen in 1996-97 and the taxable loss of $50 which arose in the 1995-96 year when the gun was valued below its acquisition cost.

What amendments are being made to the Income Tax Assessment Act 1997 (the 1997 Act)?

6.49 Part 2 of Schedule 6 of the Bill makes consequential amendments to the 1997 Act to ensure that the legislative changes will remain effective from 1 July 1997.

6.50 These amendments are necessary because some provisions in the Act are being replaced, with effect from 1 July 1997, with new provisions in the 1997 Act.

Deductions

6.51 Item 10 will update the index to section 12-5 in the 1997 Act to confirm that a deduction can be claimed for the amount described in new subsection 51(2B) . See paragraphs 6.26 to 6.28.

Prior year losses

6.52 Items 11 and 12 amend the prior year loss provisions in the 1997 Act (section 36-20) to ensure that exempt income received under the arrangements will not reduce the amount of loss that can be carried forward [new paragraphs 36-20(3)(aa) and (ea)] . Paragraphs 6.31 to 6.32 explain how prior year losses will be protected under the 1936 Act.

6.53 The amendments in Part 2 will have effect for as long as compensation payments are received under the firearms surrender arrangements. [Item 13]

Chapter 7 - Remote area housing

Overview

7.1 The amendments in Schedule 7 of this Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to exempt from fringe benefits tax (FBT) housing fringe benefits provided by primary producers in remote areas in respect of primary production employment.

Summary of the amendments

Purpose of the amendments

7.2 The amendments will exempt from FBT a benefit that would otherwise be a remote area housing fringe benefit where the benefit is provided by a primary producer to an employee in respect of the employee's employment in primary production. The taxable value of fringe benefits relating to residential fuel for use in housing covered by this exemption will continue to receive concessional treatment.

Date of effect

7.3 These amendments will apply to assessments for the FBT year beginning 1 April 1997 and later FBT years. [Item 3]

Background to the legislation

7.4 A housing fringe benefit arises under Division 6 of Part III of the FBTAA if an employee is provided with the right to use a unit of accommodation as the employee's usual place of residence. Housing fringe benefits provided to employees in remote areas are called 'remote area housing fringe benefits'. Remote area housing fringe benefits receive concessional treatment. Fringe benefits arising from the supply of free or subsidised residential fuel for use in accommodation provided as a remote area housing fringe benefit also receive concessional treatment. These concessions are described in more detail below.

What is a remote area housing fringe benefit?

7.5 In broad terms, a housing fringe benefit is a remote area housing fringe benefit under subsection 29(4) if the following conditions are satisfied:

•

the accommodation is in a remote area;

•

the accommodation is occupied by an employee whose usual place of employment is in a remote area;

•

it is customary in the industry for employers to provide free or subsidised residential accommodation to employees; and

•

it is necessary for the employer to provide free or subsidised accommodation for employees for any of the following reasons:

•

the nature of the employer's business is such that employees are likely to move frequently from one residential location to another;

•

there is insufficient suitable accommodation available in the area; or

•

it is customary in that industry for employers to provide free or subsidised accommodation.

7.6 Accommodation is in a remote area if it is not near an eligible urban area. To satisfy this test, accommodation must be at least 40 kilometres from a town with a population of 14,000 or more people and at least 100 kilometres from a town of 130,000 or more people. If the accommodation is in Zone A or Zone B for income tax purposes, it must be at least 40 kilometres from a town of 28,000 (rather than 14,000) or more people and at least 100 kilometres from a town of 130,000 or more people. 'Eligible urban area' is defined in section 140.

What is the concession for remote area housing fringe benefits?

7.7 The valuation rules for remote area housing fringe benefits are concessional. In broad terms, the taxable value of a remote area housing fringe benefit may be calculated by either of two methods:

•

the employer may elect to use the statutory value method set out in paragraph29(1)(a). The taxable value under this method is an indexed statutory amount that is apportioned if the benefit is provided for part of the year and reduced by the amount of any rent paid by the employee. For the 1996-97 FBT year, this amount is $1,313 per annum for shared accommodation and $5,263 per annum for other accommodation;

•

otherwise, the market value method applies under paragraphs 29(1)(b) or (c). In most circumstances, the taxable value under this method is 50% of the taxable value that would apply to a housing fringe benefit that is not a remote area housing fringe benefit. The taxable value of a housing fringe benefit is generally the actual market value or the indexed market value of the accommodation, reduced by the amount of any rent paid by the employee.

What is the concession for benefits arising from the supply of residential fuel?

7.8 Under subsection 59(1) of the FBTAA, the supply of free or subsidised fuel for use in accommodation provided in remote areas also receives concessional treatment. Where the taxable value of the remote area housing fringe benefit arising from the provision of the accommodation is calculated using the market value method, the taxable value of fringe benefits that arise from the supply of residential fuel is reduced by 50%.

7.9 On the other hand, where the taxable value of the remote area housing fringe benefit is calculated using the statutory value method, the taxable value of the fringe benefit arising from the supply of residential fuel is reduced to nil. This is because the statutory amounts include the concessional taxable value of any free or subsidised fuel.

Explanation of the amendments

7.10 A housing benefit provided by an employer engaged in primary production for the purposes of the Income Tax Assessment Act 1936 will be an exempt benefit if the benefit would otherwise have qualified as a remote area housing fringe benefit, under new section 58ZA . To qualify for exemption, the benefit must be provided to an employee of the employer's primary production business in respect of the employee's employment in the primary production business. [Item 1]

7.11 Subsection 59(1) of the FBTAA will be amended to ensure that, where an employer provides a housing benefit that is an exempt benefit under new section58ZA , the taxable value of a fringe benefit that arises from the provision of free or subsidised residential fuel will be reduced by 50%. [Item 2]

7.12 Previously, the taxable value of fringe benefits arising from the supply of residential fuel was reduced to nil if employers used the statutory value method for calculating the taxable value of remote area housing fringe benefits. This was because the statutory amounts included a component for the value of residential fuel. As explained earlier, remote area housing fringe benefits provided by primary producers are being exempted from FBT. Consequently, employers who previously used the statutory value method for calculating the taxable value of remote area housing fringe benefits will now incur a separate liability for FBT where they provide free or subsidised residential fuel.

Chapter 8 - Depreciation of lessor's fixtures

Overview

8.1 Part 1 of Schedule 8 of the Bill will amend Subdivision A, Division 3, Part III of the Income Tax Assessment Act 1936 (the Act) to give lessors entitlement to taxation depreciation allowances in respect of leased chattels that become a fixture on another person's land in circumstances where they would otherwise be so entitled had the leased item continued to be a chattel and not a fixture.

Summary of the amendments

8.2 The amendments will treat a lessor of depreciable plant or articles under a chattel lease as the owner entitled to depreciation allowances where the plant etc is a fixture on another person's land, provided the lessor has an effective right to remove the property on default by the lessee or on termination of the lease.

8.3 The amendments will apply in the following circumstances:

•

a taxpayer (the lessor) enters into a lease arrangement (not being a hire-purchase agreement or lease of realty) with another person (the lessee) under which a right to use depreciable property is granted to the lessee;

•

the property is a fixture on the land of a person other than the lessor;

•

but for being a fixture, the lessor would be the owner of the property within the meaning of section 54 of the Act; and

•

where these circumstances apply, the lessor will be taken to be the owner of the leased property for the purpose of applying the depreciation provisions of the Act, instead of any other person. However, the lessor will not be treated as the owner unless there is an effective right to recover the property or if the lessor's ownership of the property derives from a sale and lease back of the property by the lessee.

Date of effect

8.4 The amendments apply to depreciable plant and equipment first used on or after 1 July 1996 for the purposes of producing assessable income of the lessor.

Background to the legislation

8.5 Under section 54 of the Act, entitlements to taxation depreciation allowances accrue to the person who owns and uses a depreciable unit of property comprising plant or articles to the extent that the unit is used (or installed ready for use) in deriving assessable income.

8.6 Within that framework, taxpayers who own and lease moveable plant (referred to as chattels) to others for reward generally are entitled to deduct the cost of the plant by way of depreciation allowances over its effective life.

8.7 In certain circumstances, however, leased property may become fixtures attached to land so as to become, at law, part of the land. Generally, only the owner of the land is the owner of fixtures on that land, including leased items. Accordingly, a lessor strictly speaking may not be entitled to depreciation allowances in respect of income producing property that becomes a fixture on another person's land.

Explanation of the amendments

The basic rule

8.8 Where the conditions expressed in paragraph 3 are satisfied, the lessor of leased property which is a fixture on another person's land is to be treated as the owner of the property entitled to depreciation allowances instead of any other person who, at law, may be the owner of the property. That rule applies to plant or articles within the meaning of section 54 which, if they were not fixtures, would be chattels owned by the lessor, including plant or articles affixed to land under a Crown lease. [New subsections 54AB(1) and (2)]

Eligible lessor - right of removal of property

8.9 However, a lessor will not be treated as the owner of leased fixtures unless there is an effective right to recover the property in the event of default by the lessee or on expiry or termination of the lease. New section 54AC specifies the circumstances in which such rights obtain.

8.10 For example, where the lessee of the property is the owner of the land on which the property is affixed, the lessor will be treated as having a right to remove the property if the lessor is authorised to sever and remove the leased property under specified conditions of default or on termination of the lease, provided the right to remove the property is able to be exercised without substantial damage to the land (including buildings) or the property itself. [New subsection 54AC(1)]

8.11 Where the leased property in question is a fixture on land not owned by the lessee, the lessor will be treated as having an effective right to remove the property if the lessee has a right to sever and remove the property from the land owner's premises, the lease provides the lessor with a right to recover the property as against the lessee, and the right to remove the property is able to be exercised without substantial damage to the land (including buildings) or the property itself. [New subsection 54AC(2)]

8.12 Where a lessor of property that is a fixture on another person's land has been treated as the owner of that property, the lessor will cease to be treated as the owner in the following circumstances:

(a)

the lease expires or is otherwise terminated without the lessor exercising any right to recover the property;

(b)

there is an event of default under the lease and the lessor ceases to have a right to recover the property (e.g. because there is a change in ownership of the land, or the lessee of the property ceases to have an interest in the land);

(c)

the lessor disposes of his or her interest in the lease including the residual interest in the property;

(d)

all of the lessee's obligations under the lease are discharged but the property is not returned to the lessor; or

(e)

the property is lost or destroyed.

[New subsection 54AC(3)]

Property previously owned etc. by the lessee not eligible

8.13 The lessor will not to be treated as the owner of the property if, before the lease was entered into, the property was owned, and used or held for use, by the lessee or an associate, i.e. if the property is sold to the lessor and leased back.

8.14 That exclusion will not apply, though, if the lessor acquires the property within 6months of the lessee or associate first owning and using the property and at the time it was first owned or used, there was an arrangement that the property would be sold and leased back to the lessee. In these circumstances, the lease is treated as though it were the lessee's original form of financing of the property. That concession is not available, however, if when first acquired by the lessee or associate, the property was already a fixture on the land.

8.15 For purposes of applying those rules, the lessee or associate is treated as having sold the property to the lessor, and the lessor as having acquired it, notwithstanding that, as a fixture, it could not be sold separately from the land.

8.16 Where the lessor under a sale and leaseback is treated as the owner of the property, the lessor's cost for depreciation purposes is the lesser of the consideration paid by the lessor for the property and the depreciated value of the property in the hands of the lessee or associate at the time the lessor acquired it (adjusted for any balancing charge). Provided the relevant conditions are satisfied, the 6month concession will apply notwithstanding that, at the time of the sale to the lessor, the relevant property had already been affixed to the land.

[New section 54AD]

Lessor taken to have disposed of property in certain cases

8.17 Where the lessor is no longer treated as the owner of the property because any of the conditions specified in new subsection 54AC(3) applies, the lessor is taken to have disposed of the property for the purposes of section59 or 59AA of the Act. [New subsection 54AE(1)]

8.18 Section 59 includes in assessable income any excess of consideration on the disposal, loss or destruction of depreciated property over its depreciated value, or allows a deduction if there is a deficit. For that purpose, section 59AA treats a partial change in the ownership of property as a disposal of the property by all of the former owners to all of the new owners.

