House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Denial of certain capital losses

Inserts new section 160ZPA into the Income Tax Assessment Act 1936 to limit certain capital losses incurred by corporate groups to the groups' economic loss. The measure also amends the anti avoidance provisions contained in Part IVA of the Act to enable those provisions to apply to schemes which artificially create capital losses in the year in which the losses are created.

Date of effect: New section 160ZPA applies to capital losses created by arrangements entered into before 3 pm on 29 April 1997 which have not been offset against a capital gain in the 1995-96 or an earlier year of income, or have not been offset in an income tax return for the 1996-97 year of income, lodged before 3 pm on 29 April 1997. The amendments to Part IVA apply to capital losses created under a scheme entered into after 3 pm on 29 April 1997.

Proposal announced: The amendments were announced in the Treasurer's Press Release No. 35 of 29 April 1997.

Financial impact: The measures will protect approximately $100 million in revenue per year, starting in 1997-98.

Fringe benefits tax

Amends the Fringe Benefits Tax Assessment Act 1986, the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 to implement the Government's response to the recommendations concerning fringe benefits tax made by the Small Business Deregulation Task Force in November 1996 by:

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extending and simplifying the existing exemption for taxi travel;

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exempting car parking benefits provided by certain small businesses unless the car parking is provided in commercial car parks;

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simplifying the 'arranger' provisions; and

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exempting certain employers from keeping records for fringe benefits tax (FBT) purposes and, providing certain conditions are met, allowing those employers to calculate their FBT liability for an FBT year on the basis of fringe benefits provided in a previous FBT year.

Additionally, certain benefits consisting of places in approved student exchange programs are to be exempt from FBT.

Date of effect: The changes to the exemption for taxi travel and the exemption for car parking provided by small business employers will apply for the FBT year commencing 1 April 1997 and all later FBT years.

The changes to the arranger provisions will apply for the FBT year commencing 1 April 1998 and all later FBT years.

Employers eligible for the record keeping exemption will have their FBT liability for the 1998-99 FBT year and later FBT years calculated by reference to a base year. The exemption from keeping FBT records for eligible employers will apply to benefits provided from the day that Royal Assent is received. A special transitional provision is also proposed to enable employers to use either the 1996-97 or 1997-98 FBT year as their first base year.

The exemption relating to student exchange programs will apply for the FBT year commencing on 1 April 1996 and all later FBT years.

Proposal announced: Prime Ministers statement More Time for Business on 24 March 1997, in response to recommendations made by the Small Business Deregulation Task Force. The FBT exemption relating to student exchange programs was not previously announced.

Financial Impact: The exemption for car parking provided by small business employers is expected to have an on-going revenue cost of around $35 million per year from 1997-98.

The financial impact of the changes to the exemption for taxi travel and to the arranger provisions cannot be quantified but is not expected to be large.

The record keeping exemption arrangements (RKEA) are expected to result in a loss to revenue of $5 million in the 1998-99 financial year, $25 million in 1999-2000 and $20 million in 2000-2001 and 2001-2002. The cost to the revenue of the exemption relating to student exchange programs is not expected to be significant.

Compliance cost impact: The Compliance Cost Impact Statements are incorporated into the Regulation Impact Statements which appear at the end of Chapter 3 of the Explanatory Memorandum.

Summary of regulation impact statement

Taxi travel and carparking measures

Impact: Low

Main points:

•

The exemption for certain car parking benefits will affect employers, other than government bodies or listed public companies and their subsidiaries, whose ordinary income for the relevant year of income is less than $10 million and who provide car parking for employees other than in a commercial car park.

•

The change to the exemption for benefits arising from taxi travel will affect all employers who provide taxi travel arriving at or leaving from the work place for their employees.

•

These measures will not have a significant impact on the Government, the Australian Taxation Office, tax agents or accountants.

Policy objective: The policy objective of these measures is to reduce the cost of record keeping by small business. First, by simplifying the existing exemption for taxi travel, and second, by exempting benefits arising from car parking provided by small business employers.

Arranger provisions

Impact: This measure will affect employers whose employees receive benefits from third parties where there is not an agreement between the employer and third party.

Main Points:

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This measure will make it significantly easier for employers, whose employees receive benefits from third parties where there is not an agreement between the employer and third party, to determine whether they are liable to pay FBT for such benefits.

•

This measure will significantly reduce the compliance costs of employers in determining whether they are liable to pay FBT.

Policy objective: The proposed changes to the arranger provisions aim to reduce the compliance problems for employers arising from the arranger provisions.

Record keeping exemption arrangements

Impact: This measure will affect employers, other than government bodies and tax exempt bodies, who provide fringe benefits with an aggregate fringe benefits amount not greater than the threshold amount in a particular FBT year and maintain a similar level of benefits in later years.

Main Points:

Those employers who are eligible for the RKEA will be able to elect not to keep most FBT records in later years provided there is not a material change in the value of benefits provided. Employers would still have to retain records which they receive from associates in respect of benefits provided to their employees by those associates.

Some employers who would be eligible for the RKEA may continue to keep records because they may not be certain that the value of benefits will fall within the limits of the exemption. Other eligible employers who currently do not lodge FBT returns may continue to keep records because they do not wish to start lodging FBT returns.

Policy objective: The policy objective of this measure is to reduce the compliance costs of record keeping for small business by exempting employers from the requirement to keep records for fringe benefits tax (FBT) purposes in certain circumstances.

Effect of bankruptcy on carrying forward tax offsets

Proposes new provisions preventing a taxpayer who has become bankrupt from carrying forward unused tax offset amounts (rebates) from an earlier income year prior to the bankruptcy, in the same way as losses arising from the alternative deductions are treated.