8.19 New subsections 54AE(2), (3) and (4) specify the amount of consideration in the various circumstances of disposal specified in new subsection 54AC(3) .

8.20 In the circumstances specified in new paragraphs 54AC(3)(a), (b) and (d) , i.e. broadly where the lessor does not recover the leased property, the lessor's consideration is any termination or residual amount receivable under the lease or any amount receivable as compensation, whichever is applicable. However, if the lessor and lessee are not acting at arm's length in relation to those transactions, the lessor's consideration on disposal is the market value of the property calculated as if it were not a fixture on the land. [New subsection 54AE(2)]

8.21 Where there has been an actual disposal of the property by the lessor as specified in new paragraph 54AC(3)(c) , the lessor's consideration is that part of the disposal price reasonably attributable to the property. If the disposal was not on arm's length terms, however, the consideration will not be less than the market value of the property calculated as if it were not a fixture on the land. [New subsection 54AE(3)]

8.22 If the property has been lost or destroyed as specified in new paragraph 54AC(3)(e) , the lessor's consideration is the amount or amounts receivable as compensation for the loss etc., e.g. insurance proceeds. [New subsection 54AE(4)]

Chapter 9 - Increase in age limit for superannuation contributions

Overview

9.1 The amendments contained in Schedule 9 of the Bill provide for changes to the Superannuation Guarantee (Administration) Act 1992 and the Small Superannuation Accounts Act 1995. These changes will increase the age threshold from which employers are no longer required to provide superannuation support for their employees. The threshold will be increased from age 65 to age 70.

9.2 The amendments are consistent with the Government's decision to allow individuals over age 65 to continue contributing to a complying superannuation fund or Retirement Savings Account (RSA) until they reach age 70.

Summary of the amendments

Purpose of the amendments

9.3 The amendments will apply to employers who employ individuals beyond age 65. Where this occurs, employers will now be required to provide superannuation support for these employees.

9.4 Schedule 9 will amend the law to:

•

increase the age limit threshold set for the purpose of calculating an individual superannuation shortfall under the Superannuation Guarantee (Administration) Act 1992. The threshold will be increased from age 65 to age 70 [items 1 to2] ;

•

amend the Small Superannuation Accounts Act 1995 to increase the age limit from 65 to 70 for accepting deposits into Superannuation Holding Accounts Reserve (SHAR) [items 3 to4] .

Date of effect

9.5 The amendments will apply from 1 July 1997.

•

In relation to the Superannuation Guarantee (Administration) Act 1992, the amendment will apply to the 1997-98 year and all later years [item 2].

•

In relation to the Small Superannuation Accounts Act 1995, the amendment will only apply to deposits made on or after 1 July 1997 that relate to a period of employment that started on or after 1 July 1997 [item 4] .

Background to the legislation

9.6 As part of a range of measures to improve superannuation and retirement incomes arrangements, the Government announced in the 1996-97 Budget that it will allow people over age 65 to continue contributing to a complying superannuation fund or RSA. Individuals will be able to continue contributing up to age 70, provided they maintain a bona fide link with the paid workforce, that is, they are gainfully employed for at least 10 hours per week over the year.

9.7 Generally, the Superannuation Guarantee (Administration) Act 1992 applies to all employers. However, employers are exempted from providing superannuation support in respect of certain employees in certain circumstances. Currently, salary or wages paid to an employee who is age 65 or over are expressly exempted for the purposes of calculating an individual superannuation guarantee shortfall, under paragraph 27(1)(a) of the Superannuation Guarantee (Administration) Act 1992.

9.8 The Small Superannuation Accounts Act 1995 contains the legislative framework for employers to make payments to SHAR instead of making small superannuation contributions to a superannuation fund. Deposits to SHAR are treated as contributions to a complying superannuation fund for superannuation guarantee purposes.

9.9. Currently a deposit into SHAR for an individual must be accompanied by a deposit form (section 26 of the Small Superannuation Accounts Act 1995) which includes certain information as well as a number of declarations concerning the deposit. In particular, section 30 of the Small Superannuation Accounts Act 1995 requires that the deposit form must include a declaration from the depositor that, to the best of their knowledge, the individual was under 65 on at least one day during the period of employment to which the deposit relates.

Explanation of the amendments

9.10 To provide consistency with the increase in the age limit for superannuation contributions as mentioned in paragraph 9.6, the amendments are necessary to increase the age above which superannuation guarantee contributions are not required. This age limit will be increased from age 65 to 70. As a consequence, an amendment is also needed to the Small Superannuation Accounts Act 1995, to increase the age limit from 65 to 70 for accepting deposits from employers into SHAR.

Amendments to the Superannuation Guarantee (Administration) Act 1992

9.11 The amendments will change the reference to '65' in paragraph 27(1)(a) of the Superannuation Guarantee (Administration) Act 1992 to '70' [item 1] . This will exclude any salary or wages paid to employees aged 70 or over from the calculation of the individual superannuation guarantee shortfall.

Amendments to the Small Superannuation Accounts Act 1995

9.12 The amendments will also change the reference to '65' in section 30 of the Small Superannuation Accounts Act 1995 to '70' [item 3] . This will change the declaration contained in the deposit form (mentioned in paragraph 9.9) to allow employers to make deposits on behalf of employees who were under 70 on at least one day during the period to which the deposit relates.

9.13 The proposed change does not prevent an individual who attains the age of 65 from applying to the Commissioner of Taxation under section 66 of the Small Superannuation Accounts Act 1995, for payment of their account balance. Will the amendment apply to employees who have already turned 65?

9.14 The amendments will also apply in respect of employees who have already turned 65 before 1 July 1997.

Example

•

XYZ Ltd, a group employer, has employed Jedd Bishop since 1 January 1990. XYZ Ltd ceased contributing superannuation in respect of salary or wages paid to Jedd Bishop from 19 May 1997 because this was the day on which Jedd turned 65. Jedd continues to be employed with XYZ Ltd. The amendment will require that XYZ Ltd makes adequate superannuation provision for Jedd in relation to work performed by him from 1 July 1997 onwards.

XYZ Ltd employs Skye Bishop on 12 August 1997. Skye turned 65 on 30 June 1997. This amendment will require XYZ Ltd to make adequate provision for superannuation in respect of salary or wages paid to Skye from 12 August 1997.

In both of these situations:

-

provision for superannuation can be made to a complying superannuation fund or to SHAR; and

-

failure to do so will subject XYZ Ltd to the superannuation guarantee charge.

When do the amendments apply?

9.15 The amendment to the Superannuation Guarantee (Administration) Act 1992 will apply to the 1997-98 year and all later years. [Item 2]

9.16 The amendment to the Small Superannuation Accounts Act 1995 will only apply to deposits made on or after 1 July 1997 that also relate to a period of employment carried out on or after 1 July 1997 [item4] . This means that:

•

where an individual commences employment for the first time on or after 1 July 1997, deposits made by the employer in respect of that employee will be subject to the amendment.

•

where the employment is continuing (ie employment commences from a point in time before 1 July 1997 and continues after that date), only deposits made on or after 1 July 1997 which relate to a period of employment that started on or after 1 July 1997 will be subject to the amendment.

Example

•

John North commenced employment with TBC Services, a group employer, on 20 May 1995 at the age of 66. TBC Services makes a deposit into SHAR on behalf of John North on 20 July 1997. This deposit related to the period of employment from 1 June 1997 to 30 June 1997. The amendment will not apply to the deposit as it relates to a period of employment that started before 1 July 1997.

Chapter 10 - Rebate for superannuation contributions made on behalf of a low-income or non-working spouse

Overview

10.1 Schedule 10 of the Bill amends the Income Tax Assessment Act 1936 (the Act) to provide a rebate for a person contributing to superannuation on behalf of a low-income or non-working spouse.

Summary of the amendments

Purpose of the amendments

10.2 The proposed amendments provide a tax rebate of up to $540 per annum for a taxpayer where:

•

the taxpayer has a spouse;

•

the taxpayer contributes to superannuation on behalf of the spouse;

•

the contributions are not deductible to the taxpayer;

•

both the taxpayer and the spouse are Australian residents; and

•

the spouse's assessable income is less than $13800.

Date of effect

10.3 The proposed rebate will be available for contributions made on or after 1 July 1997. The rebate will be available from 1 July 1998 on assessment only.

Background to the legislation

10.4 As a part of proposals to improve superannuation and retirement incomes arrangements, the Government announced in the 1996 Budget that a rebate would be introduced for a person contributing to superannuation on behalf of a low-income or non-working spouse.

10.5 Currently, superannuation funds may only accept contributions for members who are less than 65 years of age (see Chapter 9 for changes to this requirement), and who are employed on a part-time or full-time basis, with limited exceptions. Superannuation funds can accept contributions made only by a member or an employer. Contributions made by a spouse on behalf of the member are not acceptable.

10.6 Amendments are being made to the Superannuation Industry (Supervision) Act 1993 (SIS) regulations to allow superannuation funds to accept contributions made by a spouse of a member who may not be in gainful employment.

10.7 Taxable contributions are included in the assessable income of a complying superannuation fund by section 281 of the Act and are generally taxed at the rate of 15 per cent. Taxable contributions are defined in section 274 of the Act as:

•

all contributions made to the fund by a person to provide superannuation benefits for another person, other than contributions made by a person who is a trustee of an exempt life insurance fund, a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust;

•

the amount of an eligible termination payment (ETP) that is rolled over into the fund and is an untaxed element of the post-June 1983 component of the ETP;

•

payments to the fund of the shortfall component of a superannuation guarantee charge;

•

deductible personal superannuation contributions; and

•

amounts transferred to the fund from a person's individual account in the Superannuation Holdings Account Reserve (SHAR).

Explanation of the amendments

10.8 The amendments introduce a new Subdivision AACA in Division 17 of Part III of the Act. The new subdivision provides a rebate of up to $540 for superannuation contributions made on behalf of a low-income or non-working spouse. The rebate is calculated as 18 per cent of contributions up to a maximum of $3000. This limit is reduced where the spouse's assessable income exceeds $10800. The rebate is not available once the spouse's assessable income is $13800.

Who is entitled to a rebate?

10.9 A taxpayer is entitled to claim the proposed rebate for superannuation contributions under new section 159T where:

•

the taxpayer has a spouse (see paragraph 10.11);

•

the taxpayer makes an eligible spouse contribution (see paragraph 10.12);

•

both the taxpayer and his or her spouse are residents (as defined in subsection 6(1) of the Act) when the eligible spouse contributions are made; and

•

the spouse's assessable income is less than $13800. [Item1]

How is the rebate calculated?

10.10 The proposed rebate is calculated in one of three ways:

•

where the taxpayer has made $3000 or less in eligible spouse contributions (see paragraph 10.12) and the spouse's assessable income is $10800 or less, the rebate is calculated as 18% of the eligible spouse contributions. (See Example 1 at paragraphs 10.23 and 10.24)

•

where the taxpayer has made more than $3000 in eligible spouse contributions and the spouse's assessable income is $10800 or less, the rebate is calculated as 18% of $3000, that is $540. (See Example 2 at paragraphs 10.25 and 10.26)

•

where the spouse's assessable income exceeds $10800, the eligible spouse contributions limit of $3000 is reduced by $1 for every $1 of assessable income in excess of $10800. The rebate is calculated as 18 per cent of the lesser of the reduced amount and the actual contributions. Therefore, the rebate is zero when the spouse's assessable income is $13800 or higher. (See Example 3 at paragraphs 10.27 to 10.28). [New section 159T - item1]

Who is a spouse?

10.11 'Spouse' is defined in subsection 6(1) of the Act to mean both a legal and a de facto husband or wife. A de facto spouse is one who lives with the taxpayer on a genuine domestic basis as the husband or wife of the taxpayer. For the purposes of the proposed rebate, 'spouse' does not include a person who lives separately and apart from the taxpayer on a permanent basis, even though legally married to the taxpayer. [New section 159TC - item1]

What are eligible spouse contributions?

10.12 'Eligible spouse contributions' are defined in new section 159TC as contributions which are made to:

•

a complying superannuation fund (as defined in Part IX of the Act); or

•

an RSA (a retirement savings account, as defined in subsection 6(1) of the Act);

to obtain superannuation benefits for:

•

the taxpayer's spouse; or

•

the dependants of the spouse in the event of the spouse's death;

and which are made during the period when the person is the taxpayer's spouse.

10.13 Superannuation benefits are defined in subsection 6(1) of the Act to be individual personal benefits, pensions or retiring allowances. Dependant is defined in subsection 10(1) of the SIS Act to include the spouse and child of the person.

10.14 Eligible spouse contributions do not include contributions made by a taxpayer who is the employer of his or her spouse. In this case, the taxpayer is entitled to claim a deduction under section 82AAC of the Act for the contributions. This will also apply to contributions to RSAs when the RSA (Consequential Amendments) Act 1997 (the RSA Act) commences. Section 82AADA of the RSA Act entitles a taxpayer to a deduction under section 82AAC where superannuation contributions are made to an RSA on behalf on an employee. [New section 159TC - item 1]

10.15 Where the RSA Act has not commenced before the commencement of these provisions, eligible spouse contributions do not include contributions made by the taxpayer to an RSA. Once the RSA Act has commenced, eligible spouse contributions may be made to an RSA. [Item 2 and subclause 2(4)]

More than one spouse in an income year

10.16 New subsection 159TA limits the amount of the proposed rebate which may be claimed where the taxpayer has more than one spouse during the income year. Where the taxpayer satisfies the conditions for the rebate in relation to more than one spouse, the rebate is the lesser of:

•

the sum of the rebate entitlements for each spouse; and

•

$540. (See Examples 5 and 6 at paragraphs 10.32 and 10.34 respectively.) [Item1]

Quotation of tax file number

10.17 New section 159TB allows the taxpayer to quote the tax file number (TFN) of the spouse. The consent of the spouse is required before the quotation can be made. It is not compulsory for the taxpayer to quote the spouse's TFN to qualify for the rebate. [Item 1]

Provisional tax

10.18 Because the proposed rebate is only available on assessment, it is not taken into account in the calculation of provisional tax liability and taxpayers are not able to vary their provisional tax in anticipation of the rebate. PAYE taxpayers are not able to reduce their tax instalment deductions to take account of the rebate. Section 221YCAA of the Act deals with the calculation of provisional tax. The definition of 'qualifying reductions' in paragraph 221YCAA(2)(m) is amended to exclude the proposed rebate from the calculation of provisional tax. [Item 3]

Taxable contributions

10.19 Taxable contributions, as defined in subsection 274(1) of the Act, are included in the assessable income of a complying superannuation fund or RSA with limited exceptions. Subparagraphs 274(1)(a)(i) and 274(1)(ba)(i) are amended to exclude eligible spouse contributions from taxable contributions. [Items 4 and 5]

10.20 The amendments to taxable contributions apply to contributions made to a superannuation fund on or after 1 July 1997 [item 6]. Where the RSA Act has not commenced before the commencement of these provisions, taxable contributions do not include contributions made by the taxpayer to an RSA. [Item5 and subclause 2(4)]

Treatment of end benefits

10.21 The superannuation contributions made on behalf of the spouse are 'undeducted contributions' (defined in subsection 27A(1) of the Act). Broadly, undeducted contributions are contributions for which a deduction has not been allowed to either the taxpayer or another person.

10.22 The undeducted contributions component of an ETP is not included in a taxpayer's assessable income; therefore, it is tax free. The taxpayer may roll over all or part of the undeducted contributions. When rolled over, the undeducted contributions component retains its identity and gives rise to an undeducted contributions component in a payment by the roll-over fund.

Example 1

10.23 Fred and Indira are married and Fred contributes to a complying superannuation fund for Indira's benefit from 1 July 1997. On 1 July 1998, Fred calculates that he has made $2500 in superannuation contributions on behalf of Indira. Indira's assessable income for the year ending 30 June 1998 is $10800.

10.24 Fred is entitled to a rebate equal to 18% of $2500, or $450.

Example 2

10.25 Vladimir and Taminga are in a de facto relationship. Vladimir makes one contribution of $4000 to an RSA for Taminga's benefit on 1 July 1997 and does not make any other contributions during the income year. Taminga's assessable income for the year ending 30 June 1998 is $10800.

10.26 Vladimir is entitled to a rebate of $540, or 18% of the maximum contributions allowable of $3000 because his actual contributions exceed $3000.

Example 3

10.27 Andre and Brooke are married and Andre contributes to a complying superannuation fund for Brooke. For the year ending 30 June 1998, he contributes a total of $4000 in superannuation and Brooke's assessable income is $12800.

10.28 Andre is entitled to a reduced rebate because Brooke's assessable income exceeds $10800. The rebate is calculated in the following manner:

(a)

Determine the difference between Brooke's assessable income and $10800 --

12800 - 10800 = 2000


(b)

Reduce the maximum contribution amount of $3000 by the excess at (a) to determine the rebatable amount --

3000 - 2000 = 1000


(c)

Calculate the rebate as 18% of the rebatable amount --

18% x 1000 = 180


10.29 Andre is, therefore, entitled to a rebate of $180.

Example 4

10.30 Camellia and Karl marry on 30 December 1997; however, Camellia has been contributing to superannuation on behalf of Karl since 1 July 1997. Camellia makes a contribution of $250 on the first of each month. Karl's assessable income for the year ending 30 June 1998 is $10800.

10.31 Camellia is entitled to a rebate in relation to the contributions made from 30 December 1997 (a total of $1500). The rebate is 18% of $1500, or $270.

Example 5

10.32 Hoa and David are in a de facto relationship. Hoa has contributed $2000 to a complying superannuation fund on behalf of David. Hoa leaves David and marries Arnie on 1 January 1998. She then contributes $500 to superannuation on behalf of Arnie. Both Arnie and David have assessable income of less than $10800 for the year ended 30 June 1998. Hoa is entitled to a rebate in relation to both spouses but the total rebate must not exceed $540.

10.33 Hoa's rebate is calculated as the sum of:

(a)

18% x 2000 = 360; and

(b)

18% x 500 = 90

Hoa is entitled to a rebate of $450.

Example 6

10.34 Assume the same circumstances as in Example 5 except that Hoa contributes $2000 to superannuation for Arnie. Her rebate will now be $540 because the sum of the individual rebates ($720) exceeds the maximum allowable rebate of $540.

Chapter 11 - Research and development

Overview

11.1 Schedule 11 of the Bill amends the research and development (R & D) provisions of the Income Tax Assessment Act 1936 (ITAA)(section 73B) consequent upon changes to those provisions contained in Taxation Laws Amendment Act (No. 3) 1996 (TLAA3).

Summary of the amendments

Purpose of the amendments

11.2 The amendments will:

•

apply the core technology deduction rules currently contained in subsections 73B(12), 73B(12A), 73B(12B), 73B(12C), 73B(27B) and 73B(27C) of the ITAA (the core technology rules) to companies in partnership, with the exception of those companies jointly registered under section 39P of the Industry Research and Development Act (IR & DA). The amendment will apply the same limitations on core technology deductions to companies in partnership as currently apply to other companies;

•

disallow deductions for companies registered jointly under section 39P of the IR & DA (syndicates) where an extension of the joint registration has been granted under section 39PB and the Industry Research and Development Board (the Board), having determined that the syndicate has breached a condition of that extension, issues a certificate to the Commissioner of Taxation under subsection 39PB(6);

•

ensure that the formula used to calculate deductible 'residual feedstock expenditure' deals appropriately with a taxpayer's multiple R & D activities within a year by permitting the deductions only on a "related R & D activity per annum" basis;

•

ensure a deduction for core technology expenditure is allowable in the year the expense was first incurred;

•

correct a paragraph citation;

•

change a heading in the depreciation table for post 23 July 1996 pilot plant; and

•

include a balancing adjustment provision for post 23 July 1996 pilot plant which is disposed of prior to the completion of the R & D activity.

Date of effect

11.3 The extension of the core technology rules to partnerships will apply to core technology expenditure incurred under contracts entered into on or after 8.30pm, by standard time in the Australian Capital Territory, on 13 December 1996.

11.4 The remaining amendments will apply as originally intended and announced, from 5pm by standard time in the Australian Capital Territory on 23 July 199

6. [Item 12]

Explanation of the amendments

Core technology expenditure

11.5 Prior to the enactment of the TLAA3, core technology expenditure was wholly deductible under subsection 73B(12) of the ITAA in the year of income in which the expenditure was incurred. Core technology (defined in subsection 73B(1AB)) is existing technology in respect of which further research and development activities may be undertaken to produce new knowledge, products, processes, etc.

11.6 However, by amendments contained in TLAA3, subsection 73B(12A) limits the deduction for core technology expenditure incurred in a year of income to a maximum of one-third of the amount of research and development expenditure incurred during the year on particular research and development activities that are related to the core technology. Subsection 73B(1AB) defines the conditions under which core technology is related to particular research and development activities. Companies in partnership are not affected by the limit introduced by the amendments, however.

11.7 Any undeducted amount of the core technology expenditure may be carried forward and deducted in a future year in which research and development activities related to the core technology occur. The amount carried forward for deduction is that part of the relevant core technology expenditure as has not been allowed previously as a deduction. In any year, the deduction will be limited to one-third of the related research and development expenditure.

11.8 If core technology is disposed of, the assessable income of the vendor includes any amount received or receivable on disposal. However, to take account of the fact that, at the time of disposal, a proportion of the vendor's core technology expenditure may not have been deducted - because of the deduction limitations described above - the assessable amount on disposal of the core technology is reduced to the extent that the core technology expenditure of the vendor has not been allowed as a deduction.

11.9 Item 13 ensures that the core technology deduction limits apply to companies in partnership, except companies jointly registered under section 39P of the IR & DA. This will place companies in partnership on the same footing as other companies in relation to deductions allowable for core technology expenditure.

Breach of conditions for extension of joint registration

11.10 TLAA3 amended section 39P of the IR & DA to prevent the Board from registering companies jointly, commonly known as syndicates, for the R & D tax concession.

11.11 Transitional arrangements, under section 39PB, allow the Board to extend the registration period for existing syndicates to allow sufficient time to complete the project. Syndicates may be granted extensions of the period of their registration only if they meet the criteria listed in subsection 39PB(4). If, after an extension is granted, the Board becomes aware that a syndicate no longer meets those criteria the Board must issue a certificate to the Commissioner under subsection 39PB(6).

11.12 The certificate must declare that the companies have incurred R & D expenditure or core technology expenditure other than as specified in the application for registration, or that total expenditure in respect of R & D activities exceeds that specified in the application and the date on which such "ineligible" expenditure was incurred.

11.13 New subsection 73B(33BA) will ensure that a deduction is not allowable for expenditure, specified in a certificate given to the Commissioner under subsection 39PB(6) of the IR & DA, that is incurred after the date specified by the Board in the certificate. [Items 10 and 11]

11.14 New subsection 73B(33BB) of the ITAA ensures that new subsection 73B(33BA) does not affect or restrict a syndicate participant from claiming expenditure in respect of R & D activities for which it is individually registered under section 39J of the IR & DA. [Items 10 and 11]

Feedstock formula

11.15 The feedstock provisions of the R & D Tax Concession limit the concessional rate of deduction for the cost of R & D feedstock to the net costs of feedstock i.e., by excluding from the concession the cost of any valuable products derived from processing or transforming feedstock through R & D activities. In effect, the cost of the feedstock that is fully expended in the R & D process receives a 125 per cent deduction, but the portion of the feedstock cost absorbed in creating products receives only a 100 per cent deduction.

11.16 To do this, the feedstock provisions divide feedstock expenditure into eligible feedstock expenditure (subject to 125 per cent deduction) and residual feedstock expenditure (subject to 100 per cent deduction). While the formula used (and examples given in the explanatory memorandum to TLAA3) produce a correct result where there is only one R & D activity being undertaken in any one year, it may not be correct where there is more than one R & D activity being undertaken in any one year.