Date of effect: The item 1 of Schedule 4 applies to assessments for the 1997-98 income year and later income years.

Amendments announced: Not previously announced.

Financial Impact: Cannot be measured.

Compliance cost impact: Nil

Payments of tax by small companies

Amends the company tax instalment provisions contained in Division 1C of Part VI of the Income Tax Assessment Act 1936 to allow instalment taxpayers classified as small to pay their likely tax on 15 December following their income year and the balance, if any, of their tax liability on the following 15 March. Consequential changes to the date for determining classification as small, medium or large, and some minor clarificatory amendments, will also be made.

Date of effect: The proposed amendments to the instalment payment schedule are to take effect from the 1996-97 income year. The proposed amendments to the classification system are to take effect from the 1997-98 income year.

Proposal announced: The amendments were announced on 24 March 1997 in the Government's More Time For Business response to the report of the Small Business Deregulation Task Force and in Treasurer's Press Release No. 101 of 29 August 1997.

Financial Impact: The proposed amendments to the instalment payment schedule will defer collection of a small amount of tax, resulting in an insignificant interest cost to the revenue. The proposed amendments to the classification system are expected to bring forward the collection of a small amount of tax, resulting in an insignificant interest gain to the revenue.

Compliance cost impact: There will be no increase in compliance costs for taxpayers.

Summary of Regulation Impact Statement

Impact: Low

Main Points:

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Companies, corporate unit trusts, public trading trusts, superannuation funds, approved deposit funds and pooled superannuation trusts who are classified as small for the purposes of the company tax instalment system will receive cash flow benefits from the amendments.

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Tax professionals who help the above taxpayers meet their tax obligations will also benefit from the certainty provided by the amendments.

Policy objective: To assist entities classified as small in managing their cash flow by extending the time in which they can meet their tax obligations.

Dividend imputation and RSAs

Amends the Income Tax Assessment Act 1936 to prevent franking credits or debits arising from the payment or refund of tax where those amounts are attributable to the Retirement Savings Account (RSA) business of a life assurance company.

Date of effect: The amendments are to apply to franking credits and debits arising for life assurance companies after the date of introduction of the Bill.

Proposal announced: Not previously announced.

Financial Impact: The proposed amendments will not have any revenue impact.

Compliance cost impact: The proposed amendments will not impose additional compliance costs for life assurance companies.

Deductible expenditure and CGT cost bases

Amends Part IIIA of the Income Tax Assessment 1936 and Division 110 of the Income Tax Assessment Act 1997 to ensure that taxpayers reduce the cost base or indexed cost base of an asset by cost base elements to the extent to which they are deductible and are not subject to an assessable recoupment on disposal. Cost base reductions will also apply where a heritage conservation rebate or a landcare and water facility tax offset is obtained in respect of the expenditure as an alternative to claiming a deduction.

Date of effect: The amendments, which were announced by the Treasurer in the 1997-98 Budget, will generally apply to assets acquired after 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997. Expenditure incurred before 1 July 1999 in respect of underlying land or buildings acquired on or before 13 May 1997 will not be subject to the measure.

Moreover, CGT cost base or indexed cost base will be reduced by a heritage conservation rebate or a landcare and water facility tax offset taken as an alternative to the deduction only where the relevant expenditure is incurred on or after this Bill is introduced into Parliament.

Proposal announced: Treasurer's Press Release Numbers 62 of 13 May 1997 and 117 of 2 November 1997.

Financial Impact: The expected gain to the revenue is $20 million in 1998-99; $50 million in 1999-2000; $125 million in 2000-01 and $130 million in 2001-02.

Compliance cost impact: The Compliance Cost Impact Statements are incorporated into the Regulation Impact Statement which appear at the end of Chapter 6 of the Explanatory Memorandum.

Summary of Regulation Impact Statement

Impact: Low

Main point:

The amendments will align the rules for dealing with net revenue deductions for cost base and indexed cost base of an asset with the existing rules for reduced cost base of an asset.

Policy objective: As part of the 1997-98 Budget, the Government announced that amounts of expenditure include in the cost base of assets for capital gains tax (CGT) purposes would be adjusted to take into account net revenue deductions allowable in respect of the exependiture.

The principle underlying this measure is that expenditure should be either deductible for income tax purposes, or included in the CGT cost base of an asset, but not both.

Generally, the amendments are to apply to the disposal of assets acquired after the Budget at 7.30 pm AEST on 13 May 1997.

Passive income of insurance companies

Replaces the formulae used to determine the passive income of the controlled foreign companies of life and general insurance companies.

Date of effect: Applies to the passive income derived by an insurance company on or after 1 July 1997.

Proposal announced: Announced on 13 May 1997 in the 1997-98 Budget.

Financial Impact: Estimated revenue savings of $10 million in each of the 1998-99, 1999-2000 and 2000-01 financial years.

Compliance cost impact: There will be some increase in compliance costs, particularly for general insurance companies, as there are more elements in the proposed replacement formulae.

Average calculated liabilities of life assurance companies

Amends Division 8 of the Income Tax Assessment Act 1936 to require life companies to use average calculated liabilities, rather than calculated liabilities at the end of the year of income, as the basis for determining:

•

the amount of income that relates to immediate annuity policies;

•

the amount of income that is attributable to policies issued by overseas branches; and

•

the amount of income and capital gains to be allocated to each class of assessable income.