11.17 For example where, within the same year, the feedstock from each R & D activity is worth less at the end of the R & D activity than when it was fed into that activity, the formula works as intended. However where, within the same year, the feedstock from one R & D activity is worth less at the end of the activity, but the feedstock from another R & D activity is worth more at the end of the activity, the formula can have the unintended effect of providing deductions (concessional or otherwise) for non-existent costs. The following example illustrates the unintended effect:

Example (this example shows how the intended result can be distorted if a taxpayer has feedstock expenditure relating to more than one R & D activity and the feedstock output of one activity is worth more than the feedstock input, while the feedstock output of another is worth less than the feedstock input)

The result should be that, of $1500 feedstock input, $400 is eligible for the concessional 125% deduction while $1100 is deductible at 100%. By allowing the two different R & D activities to be combined, the formula produces the result that $400 is eligible for the concessional deduction and $1400 for deduction at 100%, i.e. $300 more altogether than was actually expended on feedstock.

11.18 The amendmentsensure that the formula properly deals with multiple R & D activities by the same taxpayer by applying it separately to each particular R & D activity undertaken by a taxpayer. [Items 1-3 and 8]

Core technology calculation

11.19 The core technology provisions of the R & D Tax Concession limit the deductions allowable on core technology (existing technology which is the basis for further R & D) expenditure to one third of the related R & D expenditure in any year. Any undeducted amount may be carried forward and deducted in a future year in which R & D activities related to the core technology occur. Subsection 73B(1AB) defines the conditions under which core technology is related to particular research and development activities.

11.20 At present, the core technology expenditure which is the basis of the deduction is defined as the expenditure on that core technology incurred in any previous year (to the extent that a deduction has not already been allowed for that expenditure). This definition means that, inadvertently, deductions for core technology expenditure will only be available from the year after the expenditure was first incurred, rather than from the year in which it was incurred.

11.21 The amendments ensure that the undeducted core technology expenditure that is available for deduction is the core technology expenditure incurred before or during the current year of income to the extent that a deduction has not yet been allowed for that expenditure. [Items 5 and 6]

Paragraph citation

11.22 Within the core technology calculation at subsection 73B(12B) of the Act there is a definition of 'current year core technology adjustment amount'. This definition contains a reference to paragraph 73B(27)(c), which should be a reference to paragraph 73B(27C)(c).

11.23 The amendment inserts the correct reference. [Item 7]

Pilot plant depreciation table

11.24 The pilot plant provisions of the R & D Tax Concession changed the method of calculating the deduction for expenditure incurred on pilot plant. In particular, subsection 73B(4H) of the Act contains a depreciation table for R & D pilot plant. This table requires the taxpayer to determine the 'annual deduction percentage' for calculating pilot plant depreciation by taking two-thirds of the percentage rate shown in the table. However, the table shows this percentage rate as the 'annual deduction percentage'. This creates something of a nonsense in that the 'annual deduction percentage' is two-thirds of the 'annual deduction percentage'.

11.25 The amendment changes the heading of the percentage rate in the table to 'percentage'. [Item 4]

Post 23 July 1996 pilot plant balancing amount

11.26 Subsection 73B(23) of the Act determines whether a balancing amount should be included in assessable income or a further deduction should be allowed where R & D plant is disposed of.

11.27 However, provisions enacted in 1996 excised from the definition of R & D plant, any plant which was post 23 July 1996 pilot plant. This was done to provide a new depreciation regime for post 23 July 1996 pilot plant, similar to the general depreciation provisions of the Act. The result is that a balancing adjustment of the kind provided under subsection 73B(23) for other R & D plant does not apply on the disposal of post 23 July 1996 pilot plant.

11.28 The amendment provides a balancing adjustment mechanism for post 23 July 1996 pilot plant disposed of prior to the completion of the relevant R & D activity. [Item 9, new subsection 73B(24B)]

Chapter 12 - Sales tax - telecommunication and audio visual equipment

Overview

12.1 The amendment made by Schedule 12 of the Bill will ensure that goods of a kind ordinarily used in providing telecommunication and audio visual services will not be exempt from sales tax as electrical fittings.

Summary of the amendments

Purpose of the amendments

12.2 The amendment proposes to ensure that the sales tax exemption offered by Item 43 of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (E & C Act) does not extend to goods of a kind ordinarily used in the provision of telecommunication and audio visual services.

Date of effect

12.3 The amendment will apply to dealings with goods after 7.00 pm Australian Eastern Summer Time on 7 November 1996. [Item 2]

Background to the legislation

12.4 The Full Federal Court in Telstra Corporation Ltd v FC of T
1996 ATC 4805 held that certain items of equipment used in its telephone exchanges were not subject to sales tax under the former Item 90C of the Sales Tax (Exemptions and Classifications) Act 1935 (current Item 43 of Schedule 1 to the E & C Act).

12.5 Item 43 provides a sales tax exemption for certain electrical fittings, accessories and materials.

12.6 The Court decided that the words of the Item do not have any trade or technical meaning so that telephonic equipment, provided it can carry or store electricity, can be considered electrical equipment. Therefore the equipment, provided it is used as part of, or in connection with, 'fixed electrical installations' in consumers' premises can be exempt from sales tax.

12.7 The Government considers that this decision has the potential to erode the wholesale sales tax base by exempting goods that are effectively key elements of a telecommunication provider's business inputs when its outputs are not taxable.

12.8 In line with its stated policy of preventing erosion of the sales tax base, the Government announced, through Treasurer's Press Release No. 109 on 7November 1996, that it would amend Item 43 to exclude from its coverage goods used in the provision of telecommunication and audio visual services.

Explanation of the amendments

12.9 The proposed amendment inserts a new subsection (4) in Item 43 to specifically exclude from the exemption provided by that item, goods which are of a kind ordinarily used in the provision of telecommunication or audio visual services. The exemption will qualify all of Item 43. [Item 1]

Chapter 13 - Subsidiary company liquidations and capital gains tax

Overview

13.1 Schedule 13 of the Bill introduces new sections 160ZZOB and 160ZZOC which may operate to reduce a capital gain or loss otherwise realised on the cancellation of shares on dissolution of a company which is a wholly owned subsidiary of another company. The provisions will apply where consideration for the disposal of the shares is equal to the market value of assets distributed in specie to the shareholder company by the liquidator as part of a final distribution.

Summary of the amendments

Purpose of the amendments

13.2 The amendments contained in Schedule 13 have the effect that, in the context of a liquidator's final distribution, to the extent that an increase or decrease in the value of assets held by a company is reflected in the value of shares held by another company which owns 100% of the shares in the liquidating company, duplication of economic gains and losses relating to the assets will be minimised.

Date of effect

13.3 The amendments apply to share cancellations occurring after 7.30pm on 20 August 1996, which was the date on which the amendments were announced. [Part 2 of Schedule 13]

Background to the legislation

13.4 Section 160ZZO of part IIIA of the Income Tax Assessment Act 1936 (the Act) provides CGT rollover where an asset is transferred from a company to another wholly owned group company. Rollover will be available for the in specie distribution of an asset by the liquidator of a company to another company in a wholly owned company group. The rolled over asset retains its cost base (indexed or reduced) in the hands of the transferee company. If the asset is a loss asset, rollover will be compulsory by virtue of subsection 160ZZO(1AA).

13.5 Where an asset is transferred as part of a liquidator's final distribution and the shares in the transferor subsidiary are cancelled, the cancellation of the shares will be a disposal for CGT purposes (subsection 160M(3)). The consideration for the disposal for the purposes of subsection 160ZD(1) will be equal to the market value of the transferred asset or assets at the time of the transfer. Rollover is not available for the disposal of the shares on cancellation, as the shares will cease to exist. Therefore, any accrued gains relating to the asset and which are reflected in the value of the shares will be subject to CGT as consideration for the disposal of the shares, and again on subsequent disposal of the relevant asset by the transferee company. Similarly, a capital loss which is realised on the disposal of the shares may be duplicated on a subsequent disposal of the asset.

Explanation of the amendments

Prerequisites for the amendments to apply

13.6 The provisions apply where an asset is transferred from a company which is in the course of liquidation, to a holding company whose shares in the transferor were acquired in whole or in part on or after 20 September 1985. [New paragraph 160ZZOB(2)(e)]

13.7 The transfer of an asset would generally be taken to occur in the course of the liquidation of a company where the transfer is effected by a liquidator appointed pursuant to part 5.6 of the Corporations Law. However, new sections 160ZZOB and 160ZZOC are confined in their operation to the CGT consequences of a cancellation of shares on a final distribution by the liquidator. Specifically, the amendments will not affect the application of section 160ZL in relation to interim in specie asset distributions by a liquidator.

13.8 The transferee company must hold 100% of the shares in the liquidating subsidiary throughout the period commencing at the time of the first in specie asset distribution by the liquidator (whether an interim or final distribution, or part thereof) and the time at which the shares in the transferor company are cancelled [new paragraph 160ZZOB(2)(d)] . The in specie distribution must be consideration for the disposal of all of the shares in the transferor company owned in that period [new paragraphs 160ZZOB(2)(b) and (c)].

13.9 The consideration for the disposal of all of the shares in the transferee (being the market value of the transferred assets under section 160ZD) would be spread equally across all of the shares which are cancelled in the course of the liquidation. [New paragraph 160ZZOB(2)(c)]

13.10 In the case of a 'notional gain' asset the transferor and transferee companies must have elected that CGT rollover relief under section 160ZZO will apply in relation to the transfer of the asset [new subparagraph 160ZZOB(2)(a)(i)] . Where the transferred asset is a 'notional loss' asset, rollover will be compulsory under the operation of subsection 160ZZO(1AA) [new subparagraph 160ZZOB(2)(a)(ii)]

13.11 New subsections 160ZZOC(3) and (4) define the terms 'notional gain' and 'notional loss' in relation to transferred assets. A notional gain asset is an asset in relation to which a capital gain would be realised if the asset were disposed of for market value. Similarly, a notional loss asset is an asset in relation to which a capital loss would be realised if the asset were disposed of for market value.

13.12 The amendments will only apply where there is either an actual gain realised on the disposal of shares in the subsidiary company along with a notional gain accrued in relation to the transferred assets, or where an actual loss is realised on the disposal of the shares and a corresponding notional loss applies in relation to the transferred assets. [New paragraph 160ZZO(2)(f)]

Operation of the amendments

13.13 Broadly, new sections 160ZZOB and 160ZZOC may operate to reduce a capital gain or loss which would otherwise be realised on the cancellation of the shares in the transferee company. The capital gain or loss would be determined by reference to the indexed or reduced cost base of the shares in the transferor company and the market value of assets transferred in a liquidator's final distribution. A gain or loss realised on disposal of the shares may be reduced to reflect the unrealised economic gain or loss on the transferred assets.

13.14 In relation to a share cancellation, the formulae contained in new subsections 160ZZOB(3) and (4) require that:

•

the overall actual gain or overall actual loss realised on the disposal of the post CGT shares in the subsidiary company be determined.

13.15 The terms overall actual gain and overall actual loss are defined in new subsections 160ZZOC(6) and (7). An overall actual gain is taken to have arisen where the sum of actual gains realised on shares exceeds the sum of actual losses. Likewise an overall actual loss will be realised where the sum of actual losses exceeds the sum of actual gains.

•

the overall actual gain or loss on the disposal of the shares is reduced by an amount equal to a proportion of the overall notional gain or loss relating to the transferred assets. The overall notional gain or loss is apportioned to reflect the proportion of pre and post CGT shares held in the transferor company.

13.16 The terms notional gain and notional loss are defined by new subsections 160ZZOC(3) and (4) in relation to a transferred asset as being the gain or loss (as the case may be) that would be realised if the asset were disposed of at the time of transfer for an amount equal to its market value.

13.17 The difference between the sum of all notional gains and losses will be an overall notional gain or loss as defined in new subsections 160ZZOC(2) and (5) .

•

the amount which is determined using steps (1) and (2) above is divided by the number of post CGT shares in the transferor company to give a new deemed capital gain or loss realised on the disposal of each of the shares.

Example 1

13.18 Holding company H owns all of the shares in subsidiary company S. The shares have a cost base of $100 and a market value of $1000. Company S owns one asset with a cost base of $100 and a market value of $1000. On final distribution of the assets of company S, the asset is transferred (distributed in specie) to company H, and an election is made under section 160ZZO that CGT rollover should apply in relation to the transfer. Ignoring indexation, the 'notional gain' on the transferred asset is $900 and the overall actual gain on the disposal of the shares is also $900. The overall actual gain is reduced by the notional gain to give a taxable capital gain of nil.

13.19 If the cost base of the transferred asset exceeds the cost base of the shares (ie the 'notional gain' is less than the overall actual gain that would otherwise be realised on the cancellation of the shares) the overall actual gain on the shares will only be reduced by the amount of the notional gain and not by the excess notional capital gain.

Example 2

13.20 Holding company H owns 100% of the shares in subsidiary S. The shares have a cost base of $50 which reflects the market value of asset A at the time of their acquisition. The cost base of asset A is $100, its market value having decreased prior to the purchase of Company S by company H. Subsequently, the market value of asset A has increased to $1000. The notional capital gain attaching to asset A is $900. On cancellation of the shares in subsidiary S, an overall capital gain of $950 will be realised ($1000 less the $50 cost base). The amendment will operate to reduce this gain by the notional gain of $900 attaching to asset A leaving a total taxable capital gain on the share cancellation of $50.

13.21 The gain realised on cancellation of the shares can only be reduced to zero, and any accrued gains on transferred assets will be unaffected. For example, if the market value of a transferred asset is equal to the cost base of the cancelled shares, no adjustment will be made.

Example 3

13.22 Holding company H owns shares in subsidiary S with a cost base of $1000. Asset A which has a cost base of $100 and a market value of $1000, is distributed in specie to holding company H and the shares are cancelled. Consideration for the disposal of the shares will be $1000 being the market value of the transferred asset. This is equal to the cost base of the shares and therefore no overall gain or loss is realised. A $900 capital gain would be realised on a subsequent disposal by company H of asset A.

Examples 4 and 5 - subsidiary holding both gain and loss assets

13.23 Holding company H owns shares in subsidiary company S with a cost base of $50 and a market value of $100. Company S has two assets, one of which has a cost base of $100 and a market value of $50 (a notional loss asset) and the other of which has a cost base of zero and a market value of $50 (giving a notional gain of $50). In specie distribution of the assets would crystallise an actual gain of $50 on the cancellation of the shares. There is no overall notional gain or loss on the assets, since the notional loss offsets the notional gain. Therefore there will be no reduction in the capital gain realised on the shares.

13.24 Company H owns shares in company S with a cost base of $100 and market value of $200. Company S has one asset with a cost base of $10 and market value of $100 (giving a $90 notional capital gain), and another asset with a cost base of $200 and market value of $100 (giving a $100 notional capital loss). On cancellation of the shares, an actual gain of $100 ($200 - $100) will be realised. Because the transferred assets carry a notional capital loss of $10, there will be no reduction in the $100 gain realised on the cancellation of the shares.

Example 6 - pre CGT assets

13.25 Holding company H owns shares in subsidiary S with a cost base of $100. Asset A is a pre CGT asset with a market value of $1000. The consideration for the disposal of the shares will be the market value of the asset, giving a realised capital gain of $900. No capital gain applies to the transferred asset, and therefore there is no notional capital gain available to reduce the gain on the shares. Instead the current rules will apply whereby the consideration for the disposal of the post CGT shares will be equal to the market value of the pre CGT asset. This reflects the underlying intention of the amendments viz, removal of the current 'double' CGT impost on economic gains and losses relating to post CGT shares and assets.

Example 7 - mixture of pre and post CGT assets

13.26 Holding company H holds post CGT shares in subsidiary company S with a cost base of $50. Company S owns a post CGT asset with a cost base of $50 and a market value of $100, and a pre CGT asset with a market value of $100. Under the existing law, the cancellation of the shares in company S would realise a capital gain of $150.

13.27 The new provisions will reduce this gain by the $50 notional gain attaching to the post CGT asset. There will be no

Chapter 14 - Gains and losses

Overview

14.1 Parts 1 to 3 of Schedule 14 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) to allow companies to offset capital losses against capital gains realised in the same year of income in certain circumstances where there has been a change of majority ownership of the company in the year of income. The Bill will also make several associated amendments.

14.2 The associated amendments will:

•

ensure that subvention payments made as consideration for the transfer of a capital or revenue loss will not give rise to a capital gain or capital loss to the payee or payer company;

•

rectify anomalies in the loss and bad debt write-off provisions in recognition of the fact that capital gains can be injected into a company for such purposes as offset against deductions;

•

amend the capital loss provisions to include similar safeguards as currently contained in the revenue loss provisions to prevent manipulation of a business in order to benefit from the same business test relief; and

•

amend the capital loss transfer provisions to give the Commissioner of Taxation unlimited time to amend the assessment of a transferee company where the loss was not in fact incurred by the transferor company.

14.3 Parts 4 and 5 of Schedule 14 of the Bill will amend the Income Tax Assessment Act 1997 (the 1997 Act) and the Income Tax (Consequential Amendments) Act 1997 (the ITCA), where necessary, to reflect the above amendments.

Summary of the amendments

Purpose of the amendments

14.4 Broadly, the amendments align the rules governing the recoupment or transfer of capital losses with the analogous rules relating to revenue losses. The amendments relating to subvention payments clarify the law and are in line with the Commissioner's current practice in administering the existing law. The amendments relating to the anomalies in the loss and bad debt write off provisions ensure that those provisions interact properly with the capital gains tax (CGT) provisions.

Date of effect

14.5 The amendments relating to current year capital losses (including the consequential amendments) will apply from the commencement of the 1996-97 year of income [subitem 41(1)] . The amendments relating to revenue losses and subvention payments contained in Part 1 of Schedule 14 apply only to the 1996-97 year of income [subitem 17(1)] . For later laters of income, Parts 4 and 5 of Schedule 14 apply (see paragraph 14.8 below).

14.6 The amendments relating to the rectifying of anomalies in the loss and bad debt write-off provisions will apply to the 1996-97 year of income and any later year of income but have effect only to events happening after 26 March 1997 [subitem 17(2); subitem 41(2)] . The amendment inserting safeguards into the same business test provisions will apply to manipulations in the scope of a company's business activities that occur after 7.30pm EST 20 August 1996 [subitems 41(3) and (4)] .

14.7 The amendment giving the Commissioner unlimited amendment time discussed at paragraph 14.123 below will not apply to taxpayers whose assessments are incapable of being amended by the Commissioner under the existing law on 26 March 1997 [subitem 41(5)]. To illustrate, a taxpayer whose assessment in respect of an earlier year of income cannot be amended by the Commissioner because of, say, the expiry of the 4 year amendment period before 26 March 1997, would be protected from this amendment.

14.8 Parts 4 and 5 of Schedule 14 of the Bill will apply from 1 July 1997, immediately after the commencement of the 1997 Act. [Subclauses 2(6A) and (6B)]

Background to the legislation

Current year losses

14.9 The current year revenue loss provisions contained in Subdivision B of Division 2A of Part III of the Act (comprising sections 50A to 50N) apply so that where there has been a change of majority underlying ownership of a company in a particular year of income (current year), deductions relating to current year losses or outgoings may, in certain circumstances, be offset against revenue derived in the same year of income.

14.10 Broadly, the current year revenue loss provisions require the company's year of income to be divided into periods separated by 'disqualifying events'. A disqualifying event in relation to a company is deemed to have occurred at a time during a year of income if one of a number of events has occurred. These events include:

•

a lack of continuity of beneficial ownership in the shares of the company carrying more than 50% of the voting, dividend or capital rights before and after the relevant time ; or

•

where the company had an available loss immediately before the relevant time, the company derived income at the relevant time that would not have been derived by the company if the company did not have the available loss.

14.11 A notional taxable income or a notional loss is calculated in respect of each period. Broadly, a notional loss is allowed to be offset against a notional taxable income of a different period if the majority underlying ownership of the company remains the same or the company carries on the same business.

14.12 Even if the company does not satisfy one of these tests relating to the ownership or business of the company, a deduction in respect of a particular period is allowed to be offset against revenue derived in the same period in working out either the notional taxable income or notional loss in respect of the period. The notional loss may be carried forward and deducted in a subsequent year of income subject to the restrictions applying generally in those years.

14.13 An aspect of the existing CGT provisions that is broadly similar to the revenue loss provisions is that a capital loss incurred by a company during the current year of income can offset a capital gain of that year subject to the company satisfying the majority underlying ownership test or the same business test (although the latter test operates slightly differently in both contexts - see below under 'same business test safeguards' for more discussion on the matter).

14.14 A major difference is that unlike the revenue loss provisions, the existing CGT provisions prevent a company which has failed both the tests in a particular year of income from offsetting capital losses relating to a particular period in the year against capital gains relating to the same period. More specifically, paragraph 160Z(9)(b) deems a capital loss incurred by a company not to have been incurred during a year of income where the tests are not satisfied.

14.15 The Bill will amend the CGT provisions to deal with this major difference. As a result of the amendments, the CGT provisions will operate broadly like the revenue loss provisions. More specifically, the amendments will further allow a company to offset capital losses against capital gains incurred in a year of income in certain circumstances where there has been a change in the majority underlying ownership of the company.

Same business test safeguards

14.16 In the existing current year revenue loss provisions, by subsections 50D(5) and 50D(7), same business test relief is not available where a company manipulates the scope of its business activities prior to a contemplated change in its share holdings for the purpose of enabling the company to satisfy the same business test and thus qualify to have losses or income available for offset. These safeguards also appear in the prior year revenue loss and revenue loss transfer provisions.

14.17 However, there are no such safeguards in the same business test applying in relation to capital losses.

Subvention payments

14.18 When a capital or revenue loss is transferred, there will often be a subvention payment made from the transferee company to the transferor company as consideration for the transfer of the loss. The subvention payment is usually equal to the value of the tax benefit of the loss transferred.

14.19 Where a subvention payment is made as consideration for the transfer of the whole or part of a net capital loss from the loss company to the gain company, subsection 160ZP(11) provides that where the loss company is a shareholder in the gain company, the payment will not be income derived by the loss company. Subsection 160ZP(12) provides that a subvention payment will not be a deduction allowable to the gain company. These provisions correspond to subsections 80G(17) and 80G(18) in the revenue loss transfer provisions.

14.20 A deficiency exists in these provisions because they do not deal with the CGT consequences to the loss and gain company when a subvention payment is made. It is possible that an asset for the purposes of the CGT provisions under section 160A may include a loss or the ability to utilise that loss. Consequently, the operation of the CGT provisions may deem a capital gain to accrue to the loss company when the loss is transferred to the gain company. Similarly, when the loss is utilised by the gain company, a capital loss may be incurred.

14.21 It was not intended that a subvention payment give rise to a capital gain to the payee or capital loss to the payer. The Commissioner's current administrative practice gives effect to the policy. To clearly reflect this policy in the law, the income tax law will be amended to ensure that a subvention payment will not result in a capital gain to the loss company or a capital loss to the gain company.

Loss and bad debt write off provisions

14.22 The capital and revenue loss provisions and the bad debt write-off provisions contain terms in recoupment/deductibility tests that do not take account of the introduction of capital gains tax. An example is the definition of 'disqualifying event' applying in the context of current year revenue losses (referred to above). A disqualifying event occurs at a time when a company derives income that it would not have derived if the company did not have the available loss (ie available deductions) immediately before the time. The definition disregards the fact that capital gains can be injected into a company under similar circumstances for the purposes of utilising available deductions.

Unlimited amendment period for capital loss transfers

14.23 A concession applies to wholly owned corporate groups and allows capital losses from one resident group company to be transferred to offset capital gains derived by another resident group company. A similar concession applies to revenue losses within corporate groups.

14.24 In the revenue loss context, the Commissioner is given unlimited time to amend the assessment of a transferee company where it is subsequently found that the loss (or part of the loss) was not in fact incurred by the transferor company.

14.25 In the capital loss context, the Commissioner does not have unlimited time to amend the assessment of a transferee company where all (or part of) a transferred net capital loss was not in fact incurred by the transferor company. The general power to amend applies in this situation and, except in cases of fraud or evasion, the Commissioner generally must amend assessments within 4 years from the date upon which the company furnished to the Commissioner a return determining its taxable income and tax payable.