Date of effect: The amendments apply from the first year of income that commences on or after 29 April 1997. However, the amendments will apply to the preceding year of income if a significant event occurred in one of the insurance funds of a life company in the period from 29 April 1997 to the end of that year of income.

Proposal announced: The use of average calculated liabilities as the basis for calculating exempt income that relates to immediate annuity business and apportioning income and capital gains was announced in Treasurer's Press Release No. 34 of 29 April 1997. The use of average calculated liabilities as the basis for calculating the amount of exempt income that is attributable to policies issued by overseas branches was announced when Taxation Laws Amendment Bill (No. 6) 1997 was introduced on 29 October 1997.

The use of average calculated liabilities as the basis for calculating the amount of exempt income that is attributable to policies issued by overseas branches has not previously been announced.

Financial Impact: The amendments are expected to protect revenue in the order of $100 million.

Compliance cost impact: The Compliance Cost Impact Statements are incorporated into the Regulation Impact Statements which appear at the end of Chapter 8 of the Explanatory Memorandum.

Summary of Regulation Impact Statement

Impact: Low

Main Points:

The proposed measure will have minimal regulation impact on life companies. The measure requires life insurers to value calculated iabilities annually except where there is a significant event which substantially alters the value of calculated liabliities. If a significant event occurs, the life insureer will be required to do an additioanl valuation of calculated liablities at that time. Performance of actuarial valuations is time consurming, costly and inconvenient. However, because of the small number of life insurers affected, and because a calculation of calculated liablitites is likely to be required for prudential and accounting purposes, the cost of compliance of the proposal is expected to be small.

Policy objective: The policy objective is to remove distortions in calculating a life company's calculated liabilities for the purposes of the Income Tax Assessment Act 1936 (the Tax Act). Amendments to the Tax Act will require life companies to use average calculated liabilities for life insurance policies held during the income year, rather than calculated liabilities at the end of the year of income, as the basis for determining:

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the amount of income that relates to immediate annuity policies;

•

the amount of income that is attributable to policies issued by overseas branches; and

•

the amount of income and capital gains to be allocated to each class of assessable income.

Depreciation

Inserts new section 61A into the Income TaxAssessment Act 1936 (the Act) to ensure that, for tax exempt entities which became subject to taxation before 3 July 1995, depreciation deductions and balancing adjustments are based on the notional written down values of their depreciable assets as if the entity had always been subject to taxation. The calculation of those notional written down values includes any loadings that would have applied under the former section 57AG of the Act if the entity had always been subject to taxation.

Date of effect: Applies to tax exempt entities which became subject to taxation in the period commencing at the start of the year of income in which 1 July 1988 occurred and ending on 2 July 1995. (Schedule 2D, Division 57 of the Act applies to exempt entities which become taxable after that date)

Proposal announced: 1997-98 Federal Budget, 13 May 1997.

Financial Impact: No additional revenue is expected. However, failure to implement this measure poses a potentially significant threat to the revenue.

Compliance cost impact: The amendment gives effect to the ATO's long standing interpretation of existing law. That interpretation has generally been accepted. It is therefore anticipated that there will be no compliance costs associated with the amendment.

Company tax instalments

Amends the Income Tax Assessment Act 1936 by excluding superannuation funds, approved deposit funds and pooled superannuation trusts from the grouping provisions contained in the company tax instalment system.

Date of effect: The amendments will apply from the 1995-96 income year.

Proposal announced: Assistant Treasurers Press Release (No. 1) of 27 February 1997.

Financial Impact:: The amendments may result in a deferral of revenue which cannot be quantified but is expected to be insignificant.

Compliance cost impact: Compliance costs for affected taxpayers will be reduced.

Summary of Regulation Impact Statement

Impact Low

Main Points:

•

Compliance costs for superannuation funds, approved deposit funds and pooled superannuation trusts will reduce because they will not have to consider whether the grouping provisions contained in the company tax instalment system apply.

•

Furthermore, companies will not have to consider whether the grouping provisions apply to superannuation funds, approved deposit funds or pooled superannuation trusts that they control.

Policy objective: Implement the Governments announcement to exclude superannuation funds, approved deposit funds, and pooled superannuation trusts from the application of the grouping provisions contained within the company tax instalment system.

Chapter 1 - Denial of certain capital losses

Overview

1.1 Schedule 1 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) to deny the ability to offset against capital gains certain capital losses created by an arrangement entered into before 3 pm on 29 April 1997 and to prevent companies using capital losses artificially created through an arrangement entered into after that time.

Summary of the amendments

Purpose of the amendments

1.2 The overall purpose of the amendments is to deny the use of capital losses which do not reflect economic losses actually incurred. Part 1 of Schedule 1 amends the law to deny certain capital losses incurred by a company where an asset has previously been rolled over from a related company under section 160ZZO of the Act.

1.3 Part 2 of Schedule 1 applies the anti-avoidance provisions contained in Part IVA of the Act to the creation of capital losses in the year in which they are incurred, rather than to the amount of loss offset against capital gains in a particular year.

Date of effect

1.4 The amendments made by Part 1 apply to capital losses incurred as a result of arrangements entered into before 3 pm on 29 April 1997. The amendments made by Part 2 apply to capital losses resulting from schemes entered into after 3 pm on 29 April 1997 [item 14] . Where both measures could apply, those in Part 1 would apply before Part 2 (see paragraphs 1.9 and 1.10).

Background to the legislation

1.5 Under the existing law, corporate groups could artificially multiply and group an actual economic capital loss several times over through manipulation of the capital gains tax provisions. In particular, section 160ZZO of the Act is open to manipulation. Section 160ZZO provides that where an asset is transferred from a company to a related company, the general capital gains tax provisions do not apply to the disposal and acquisition. Instead, the company acquiring the asset (the loss company) is considered to have acquired it at the time and for the cost base, indexed cost base or reduced cost base that applied to the company disposing of the asset. If a capital loss is incurred on the subsequent disposal of an asset, the loss is calculated using the asset's reduced cost base. The subsequent disposal of the asset by the acquiring company is generally subject to the normal capital gains tax provisions. A simplified example of this type of arrangement is provided below.

Example: creating capital losses by unbundling group companies in a 'chain' before liquidating that chain.

Assumptions for this example

1.6 There is a group of companies structured as shown below with a $1 billion investment made by the group. The companies in the group are, directly or indirectly, 100% owned by the parent company A. The same $1 billion is passed down the chain by each successive company purchasing shares in the company below. Company C used the $1 billion to acquire an asset (the loss asset).

1.7 A year later, the asset that C owns, which cost $1 billion has a market value of $300 million. Hence, there is an unrealised capital loss of $700 million inherent in the asset held by C.

Approach

•

B transfers its shares in C to A for $300 million (market value). Rollover relief is claimed under section 160ZZO. A is deemed to acquire these shares for a cost base equal to B's reduced cost base on the shares ($1 billion), in determining whether a capital loss arises on the disposal of the shares.

•

C's asset is transferred to A at market value ($300 million). Rollover relief is claimed under section 160ZZO. A is deemed to acquire this asset for C's reduced cost base and, on disposal of the asset, A realises a capital loss of $700 million.

•

The cost bases of A's shares in C and B are each $1 billion, while the market value of each parcel of shares is $300 million represented by the cash received for the transfer of the loss asset by C and the shares B held in C.

•

A liquidates B and C and generates a capital loss of $700 million each on the cancellation of its shares in the companies.

•

These steps generate a total of $2.1 in billion capital losses when the actual economic loss suffered by the group as a whole was $0.7 billion. On the facts of this example, each additional interposed entity in the chain would result in an additional capital loss of $0.7 billion being available.

1.8 At 3 pm on 29 April 1997, the Treasurer announced that the Government would introduce measures to deny taxpayers the ability to offset certain capital losses, artificially created before that time, against subsequent capital gains in the 1996-97 and later years of income. An exception was provided for amounts offset against capital gains in a tax return for the 1996-97 income year, lodged before announcement of the measures, or in previous income years.

Explanation of the amendments

Interaction between Parts 1 and 2 of Schedule 1

1.9 Part 1 is a specific anti-avoidance provision which applies to capital losses incurred in limited circumstances. One criterion for application of Part 1 is that the capital loss in question is incurred in respect of the disposal of an asset which was rolled over, under section 160ZZO, to the company making the disposal. Part 1 does not require that the capital loss be incurred before or after any particular date. However, the rollover of the asset subsequently disposed of must have occurred before 3 pm on 29 April 1997.

1.10 Part 2 amends the general anti-avoidance provisions of the Act and therefore has much broader application than Part 1 . As a matter of statutory interpretation, the general anti-avoidance provisions are known as 'residual' provisions. That is, they apply after any other relevant provisions in the Act have been applied. Therefore if new section 160ZPA could apply to a capital loss and, in addition, the loss was incurred under a scheme which had been entered into after 3 pm on 29 April 1997, new section 160ZPA would be applied. Part IVA would only apply to the extent that the company obtained a tax benefit that would not be within new section 160ZPA .

Part 1

1.11 Part 1 of Schedule 1 inserts new section 160ZPA , which denies the use of certain capital losses incurred by a company. Part 1 applies where an eligible loss, described in new subsection 160ZPA(4) has been incurred and that loss was not offset against subsequent gains as described in new subsection 160ZPA(6) . Part 1 does not apply if the company is a small business or the asset rolled over is plant, machinery, or a building used for specified periods in manufacturing businesses. [New subsection 160ZPA(5)] Part 1 only applies to a company with net capital losses in the particular year of income. [New paragraphs 160ZPA(2)(a) and (4)(c) and (d)] In any other case, the company will have used up any eligible rollover losses it incurred prior to the date of announcement.

How to calculate an eligible rollover loss

1.12 New subsection 160ZPA(4) provides that a company incurs an eligible capital loss if it makes a capital loss on the disposal of an asset in the circumstances set out below.

1.13 Firstly, the asset disposed of should have been acquired from a related company and section 160ZZO of the Act should have applied to the acquisition of the asset from the related company (referred to as a rollover disposal). [New paragraph 160ZPA(4)(a)] For this provision to apply, the rollover disposal must have occurred before 3 pm on 29 April 1997. [New paragraph 160ZPA(4)(f)] For a rollover disposal to occur, the companies must be related companies. A company is related to another company where that company owns directly or indirectly 100% of the shares in the other company or there is a company which owns 100% of both, either directly or through subsidiaries.

1.14 The provisions will not apply to deny a capital loss if the loss asset is not disposed of by the loss company until after 5 years from its being rolled over to the loss company by another company in the group. [New paragraph 160ZPA(4)(g)] Generally, the longer the period between the rollover and the disposal of the rolled over asset, the smaller the likelihood that the rollover was part of an arrangement designed to artificially duplicate a capital loss. A period of five years is considered sufficient to ensure that the rollover and subsequent disposal are not part of such an arrangement. Also, the longer the period between the rollover and the disposal of the rolled over asset, the more likely it is that any loss on disposal of the loss asset may be unrelated to any loss realised in relation to the transferor of the loss asset or in relation to any indirect interests in the transferor.