Explanation of the amendments

Current year capital loss provisions

14.26 The provisions discussed below dealing with the treatment of current year capital gains and losses replace the existing paragraph 160Z(9)(b) and subsection 160Z(9A) [items 28, 29 and 30] . The provisions are based on the current year revenue loss provisions rewritten as part of the Tax Law Improvement Project in the Income Tax Assessment Act 1997. The definitions for the purposes of these provisions are provided in new sections 160JA and 160JB [item 25] . Section 160ZC of the Act, which deals with the calculation of net capital gains and net capital losses, will have effect subject to new Divisions 3A , 3B and 3C of Part IIIA of the Act [item 31] .

14.27 Items 236 and 237 of the ITCA repealed subsection 160Z(9A) and inserted a new paragraph 160Z(9)(b) into the 1936 Act. As discussed, however, the Bill repealed both of these provisions and replaced them with new Divisions 3A, 3B and 3C of Part IIIA of the 1936 Act. Consequently, items 236 and 237 of the ITCA will be repealed to ensure the provisions of the Bill applies as intended. These items will be taken never to have had any effect. [Items 61 and 64]

14.28 New Division 3A contains the rules for determining the net capital gain or loss of a company for a year of income where the majority underlying ownership of the company has changed and the company does not satisfy the same business test [item 32 - new section 160ZNA] . The tests for determining whether a company has maintained the same majority owners (the ownership tests) are contained in the new Division 3B and the same business test is contained in new Division 3C. These tests are discussed at paragraphs 14.87 to 14.101 below. When is a company required to work out its net capital gain or loss under Division 3A?

Change of ownership

14.29 A company must calculate its net capital gain or loss under Division 3A unless there are persons who had more than a 50% stake in the company during the whole of the year of income. Where the same persons had more than a 50% stake for only part of the year of income and that part of the year commenced at the start of the year of income, the company is not required to calculate its net capital gain or loss under this Division if the company satisfies the same business test for the rest of the year of income ( same business test period ) [item 32 - new subsection 160ZNB(1)] . The same business test is to be applied in relation to the business carried on immediately before the time ( test time ) when the ownership changed [item 32 - new subsection 160ZNB(2)] .

14.30 If there are persons who had more than 50% of the voting power in the company during part or all of the year of income ( ownership test period ) and there are persons who had rights to more than 50% of the company's dividends and there are persons who had rights to more than 50% of the companys capital distributions during the whole of the ownership test period, then those persons are taken to have had more than a 50% stake in the company during the period [item 32 - new subsection 160ZNC(1)] . The tests for determining whether the conditions in subsection 160ZNC(1) are satisfied are contained in new Division 3B (discussed below under 'ownership tests') [item 32 - new subsections 160ZNC(2) and 160ZNC(3)] . (Alternative rules applying to listed public companies and their subsidiaries are discussed at paragraphs 14.41 to 14.68 below.)

Change of control

14.31 A company must also calculate its net capital gain or loss under this Division if:

•

during the year of income, a person begins to control or becomes able to control the voting power in the company for the purpose of gaining a benefit or advantage for the person or someone else in relation to how the Act applies; and

•

the company does not satisfy the same business test for the rest of the year of income after the person has gained the control [item 32 - new section 160ZND] .

14.32 The person can gain control directly or indirectly through one or more interposed entities.

Determination of net capital gain or net capital loss

14.33 When a company is required to work out its net capital gain or loss under Division 3A, the year of income is divided into periods. The first period commencs at the start of the year of income, each later period starts immediately after the end of the previous period and the last period ends at the end of the year of income. Each period except the last ends at the earlier of:

•

the latest time that would result in persons having more than a 50% stake in the company during the whole of the period (outlined at paragraphs 14.29 and 14.30 above); or

•

the earliest time when a person begins to control the voting power in the company in a manner outlined in subsection 160ZND(1) (outlined at paragraph 14.31 above) [item 32 - new section 160ZNE] .

14.34 However, if the company satisfies the same business test for all of the periods when they are considered as a single period, then the separate periods are considered to be a single period [item 32 - new subsection 160ZNE(4)] . The same business test is applied to the business the company carried on immediately before the end of the first of the periods.

14.35 The company is required to work out the notional net capital gain or notional net capital loss for each period as if each period were a year of income [item 32 - new subsection 160ZNE(5)] . A company has a notional net capital gain for a period if the sum of:

•

the total capital gains that accrued to the company in the period; and

•

any amounts required to be included in the company's assessable income under section 97 or section 98A that are capital gains (to the extent that they are reasonably related to the period);

exceeds the sum of the capital losses that were incurred by the company in the period. [Item 32 - new subsections 160ZNF(1) and 160ZNF(4)]

14.36 A notional net capital loss is incurred for a period if the total capital losses that accrued to the company in the period exceeds the sum of:

•

the total capital gains that accrued to the company in the period; and

•

any amounts required to be included in the company's assessable income under section 97 or section 98A that are capital gains (to the extent that they are reasonably related to the period). [Item 32 - new subsections 160ZNF(2) and 160ZNF(4)]

14.37 If the company does not have a notional net capital loss for any of the periods in the year of income, Division 3A has no further application and the companys net capital gain is calculated under section 160ZC. [Item 32 - new section 160ZNF(3)]

14.38 A capital gain is taken to accrue, or a capital loss it taken to be incurred, in respect of the disposal of a particular asset at the time of disposal. [Items 26 and 27 - amended paragraphs 160Z(1)(a) and (b)]

14.39 The company's net capital gain for the year of income is the sum of:

•

the company's total notional net capital gains for any periods in the year; and

•

any amounts required to be included in the company's assessable income under section 97 or section 98A that form part of a net capital gain that are not reasonably related to a particular period;

reduced by the amount of any net capital losses in respect of earlier years of income that may be applied under section 160ZC. [Item 32 - new subsection 160ZNG(1)].

14.40 The sum of the companys notional net capital losses in the year of income is taken to be a net capital loss that was incurred by the company in respect of the year of income. [Item 32 - new subsection 160ZNG(2)]

Tracing the ownership of shares in a listed public company

14.41 Divisions 3A and 3B of the Bill are modified by the special rules for listed public companies , and their 100% subsidiaries , contained in proposed Divisions 3CA, 3CB, 3CC and 3CD of Part IIIA of the 1936 Act. The rules will provide an alternative for establishing the continuity of majority underlying ownership of shares in a listed public company. The rules are designed to assist listed public companies trace who owns their shares.

14.42 These special rules are based on the analogous provisions contained in the 1997 Act. The equivalent provisions in the 1997 Act are:

14.43 A detailed discussion of the special tracing rules can be found in chapter 8 of the Explanatory Memorandum to the 1997 Act.

14.44 The new rules will differ from the standard test for continuity of majority underlying ownership in new Division 3B in two major aspects:

•

testing for ownership will be periodic rather than at all times during the income year;

•

when a company is required to establish who are its ultimate beneficial owners the following rules will apply:

(a)

all registered shareholdings of the company that are less than one per cent will be taken to be owned by a notional shareholder; and

(b)

direct or indirect holdings of a complying superannuation fund, complying approved deposit fund or certain types of company will be deemed to be beneficially held by that fund or company.

14.45 This means the notional shareholder, fund or company will beneficially own the relevant shares for the purposes of establishing if the company has maintained majority underlying ownership.

14.46 To determine whether the current year capital loss provisions in Divisions 3A and 3CA will apply, (that is, whether the majority underlying ownership and same business tests have been failed), regard will now be had to Divisions 3B, 3C, 3CB, 3CC and 3CD.

14.47 The definitions for the purposes of the proposed new special tracing rules are contained in new section 160JA . Division 3E of the Bill, which outlines when a person has a 'shareholding interest' in a company, has been omitte. 'Shareholding interest' is defined in section 175-65 of the 1997 Act. The term 'constituent document' has also been omitted from sections 160ZNN and 160ZNO and replaced with 'constitution' , which is defined in section 995-1 of the 1997 Act.

Proposed Division 3CA - Calculating a net capital gain or net capital loss

14.48 Proposed Division 3CA modifies the way in which Division 3A applies to a listed public company and its 100% subsidiaries. Division 3A details how to calculate a net capital gain or net capital loss of a company for a year of income in which there has been a change in majority underlying ownership and the same business test is not satisfied.

14.49 The tests for finding out whether a listed public company has maintained majority underlying ownership are now contained in proposed Divisions 3CB, 3CC and 3CD. [New section 160ZNSA]

14.50 A company can choose that Division 3CA will not apply to modify the operation of Division 3A. The company must choose on or before the day it lodges its return for the year of income, or before a later day if the Commissioner allows. [New section 160ZNSE]

14.51 New subsection 160ZNSB(1) provides that Division 3CA will only apply to a company where the company is a listed public company at all times during the year of income (the test period ). Division 3CA will also apply to a company which is not a listed public company if the company is a 100% subsidiary of a listed public company at all times during the subsidiary's year of income [new section 160ZNSD] . In this case, Division 3CA will apply as if the subsidiary company were a listed public company.

14.52 A listed public company and its wholly owned subsidiaries will satisfy the majority underlying ownership test for the purposes of Division 3A if there is no abnormal trading in the company's shares during the test period [new subsection 160ZNSB(2)] . If there is abnormal trading but the company has maintained substantial continuity of ownership as between the start of the test period and the time of the abnormal trading, the company will also be taken to have satisfied the majority underlying ownership test [new subsection 160ZNSB(3)] .

14.53 If there is abnormal trading and no substantial continuity of ownership, the company will be taken to have failed the majority underlying ownership test [new subsection 160ZNSB(4)] . In this case, if the company satisfies the same business test for the rest of the year of income (the same business test period ) after the first abnormal trading, the company will not be subject to Division 3A [new subsection 160ZNSB(5)] .

14.54 If the company is required to calculate its net capital gain or net capital loss under Division 3A, the income year is divided into periods according to when there is a failure to maintain majority underlying ownership. [New section 160ZNSC]

Proposed Division 3CB - Tests for determining ownership

14.55 Proposed Division 3CB contains the tests for determining whether a listed public company has maintained the same owners as between two points in time. Proposed Divisions 3CC and 3CD contain rules to assist the company to satisfy these ownership tests. [Newsection160ZNSF]

14.56 If there is substantial continuity of ownership as between the start of the test period and another time (test time) during the test period, then a company will be taken to have maintained majority underlying ownership.

14.57 Substantial continuity of ownership will occur when:

•

the same persons (not companies) have more than 50 per cent of the voting power in the company both at the start of the test period and immediately after the other test time; and

•

the same persons (not companies) own the rights to more than 50 per cent of the company's dividends and capital distributions both at the start of the test period and immediately after the other test time. [New section 160ZNSG]

14.58 To determine whether a condition in section 160ZNSG is satisfied, an ownership test for that condition must be applied. The ownership tests basically provide that the ownership rights can be held directly or indirectly through one or more interposed entities [new sections 160ZNSH, 160ZNSI and 160ZNSJ] . There is provision for tracing through interposed entities to disclose the ultimate beneficial owners.

14.59 The rules in Division 3B (generally designed to overcome arrangements affecting beneficial ownership) also apply for the purposes of an ownership test. [New section 160ZNSK]

Proposed Division 3CC - How to treat shareholdings of less than 1 per cent

14.60 Proposed Division 3CC modifies how the ownership tests apply to a listed public company (head company) if the company has voting, dividend or capital shareholdings of less than 1 per cent [new section 160ZNSM] . The Division will also apply where another listed public company is interposed between the head company and certain persons (none of them companies). The certain persons are those who control the voting power in the head company indirectly through the interposed company or have the right to receive for their own benefit, and indirectly through the interposed company, any dividends or capital distributions the head company may pay [new section 160ZNSN] . The interposed company must have voting, dividend or capital shareholdings of less than 1 per cent [new subsection 160ZNSN(3)] . These rules will assist listed public companies to satisfy the ownership tests in Division3CB.

14.61 When applying the ownership tests at a particular time, a company will not be required to trace through to the ultimate beneficial owners where the registered shareholding is less than 1 per cent (except where those shares are part of a substantial shareholding ). The total of such holdings will be treated as if they were held by a single notional entity and the ownership rights attached to those shares will be taken to be the rights of that notional shareholder only. The notional shareholder will be treated as a person other than a company. [New subsections 160ZNSO(1) and 160ZNSO(3)]

14.62 Similarly, if another listed public company is interposed between the head company and those persons, all shareholdings of less than 1 per cent in the interposed company will be treated as if they were held by a different single notional entity, which will also be treated as a person other than a company [new subsections 160ZNSO(2) and 160ZNSO(3)] . Again, the company will not have to trace through the interposed company to the persons who beneficially own those shares in the interposed company.