1.15 New paragraph 160ZPA(4)(b) provides that for an eligible rollover loss to have been incurred, the transactions must be such that if section 160ZZO had not applied to the rollover of the asset, there would have been no capital loss or a smaller capital loss. Therefore, if the transactions did not create or increase the value of capital losses incurred by the loss company, new section 160ZPA will not apply to the transactions.

1.16 The loss company must have rights in relation to the company rolling over the asset (the transferor). [New paragraph 160ZPA(4)(c)] The right may be:

•

an interest in the transferor held either directly or indirectly through interests in interposed companies; or [New subparagraph 160ZPA(4)(c)(i)]

•

the right to recover a debt from, or acquire shares in, the transferor company; or [New subparagraph 160ZPA(4)(c)(ii)]

•

an interest in a company, partnership or trust, held either directly or indirectly through interposed companies, which has the right to recover a debt from, or acquire shares in the transferor. [New subparagraph 160ZPA(4)(c)(iii)]

1.17 An interest is defined in new subsection 160ZPA(7) to mean a share in a company or an interest in the income or capital of a partnership or trust. An example showing the connection between the transferee and transferor is set out below.

1.18 In the above example, A holds a direct interest in companies B, D and E and has an indirect interest in Company C. Company B holds a direct interest in Company C, an indirect interest in Company D and rights in relation to Company E.

1.19 The loss company must have acquired the right after 19 September 1985. [New paragraph 160ZPA(4)(d)] That is the date on which the capital gains tax provisions became effective. This condition has the same application whether the company actually acquired the asset after that date or was deemed to have acquired it on that date by another CGT provision. If any of the rights linking the loss company to the transferor were acquired after 19 September 1985 or a direct right was acquired after that date, new section 160ZPA will apply.

1.20 Immediately after the rollover disposal, the market value of the loss company's rights in the transferor must be less than its reduced cost base or what would be its reduced cost base if the right were an asset to whose disposal the general capital gains tax provisions applied. [New paragraph 160ZPA(4)(e)]

1.21 In the case of a right held indirectly through a company subsidiary to the loss company, the direct interest held by the subsidiary may have been acquired on or before 19 September 1985 (see paragraph 1.19). In that case, the capital gains tax provisions would not provide a cost base in relation to the subsidiary's direct interest. In the example in paragraph 1.17 above, Company A has an indirect right in Company C, acquired after 19 September 1985, although B's direct right in C was acquired before that date. New paragraph 160ZPA(4)(e) provides that, in that case, the shares in Company C are considered to have the cost base they would have had if the CGT provisions did provide a cost base.

1.22 The rollover disposal must have occurred before 3 pm on 29 April 1997. [New paragraph 160ZPA(4)(f)] This provision and its interaction with the amendments made by Part 2 are discussed in paragraphs 1.9 to 1.10 above.

Unused amount of the eligible rollover loss

1.23 New subsection 160ZPA(6) provides for the calculation of the 'unused amount' (that is, the amount of an eligible rollover loss that is not taken to have been offset by a realised capital gain) which is denied under either new subsection 160ZPA(1) or (2) . The unused amount of an eligible rollover loss is calculated in the test year, which is either the year in which a company incurs the eligible rollover loss or a later year. If the test year is a later year, the unused amount is recalculated in each subsequent year, unless the company's net capital loss is nil. [New paragraph 160ZPA(6)(a)] If a company does not have a net capital loss, then the company has used all its capital losses, including eligible rollover losses, to reduce capital gains.

1.24 In the year in which an eligible rollover loss is incurred, the unused amount of that loss is calculated as the company's net capital loss minus the amount that would have been the net capital loss if section 160ZZO had not applied to any of the rollover disposals concerned. [New paragraph 160ZPA(6)(b)] If the loss company would not have incurred a capital loss but for the arrangement, the amount of net capital loss the company would have incurred is taken to be nil.

1.25 In the example provided in paragraphs 1.6 to 1.7 above, the net capital loss is $2.1 billion. If section 160ZZO had not applied to the rollover disposals, company C could realise a capital loss of $700 million. C's loss could have been transferred to A under section 160ZP. In this case, A's unused amount would equal:

$2.1 billion less $0.7 billion = $1.4 billion.


1.26 If A did not accrue capital gains during the year of income and therefore C was unable to transfer the losses to A, then those losses would be extinguished when C was liquidated. A could make a loss of $700 million on the liquidation of B. In this case, the unused amount would equal:

$2.1 billion less $0.7 billion = $1.4 billion.


1.27 In a year after that in which a company incurred an eligible rollover loss, the unused amount of that loss is calculated as set out in new paragraph 160ZPA(6)(c) . If the company accrues no capital gains in a test year, the unused amount will be equal to the unused amount for the previous year as the amount of the reduction will always be nil. If a company accrues capital gains or transfers the whole or part of a net capital loss to a related company under section 160ZP (as described in new subsection 160ZPA(8)) , the unused amount is reduced. New subsection 160ZPA(9) describes a loss or part of a loss transferred to a related company under section 160ZP, which can reduce unused amounts in the same way as capital gains. An example is provided in paragraph 1.28 below.

1.28 If a company with net capital losses for the previous year of income of $2,500, including an unused amount of $2,000, accrued a capital gain of $500 and transferred $500 in net capital losses to a related company under section 160ZP, the unused amount for the company's test year would be calculated as follows:

2,000-(500+500)*2000/2,500 = $1,200


1.29 The unused amount is calculated separately in respect of each eligible rollover loss incurred by a company. The sum of eligible rollover losses in a year of income becomes one unused amount in subsequent years of income. Each unused amount is calculated separately and the sum of any unused amounts is denied under new subsection 160ZPA(1) or (2).

When a capital loss is denied - the usual case

1.30 The treatment of unused amounts varies depending on whether the company has lodged its income tax return for the 1996-97 year of income before 3 pm on 29 April 1997. Most companies would not meet this condition. Therefore, most eligible rollover losses will be denied in the 1996-97 and later years of income by new subsection 160ZPA(1).

1.31 If a company incurred a net capital loss in the 1995-96 year of income and that loss included one or more unused amounts of eligible rollover losses then, subject to new subsection 160ZPA(3), (see paragraphs 1.38 to 1.56 below) the net capital loss which is available to be offset against future capital gains is reduced by the unused amount.

1.32 A company's net capital loss in a year of income is determined by section 160ZC as, broadly, the sum of the company's net capital losses incurred in that year and previous years, reduced by any amounts offset against net capital gains accrued in the year of income. A company's net capital loss is also reduced if it makes an agreement to transfer all or part of a net capital loss to a related company under section 160ZP. In calculating the net capital loss for the purposes of new section 160ZPA, a transfer of a loss under section 160ZP will only be taken into account if that transfer occurred before 3 pm on 29 April 1997. [New subsection 160ZPA(8)]

1.33 If:

•

a rollover disposal occurred before 3 pm on 29 April 1997; and

•

an eligible rollover loss was incurred in the 1996-97 or a later year of income; and

•

the company did not lodge its income tax return for the relevant year of income before 3 pm on 29 April 1997; and

•

the eligible rollover loss was created or increased because of the application of section 160ZZO;

then, subject to new subsection 160ZPA(3), that eligible rollover loss is denied. The loss cannot be offset against subsequent capital gains, whether they are incurred in the same year of income or a later year.

When a capital loss is denied 1996-97 income tax return lodged before 3 pm on 29 April 1997

1.34 If a company was an early balancing company which had incurred an eligible rollover loss and had lodged its income tax return for the 1996-97 year of income before 3 pm on 29 April 1997, then subsection 160ZPA(2) could apply to prevent that loss being carried forward into the 1997-98 year of income.

1.35 New subsection 160ZPA(2) applies, subject to new subsection 160ZPA(3) , where the company has a net capital loss at the end of the 1996-97 year of income. That net capital loss is reduced, for the purposes of the 1997-98 and all subsequent years of income, by the sum of the company's unused amounts as at the end of the 1996-97 year of income.

1.36 If a company had incurred the eligible rollover loss in the 1996-97 year of income, new paragraph 160ZPA(2)(d) would apply to deny the unused amount of the loss to the extent there is a net capital loss for that year. The unused amount would be calculated under new paragraph 160ZPA(6)(b) as the entire amount of the eligible rollover loss.

1.37 If a company had incurred eligible rollover losses in or before the 1995-96 year of income, and also in the 1996-97 year of income, the amounts to be denied would be calculated separately for each case. To the extent that the company incurred a net capital loss, the eligible rollover losses in respect of both years would be denied. The separate calculations for the two years of income are necessary because section 160ZC of the Act, which sets out the calculation for net capital gains and losses, applies differently to the two years. Up until the 1995-96 year of income, net capital losses are calculated cumulatively, so that a company's net capital loss in a year of income includes any net capital losses carried forward. From 1996-97 onwards, a company's net capital losses are calculated separately in each year of income.

Commissioner to reduce the amount of the capital loss denied

1.38 The Commissioner is required to reduce the amount of the capital loss otherwise denied under either new subsection 160ZPA(1) or (2) , if requested to do so by the company which incurred the loss (ie. the loss company), where it is fair and reasonable to do so having regard to certain listed, and any relevant, criteria. [New subsection 160ZPA(3)]

Factors to be considered by the Commissioner

1.39 The factors to be considered by the Commissioner in deciding whether, or by how much, it is fair and reasonable to reduce the amount of the capital loss that would otherwise be denied are listed in new paragraph 160ZPA(3)(b) .

Any other disposals by the loss company

1.40 The Commissioner is to have regard to whether the loss company has disposed of, or is likely to dispose of, the interest, right or debt mentioned in new paragraph 160ZPA(4)(c) . [New subparagraph 160ZPA(3)(b)(i)] An eligible rollover loss cannot be artificially multiplied by a company group without there being a disposal by the company group of an interest in the company that originally rolled over the loss asset to the loss company. The existence, or otherwise, of such a disposal is an important consideration in determining the correct amount of an eligible rollover loss to be denied. However, it is also necessary to have regard to the extent to which the loss company could dispose of such an interest in the future. The greater the chance of such a disposal occurring, the greater the opportunity to artificially multiply a capital loss in the future.

1.41 Although this provision only refers to disposals by the loss company itself, new subparagraphs 160ZPA(3)(b)(ii) and (iii) (see below) give the Commissioner express authority to take into account losses created by the disposal of other companies in the group.

Other losses incurred by companies in the group

1.42 The Commissioner is to have regard to the extent to which the eligible rollover loss or losses are related to losses incurred, and losses which could potentially be incurred, by other companies in the group. [New subparagraph 160ZPA(3)(b)(ii)]

The amount of any loss incurred by other members of the group

1.43 The Commissioner is to have regard to the individual and cumulative amounts of those losses referred to in new subparagraph 160ZPA(3)(b)(ii) . [New subparagraph 160ZPA(3)(b)(iii)]

Example 1

1. 45 The Commissioner would take into account the fact that:

A has made additional losses of $1.4 billion from disposing of the shares in B and C, of which $700 million is an eligible rollover loss (the loss on the disposal of the shares in C which had been rolled over to A by B);

the $1.4 billion loss from disposing of these shares is directly related to the unrealised loss on the loss asset at the time of the rollover;

A makes a loss of $800 million from the disposal of the loss asset which is an eligible rollover loss;

$100 million of the loss from the disposal of the loss asset arose from a decrease in the value of the loss asset after the roll over. This decrease in value of the rolled over asset was not reflected in the losses arising from disposal of the shares in B and C.