14.63 For each of the ownership rights, the notional shareholder will be taken to have rights no greater than those it had at the start of the test period. [New section 160ZNSP]

14.64 Division 3CC will not apply to the head company unless, at the ownership test time, all the voting shares in the company have the right to receive more than 75 per cent of any dividends the company may pay or any distributions of capital of the head company. [Newsection160ZNSR] .

14.65 Division 3CC will not apply for the purposes of section 160ZNSB if the Commissioner considers it reasonable to assume that the head company would not satisfy the ownership test if it were not for the rules in Division 3CC. [New section 160ZNSS] Proposed Division 3CD - Superannuation and approved deposit funds

14.66 Proposed new Division 3CD contains rules in regards to interposed superannuation funds , approved deposit funds and special companies which will assist listed public companies to satisfy the ownership tests in Division 3CB. [New section 160ZNST]

14.67 A listed public company will not have to trace through any complying superannuation funds, complying approved deposit funds or special companies that are interposed between the company and certain persons (none of them companies). The certain persons are those who control any of the voting power in the company (indirectly through the fund or special company) or have the rights to its dividends or capital (directly and indirectly through the fund or special company). [Newsubsections 160ZNSU(1) and 160ZNSV(1)]

14.68 If the fund or special company has more than 50 members, the fund or company will be treated as a person other than a company who holds the respective ownership rights [new subsections 160ZNSU(2) and 160ZNSV(2)] . If the fund has 50 members or less, each member will be treated as a person other than a company who controls a fixed proportion of the ownership rights [new subsections 160ZNSU(3) and 160ZNSV(3)] .

Consequential amendments resulting from current year capital loss rules

Commissioner's amendment period

14.69 Subsection 170(13) has been amended. The amendment extends the Commissioner's power to amend an assessment within 6 years after the date upon which tax became payable under an assessment for the purpose of giving effect to new section 160ZND, new sections 160ZNM to 160ZNR and Division 3D. [Item 40 - amended subsection 170(13)]

14.70 This gives the Commissioner a power which already exists in respect of current year revenue losses.

14.71 Item 248 of the ITCA inserted a new subsection 170(13) into the 1936 Act. However, the subsection does not contain references to the relevant provisions of the new current year capital loss provisions in the Bill. Thus, item 248 will be amended to include references to new sections 160ZND, 160ZNM to ZNR (inclusive) and to new Division 3D of Part IIIA of the 1936 Act. [Item 63]

Other consequential amendments

14.72 Subparagraph 160ZP(7AAA)(b)(i) (inserted by Taxation Laws Amendment Bill (No. 2) 1997) has been replaced by a new subparagraph. The repealed provision referred to paragraph 160Z(9)(b) which has been repealed by item 29 of this Schedule and replaced with the new Divisions 3A to 3D. Under the new subparagraph 160ZP(7AAA)(b)(i), a net capital loss can only be transferred to a company if, subject to any other conditions required to be satisfied under subsection 160ZP(7), the company is not required to:

•

calculate a net capital gain or net capital loss for the gain year under Division 3A (ie the current year capital loss provisions); and

•

calculate a net capital loss for the gain year under Division 3D (ie the anti-avoidance provisions). [Item 33 - new subparagraph 160ZP(7AAA)(b)(i)]

14.73 For the purposes of determining whether a company is required to calculate a net capital gain or net capital loss under Divisions 3A, subsection 160ZNF(3) is to be disregarded. Subsection 160ZNF(3) provides that Division 3A has no further application if the company does not have a notional net capital loss for any of the periods in the year (see paragraph 14.64 above). Accordingly, a company will be treated as being required to calculate a net capital gain under Division 3A even if the company is not required to do so under subsection 160ZNF(3) (ie because the company does not have a notional net capital loss for any of the periods in the year). [Item 34 - new subsection 160ZP(7AAB]

14.74 For the purposes of determining whether a company is required to calculate a net capital loss under Division 3D, the gain company is to assume that it has incurred a capital loss at the beginning of the gain year. The capital loss is equal to the amount of a net capital loss sought to be transferred [item 34 - new subsection 160ZP(7AAC)]. This will ensure, for example, that the anti-avoidance provisions in Division 3D (discussed below) will be effective in preventing a transferred net capital loss from being available for offset against a capital gain that would not have accrued to the gain company if the loss were not available.

14.75 Further, subsection 160ZP(9) and (9A) have been replaced by new subsection 160ZP(9). The new provision broadly reflects the underlying policy of the repealed provisions but recognises the fact that the current year capital loss provisions are now contained in Divisions 3A to 3D. Under the new provision, a net capital loss is prevented from being transferred in the year of income in which the loss was incurred if the transferor company is required to calculate the net capital loss under Division 3A (ie current year capital loss provisions) or Division 3D (ie anti-avoidance provisions). [Item 36 - new subsection 160ZP(9)]

14.76 The ITCA Act repealed subsection 160ZP(9A) and inserted new paragraphs 160ZP(9)(a) and 160ZP(9)(b) into the 1936 Act. As mentioned, this Bill proposes to repeal these provisions and replace them with a new subsection 160ZP(9), which recognises the fact that the current year capital loss provisions are now contained in Divisions 3A to 3D of Part IIIA of the 1936 Act. Consequently, items 241 and 242 of the ITCA Act will be repealed to ensure the provisions of the Bill apply as intended. These items will also be taken never to have had any effect. [Items 62 and 64]

Consequential amendments to current year revenue loss provisions

14.77 Under the existing current year revenue loss provisions [subparagraph 50B(4)(a)(i) of the Act], a notional taxable income or notional loss for a particular period in a year of income is calculated by taking into account any amounts that would be included in the taxpayer's assessable income if the period were a year of income. Assessable income includes a net capital gain [subsection 160ZO(1)].

14.78 Subparagraph 50B(4)(a)(i) of the Act will be amended to prevent an amount of net capital gain from being included twice - in the calculation of a notional taxable income or notional loss under the current year revenue loss provisions and also in the calculation of a notional net capital gain or loss under the new Division 3A of Part IIIA. [Item 2]

14.79 The Bill will also ensure that where a company's taxable income for a year of income is calculated under the current year revenue loss provisions, the taxable income will include a net capital gain for the year. The net capital gain may be calculated under either section 160ZC (ie normal rules) or Division 3A (ie current year capital loss rules). [Item3 - amended paragraph 50C(2)(b)]

Amendments to the 1997 Act

14.80 The current year revenue loss provisions in the 1997 Act will also be amended. Amended subsection 165-65(3) of the 1997 Act will ensure that a company's taxable income for a year of income, calculated under the current year revenue loss provisions, will include a net capital gain for the year. [Item 46]

14.81 In addition, new paragraph 165-70(3)(f) will ensure that a company's tax loss for a year of income will be calculated by taking into account any net capital gain accrued in the year of income. [Item 47]

14.82 Also, new subsection 165-60(6A) will prevent a net capital gain from being included in the calculation of a notional taxable income or notional loss. [Item 44]

Sections 97 and 98A amounts

14.83 The existing current year revenue loss provisions require all amounts that are to be included as assessable income (ie including a net capital gain) under section 97 or section 98A that are reasonably related to a particular period in a year to be included in the calculation of a company's notional taxable income or notional loss for the period. The provisions provide further that such amounts not reasonably attributed are to be included in the calculation of the net capital gain or loss for the year of income.

14.84 Since the assessable income of a taxpayer includes a net capital gain and section 97 or section 98A amounts are to be taken into account under the new Division 3A, amendments have been made to the current year revenue loss provisions to prevent double counting. More specifically, subsection 50E(1) and subsection 50B(1) have been amended to exclude section 97, 98A amounts that are capital gains. [Items 1 and 4]

Amendments to the 1997 Act

14.85 New subsections 165-60(2A) and 165-60(7) of the 1997 Act will be amended to exclude section 97 and section 98A amounts that are capital gains. [Items 43 and 45]

14.86 New section 170-25 of the 1997 Act will now include the CGT consequences for the payment for a transferred tax loss. Specifically, a capital gain will not accrue to a payee company because of the receipt of consideration for the transfer of a tax loss. In addition, a capital loss will not be incurred by the payer company because of the giving of the consideration for the amount of the tax loss. [Items 48]

Ownership tests

14.87 New Division 3B contains the tests for determining whether a company has maintained the same owners in a year of income. The primary test states that persons will have more than 50% of the voting power, more than 50% of the companys dividends or more than 50% of the companys capital distributionsduring the period where there are persons who at all times during the ownership test period beneficially own shares that carry:

•

the right to exercise more than 50% of the voting power in the company [item 32 - new subsection 160ZNH(1)] ;

•

the right to receive more than 50% of any dividends that the company may pay [item 32 - new subsection 160ZNI(1)] ; or

•

the right to receive more than 50% of any distribution of capital of the company [item 32 - new subsection 160ZNJ(1)] .

14.88 The alternative test states that persons will have more than 50% of the voting power, more than 50% of the companys dividends or more than 50% of the companys capital distributions during the period if it is the case, or reasonable to assume, that there are individuals who:

•

between them control or are able to control the voting power in the company at all times during the ownership test period, whether directly or indirectly through one or more interposed entities [item 32 - new subsection 160ZNH(2)] ; or

•

at all times during the ownership test period, have between them the right to receive for their own benefit, whether directly or indirectly through one or more interposed entities, more than 50% of any dividends that the company may pay [item 32 - new subsection 160ZNI(2)] or more than 50% of any distribution of capital of the company [item 32 - new subsection 160ZNJ(2)] .

14.89 Entity is defined in new section 160JB to mean an individual, a body corporate or politic, a partnership or trust, a superannuation fund or any other unincorporated association or body of persons. [Item 25]

14.90 A condition of the primary test will be satisfied notwithstanding that a person does not beneficially own exactly the same shares at all times during the ownership test period [item 32 - new subsection 160ZNK(1)] . A private company must satisfy a condition of the primary test for the test to be satisfied whereas a public company is taken to have satisfied the primary test if it is reasonable to assume it has done so [item 32 - new subsection 160ZNK(2)] . In addition, a test for a condition can be satisfied by one person [item 32 - new section 160ZNL] .

14.91 For the purposes of a test, the Commissioner may treat particular shares as not being beneficially owned by a person at a particular time during the ownership test period if, before or during the year of income:

•

an arrangement was entered into which related to, affected or depended for its operation on, the beneficial interest (or the value of that interest) in the shares, a right relating to the shares or the exercise of such a right;

•

the arrangement was entered into to reduce or eliminate an entitys liability to income tax for a year of income. [Item 32 - new section 160ZNM]

14.92 For the purposes of a test, shares are taken never to have carried particular rights during a year of income if the Commissioner is satisfied that the shares stopped carrying those rights, or may stop carrying those rights, after the year of income. This must occur because of the companys constituent document as in force at some time during the year of income or because of an arrangement entered into before or during the year of income. [Item 32 - new section 160ZNN]

14.93 Alternatively, shares are taken to have carried particular rights at all times during a year of income if the Commissioner is satisfied that the shares started carrying those rights, or may start carrying those rights, after the year of income. Again, this must occur because of the companys constituent document as in force at some time during the year of income or because of an arrangement entered into before or during the year of income. [Item 32 - new section 160ZNO]

14.94 Redeemable shares beneficially owned by a person during the year of income are not taken into account in determining whether a test is satisfied [item 32 - new section 160ZNP] . Sections 160ZNM, 160ZNN, 160ZNO and 160ZNP will not affect how shares, and rights carried by shares, are counted for the purposes of determining the total voting power in the company or a companys total dividends payable or total distributions of capital [item 32 - new section 160ZNQ] .