1.46 In this situation the Commissioner may decide that it is fair and reasonable to reduce the amount to be denied under new subsections 160ZPA(1) and (2) by $100 million.

Example 2

1.47 This example illustrates the application of new subsection 160ZPA(3) where the Commissioner takes into account only the three factors discussed above in the context of a situation where the value of the loss asset increases after rollover to the loss company. For the purposes of this example the facts are as in Example (i) with the following modifications:

After the loss asset is transferred from C to A , its market value increases from $300 million to $950 million. Upon disposal of the asset, A realises a capital loss (an eligible rollover loss) of only $50 million.

1.44 This example illustrates the application of new subsection 160ZPA(3) where the Commissioner takes into account only the three factors discussed in paragraphs 1.38 to 1.41 above, in the context of a situation where the value of the loss asset decreases after rollover to the loss company. For the purposes of this example the facts are:

•

There is a group of companies structured as shown below with a $1 billion investment made by the group. The companies in the group are, directly or indirectly, 100% owned by the parent company A. The same $1 billion is passed down the chain by each successive company purchasing shares in the company below. Company C used the $1 billion to acquire an asset (the loss asset).

•

A year later, the asset that C owns, which cost $1 billion has a market value of $300 million. Hence, there is an unrealised capital loss of $700 million inherent in the asset held by C .

•

C 's asset is transferred to A for consideration equal to market value ($300 million). Rollover relief is claimed under section 160ZZO. A is deemed to acquire this asset for C 's reduced cost base ($1 billion).

•

After the loss asset is transferred from C to A , its market value decreases from $300 million to $200 million. On disposal of the asset, A realises a capital loss (an eligible rollover loss) of $800 million.

•

B transfers its shares in C to A for $300 million (their market value). Rollover relief is claimed under section 160ZZO. A is deemed to acquire these shares for a cost base equal to B 's reduced cost base on the shares ($1 billion), in determining whether a capital loss arises on the disposal of the shares.

•

The cost bases of A's shares in C and B are each $1 billion, while the market value of each parcel of shares is $300 million represented by the cash received for the transfer of the loss asset by C and the shares B held in C .

•

A liquidates B and C and generates a capital loss of $700 million on the cancellation of its shares in each of the companies, generating a total loss on the shares of $1.4 billion.

•

In the absence of new section 160ZPA company A would generate capital losses of $2.2 billion as a result of these transactions. This amount would include two eligible rollover losses: $700 million from the disposal of A 's interests in C and $800 million from A 's disposal of the original loss asset. Of this amount, $1.5 billion of losses would be denied under either new subsection 160ZPA(1) or (2) on the basis that none of these losses have previously been used to offset a capital gain.

•

A requests that the Commissioner decide whether it would be fair and reasonable to reduce the amount of the loss denied by $100 million to $1.4 billion.

1.45 The Commissioner would take into account the fact that:

•

A has made additional losses of $1.4 billion from disposing of the shares in B and C , of which $700 million is an eligible rollover loss (the loss on the disposal of the shares in C which had been rolled over to A by B );

•

the $1.4 billion loss from disposing of these shares is directly related to the unrealised loss on the loss asset at the time of the rollover;

•

A makes a loss of $800 million from the disposal of the loss asset which is an eligible rollover loss;

•

$100 million of the loss from the disposal of the loss asset arose from a decrease in the value of the loss asset after the roll over. This decrease in value of the rolled over asset was not reflected in the losses arising from disposal of the shares in B and C .

1.46 In this situation the Commissioner may decide that it is fair and reasonable to reduce the amount to be denied under new subsections 160ZPA(1) and (2) by $100 million.

Example 2

1.47 This example illustrates the application of new subsection 160ZPA(3) where the Commissioner takes into account only the three factors discussed above in the context of a situation where the value of the loss asset increases after rollover to the loss company. For the purposes of this example the facts are as in Example (i) with the following modifications:

•

After the loss asset is transferred from C to A , its market value increases from $300 million to $950 million. Upon disposal of the asset, A realises a capital loss (an eligible rollover loss) of only $50 million.

•

A satisfies the Commissioner that it has no intention of disposing of C and hence will not realise the losses inherent in its interests in C . In addition, it can establish that it will only dispose of 50% of its interests in B .

•

A requests that the Commissioner decide whether it would be fair and reasonable to reduce the amount of the loss that would otherwise be denied under new subsection 160ZPA(1) or (2) by 50%, from $50 million to $25 million.

1.48 The Commissioner would take into account the facts that:

•

A is unlikely to realise any of its losses inherent in its interests in C ;

•

A is also unlikely to realise more than 50% of the losses inherent in its interests in B ;

•

the duplication of losses is not limited to $25 million as A will be able to generate a total of $400 million of losses (the $50 million eligible rollover loss and $350 million of other capital losses (ie. 50% of $700 million)) even if it only disposes of 50% of its interests in B ;

•

the company group has only suffered an economic loss of $50 million.

1.49 The Commissioner is unlikely to reduce the amount of the loss that would otherwise be denied under new subsection 160ZPA(1) or (2) .