14.95 Shares that are beneficially owned by a person who dies will continue to be owned beneficially by the person, for the purposes of a test, so long as they are owned by the trustee of the persons estate or are beneficially owned by a beneficiary of the estate. [Item 32 - new section 160ZNR]

Same business test

14.96 New Division 3C contains the same business test that is to be applied for the purposes of new Divisions 3A and 3B. The new provisions replicate the current year revenue loss provisions rewritten as part of the Tax Law Improvement Project in the Income Tax Assessment Act 1997. The 1997 Act reflects the same business test applying in the current year capital loss rules in subsection 160Z(9A) of the Act, except to the extent that subsection 160Z(9A) does not contain safeguards.

14.97 As mentioned at paragraphs 14.16 and 14.17 above, the absence of safeguards in the existing same business test in the capital loss rules causes the test to be deficient. To overcome this deficiency, the same business test in the new Division 3C incorporates the safeguards to prevent taxpayers from manipulating the scope of their business activities to satisfy the test.

14.98 The general rule is that the same business test will be satisfied if throughout the same business test period it carries on the same business as it carried on immediately before the test time. [Item 32 - new subsection 160ZNS(1)]

14.99 However, the company will not satisfy the same business test if:

•

at any time during the same business test period, it derives assessable income from a business of a kind that it did not carry on before the test time; or

•

at any time during the same business test period, it derives assessable income from a transaction of a kind that it had not previously entered into in the course of its business operations before the test time. [Item 32 - new subsection 160ZNS(2)]

14.100 Safeguards have been inserted to deem a company to have failed the same business test if:

•

before the test time, it commences a business not previously carried on or initiates a transaction in the course of its business operations not previously entered into in order to be deemed to have carried on the same business as required under the general rule outlined at paragraph 14.59 above;

•

at any time during the same business test period, it incurs expenditure in carrying on a business of a kind that it did not carry on before the test time;

•

at any time during the same business test period, it incurs expenditure as a result of a transaction of a kind that it had not entered into in the course of its business operations before the test time. [Item 32 - new subsections 160ZNS(3) and (4)]

14.101 The amendments inserting the safeguards will apply to an assessment in respect of any year of income where the assessment is affected by actions of a taxpayer causing the taxpayer to fail the same business test if those actions occur after 7.30pm EST on 20 August 1996. [Item 41 - subsections (3) and (4)]

Anti avoidance provisions

14.102 New Division 3D contains anti-avoidance measures dealing with capital losses of companies. The Division broadly reflects the operation of the current law.

14.103 The Commissioner may disallow capital losses of a company, or parts of them, for a year of income if a capital gain ( injected capital gain ) accrued to the company in the year of income which would not have accrued if the company had not incurred those losses [item 32 - new subsection 160ZNT(1)] . The disallowed losses may exceed the injected capital gain.

14.104 The Commissioner may also disallow a deduction or a capital loss of a company for a year of income to the extent that the company would not have incurred the deduction or loss if some or all of a capital gain accrued in the year of income had not accrued. [Item 32 - new subsection 160ZNU(1)]

14.105 However, the Commissioner cannot disallow capital losses or deductions if the continuing shareholders will benefit from the accrual of the injected capital gain, or from any profit or advantage that arises from the incurring of the deduction or loss, to an extent that the Commissioner thinks is fair and reasonable having regard to their interests in the company. [Item 32 - new subsections 160ZNT(2) and 160ZNU(2)]

14.106 Continuing shareholders are the individuals who have shareholding interests in the company both immediately before the injected capital gain accrued, or the deduction or capital loss was incurred, and immediately afterwards. [Item 32 - new subsection 160ZNT(4)]

14.107 New Division 3E outlines when a person has a shareholding interest in a company. Specifically, a person has a shareholding interest if the person is the beneficial owner of shares in the company or an interest in shares in the company. A person will also have a shareholding interest if the person has a shareholding interest in another company and the other company has a shareholding interest in the company. [Item 32 - new section 160ZNY]

14.108 The Commissioner may also disallow a deduction or a capital loss of a company if:

•

a person other than the company obtains a tax benefit in connection with a scheme and the scheme would not have been entered into if the company had not incurred the deduction or the capital loss ( available expense ) [item 32 - new subsection 160ZNV(1)] ; or

•

a person obtains a tax benefit in connection with a scheme and the scheme would not have been entered into or carried out if the capital gains that accrued to the company ( available capital gains ) had not accrued before the deductions or capital losses were incurred and had not accrued in the same year of income as the deductions or capital losses were incurred [item 32 - new subsection 160ZNV(2)] .

14.109 The disallowed deduction or capital loss cannot exceed the available expense but it may exceed the available capital gains.

14.110 However, the Commissioner cannot disallow capital losses or deductions under section 160ZNV if the person who obtains the tax benefit had a shareholding interest in the company at some time during the year of income and the Commissioner considers the tax benefit to be fair and reasonable having regard to that shareholding interest. [Item 32 - new subsection 160ZNV(3)]

14.111 Where a capital loss is disallowed, this means that the capital loss cannot be taken into account in determining whether a net capital gain accrued to the taxpayer in the year of income. [Item 32 - new subsections 160ZNT(3), 160ZNU(3) and 160ZNV(4)]

14.112 If a company has a taxable income for a year of income because the Commissioner disallows deductions of the company for that year of income, the company may also have a loss for the year of income. The loss is equal to the sum of the deductions disallowed less the net exempt income for the year of income. [Item 32 - new section 160ZNW]

14.113 If a company has a net capital gain for a year of income because the Commissioner disallows capital losses of the company for the year of income, the company may also have a net capital loss for the year of income. The loss is equal to the sum of the disallowed capital losses in the year of income. [Item 32 - new section 160ZNX]

Subvention payments

14.114 A net capital loss can be transferred between resident companies within the same 100% owned group where the conditions in subsection 160ZP(7) of the Act are met. As discussed at paragraphs 14.15 to 14.18 above, consideration (for example, a subvention payment) may be given by the gain company to the loss company for the transfer of the net capital loss. Where the loss company receives consideration for the transfer of the whole or a part of a net capital loss from the gain company, and the loss company is a shareholder in the gain company, then a capital gain will not accrue to the loss company because of the receipt of the consideration and the consideration will not be income of the loss company. [Item 37 - new subsection 160ZP(11)]

14.115 Similarly, the gain company will not incur a capital loss when the transferred capital loss is utilised and the consideration given will not be an allowable deduction to the gain company. [Item 37 - new subsection 160ZP(12)]

14.116 Consequential amendments have been made as a result of new subsections 160ZP(11) and 160ZP(12), to reflect that for CGT purposes, consideration for the transfer of a loss may not only consist of monetary payment. [Item 38 - amended subsection 160ZP(13), item 39 - amended subsection 160ZP(14)]

14.117 The corresponding revenue loss provisions have also been amended to ensure there will be no capital gain or loss for the loss or income company where consideration is given for the transfer of a revenue loss. [Item 16 - new subsection 80G(17), item 16 - new subsection 80G(18)]

Loss and bad debt write off provisions

14.118 Amendments have been made to the current year revenue loss provisions (in particular, section 50H) to ensure that references to income include references to capital gains. This is necessary because a revenue loss is deductible against a net capital gain. Similar amendments have also been made to the recoupment tests in section 80DA of the Act.

14.119 Finally, amendments have been made to the bad debt write-off provisions (ie section 63B), also to ensure that a reference to income will include a capital gain. The amendments are necessary because a bad debt deduction can also be offset against a net capital gain.

14.120 The following amendments have been made to ensure that provisions dealing with the derivation of income for the purpose of offsetting deductions also deal with the accrual of capital gains for the same purpose. The amendments are:

•

amended paragraph 50H(1)(e) [item 5];

•

new subsection 50H(3A) [item 6];

•

amended subsection 50H(5) [item 7];

•

new subsection 50H(10) [item 8];

•

amended paragraph 63B(1)(a) [item 18];

•

amended subsection 63B(2) [items 19 and 20];

•

amended subsection 63B(3) [item 21];

•

amended subsection 63B(8) [items 22, 23 and 24];

•

amended paragraph 80DA(1)(a) [item 9];

•

amended subsection 80DA(2) [items 10 and 11];

•

amended subsection 80DA(3) [item 12 ]; and

•

amended subsection 80DA(8) [items 13, 14 and 15].

Amendments to the 1997 Act

14.121 Proposed Part 4 of Schedule 14 of the Bill will amend Division 175 of the 1997 Act to reflect the above amendments. More specifically, the following provisions are amended at items 49 to 58 :

•

amended subsection 175-10(1);

•

amended subsection 175-10(2);

•

new subsection 175-20(1);

•

amended subsection 175-20(2);

•

amended subsection 175-20(3);

•

new paragraph 175-30(2)(b);

•

amended subsection 175-30(2).

14.122 As a consequence of the amendments to sections 175-10 and 175-20, subsection 995-1(1) of the 1997 Act, which contains the definitions for the purposes of the Act, will be amended to replace the definition of injected income with a definition of injected amount. [Items 59 and 60]

Unlimited amendment period for capital loss transfers

14.123 New subsection 160ZP(8D) will give the Commissioner unlimited time to amend the assessment of a transferee company where a transferred net capital loss (or part of the loss) was not in fact incurred by the transferor company. [Item 35]

Chapter 15 - Deductions for gifts

15.1 Part 1 of Schedule 15 [Items 1 to 6] amends the Income Tax Assessment Act 1936 to allow income tax deductions for gifts of $2 or more to the funds/organisations listed in paragraph 15.4.

15.2 Part 2 of Schedule 15 [Items 7 to 13] amends the Income Tax Assessment Act 1997 to also allow income tax deductions for gifts of $2 or more to the funds/organisations listed in paragraph 15.4 for the 1997/8 income year and later years.

15.3 This will be done by listing the organisations/funds in tables 5, 6 and 12 of the gift provisions in each of the relevant Acts. The index to the provisions in each of the relevant Acts will also be updated.

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

Chapter 16 - Technical amendments

Overview

16.1 Schedule 16 of the Bill makes a number of technical amendments to the following Acts.

Taxation Laws Amendment Act 1993

16.2 Section 44 of the above Act refers to the definition of 'excluded property' in section 57AF of the Income Tax Assessment Act 1936. This reference should have been to 'excluded unit of property'. The proposed amendment will make this technical correction. [Item 1]

Taxation Laws Amendment Act (No. 3) 1994

16.3 A table in Part 1 of Schedule 2 of the above Act sets out some of the consequential amendments to be made to the Income Tax Assessment Act 1936 as a result of the introduction of the Reportable Payments System in 1994. In that table reference to the amendment to subsection 222AFA(4) (adding 1AA after Divisions in that section) should have been contained in a separate item. The proposed amendments will rectify this. [Items 2 and 3]

Taxation Laws Amendment Act (No. 4) 1995

16.4 The heading to item 1 of Schedule 2 of the above Act should have referred to paragraph 46M(3)(b) rather than paragraph 46L(3)(b). [Item 4]

16.5 Items 134 and 136 of Schedule 2 of the above Act omitted the word 'rebate' where second occurring. The proposed amendments will correct these technical errors. [Items 5 and 6]

Taxation Laws Amendment Act (No. 3) 1996

16.6 Item 74 of Schedule 4 of the above Act added 'and' to the end of paragraphs 46(2)(a), (b) and (c) of the Industry, Research and Development Act 1985. However 'and' already appears at the end of paragraph 46(2)(c). The proposed amendment removes the reference to paragraph 46(2)(c) from item 74. [Item 7]

Taxation Laws Amendment Act (No. 2) 1997

16.7 Item 8 makes a technical amendment to the provisions dealing with the transfer of capital losses. An explanation is provided at paragraph 14.72 in Chapter 14.

Taxation Laws Amendment (Private Health Insurance Incentives) Act 1997

16.8 An increase of the medical expenses rebate threshold was announced in the 1996-97 Budget. The Government introduced amendments to the above Act to provide for the threshold increase to complement the incentives under the Act. The Parliament subsequently passed the threshold increase at half the proposed level ($1250 instead of $1500).

16.9 There was a drafting error in the amendment that inserted the medical expenses rebate amendments into the Act. The amendments became Schedule 3. The Schedule clause at the front of the Act states that '...each Act that is specified in a Schedule to this Act is amended...as set out... in the Schedule concerned...'. The error is that Schedule 3 does not specify an Act and therefore the amendment is technically deficient.

16.10 Item 9 inserts the title of the Act (the Income Tax Assessment Act 1936) to be amended by Schedule 3.