Example 3

1.50 This example illustrates the application of new subsection 160ZPA(3) where the Commissioner takes into account only the three factors discussed above in the context of a situation where a number of companies in the group have incurred (or have the potential to incur) capital losses as a result of the rollover of a loss asset. For the purposes of this example the facts are as in Example 1 with the following modifications:

•

Company A invests $800 million in Company B and $200 million in Company C . B invests the $800 million in C . Consequently, A owns 100% of B and 20% of Company C , and B owns the other 80% of C .

•

B does not transfer its shares in C to A . A disposes of the loss asset transferred from C , thereby realising an eligible rollover loss of $700 million. Subsequently, both A and B dispose of their interests in C for market value. As a result, A realises another capital loss of $140 million (20% of $700 million) and B realise a capital loss of $560 million (80% of $700 million). The company group has a total of $1.4 billion capital losses as a result of these transactions.

•

A requests that the Commissioner decide whether it would be fair and reasonable to reduce the amount of the loss to be denied from $700 million to $140 million. The basis for the application is that A , itself, has only duplicated $140 million of capital losses.

1.51 The Commissioner would take into account the fact that:

•

the cumulative capital losses available to the group (actual and potential) is $1.4 billion compared to the group's economic loss of $700 million;

•

the only eligible rollover loss (which is the maximum amount which could be denied under new subsection 160ZPA(1) or (2) ) is the $700 million loss from the disposal by A of the loss asset;

•

although A has only generated $140 million of capital losses by disposing of the shares in B , the company group has generated capital losses of $1.4 billion in total, of which only $700 million are economic losses.

1.52 Because the group as a whole has $700 million of artificial losses, the Commissioner is unlikely to decide to reduce the amount of loss otherwise disallowed under new subsection 160ZPA(1) or (2).

The content and timing of information provided to the Commissioner

1.53 The Commissioner may have regard to the content and time of any disclosure of information by the company making the application (usually the loss company) for the Commissioner to determine whether, or by how much, to reduce the amount of the capital loss denied. This factor would allow the Commissioner to have regard to such things as:

•

the loss company's failure to provide information to the ATO on the arrangements which resulted in the eligible rollover loss being created; or

•

the provision of information only after an audit had been commenced by the ATO.

Example 4

1.54 For the purposes of this example the facts are:

•

Company A is an early balancing company which lodged its income tax return for the 1996-97 year of income after 3 pm on 29 April 1997.

•

A incurred an eligible roll over loss in the 1996-97 year of income and did not reduce the loss in its income tax return as required by new subsection 160ZPA(1) .

•

After A came under investigation by the ATO in the 1998-1999 year of income, it notified the Commissioner of the eligible rollover loss and requested the Commissioner to decide whether would be fair and reasonable to reduce the amount of the loss that would otherwise be denied.

1.55 The fact that A failed to notify the Commissioner of its eligible rollover loss until it was under investigation would be one factor which would have to be weighed with all the other factors by the Commissioner in deciding whether it is fair and reasonable to reduce the amount of the loss that would otherwise be denied under new subsection 160ZPA(2) . A failure, in a self assessment environment, to provide relevant information in a timely fashion should be viewed as of at least equal, if not greater, weight to the other factors discussed above.

Other relevant matters

1.56 In addition to being able to take into account the specified factors, the Commissioner may take into account any other factors he considers relevant. [Subparagraph 160ZPA(3)(b)(v)]

Exclusion for small business and manufacturing business assets

1.57 New section 160ZPA does not apply to a company if it would satisfy the requirement in subsection 160ZZPP(4) of the Act at the time it incurred the eligible rollover loss. [New paragraph 160ZPA(5)(a)] The requirement, which is akin to a small business test, is that the sum of:

the total of the net values of the assets of the company; and

the net values of the assets of any entities that are connected with the company; and

if an associate of the company is a partner in a partnership (other than a partnership that is connected with the company) - the share of the associate in the net value of the assets of the partnership;

do not exceed $5 million.

1.58 In addition, new section 160ZPA does not apply where the asset whose disposal would create an eligible rollover loss is plant, machinery or a building and it is used in a manufacturing business both before and after the transfer. [New paragraph 160ZPA(5)(b)] For this exception to apply, the asset must have been used by the transferor in a manufacturing business immediately before the rollover disposal and the loss company must use the asset in a manufacturing business for a period of at least 12 months starting immediately after the date the asset was transferred.

Part 2

1.59 Part 2 of Schedule 1 amends Part IVA of the Act so that it can be applied to the creation of capital losses in the year in which they are incurred, rather than when a capital loss is offset against capital gains in that income year or a later income year. Item 2 amends subsection 177A(1), which defines certain terms for the purposes of Part IVA, to provide that a capital loss has the same meaning as in Part IIIA of the Act.

1.60 Part IVA of the Act contains the general anti-avoidance provision which confers on the Commissioner the power to cancel tax benefits when certain objective criteria set out in the Part are met.

Tax Benefits

1.61 A 'tax benefit' is defined for the purposes of Part IVA in subsection 177C(1). Currently, a 'tax benefit' includes:

•

the non-inclusion in assessable income of an amount that, but for the scheme, might reasonably be expected to have been included; or

•

a deduction being allowable that, but for the scheme, might reasonably be expected not to have been allowable.

1.62 New paragraph 177C(1)(ba) extends the definition of 'tax benefit' to include a capital loss incurred in a year of income where it might reasonably be expected that, but for the scheme, no capital loss would have been incurred. [item 3] Broadly, a capital loss is incurred in a year of income where the reduced cost base of the asset disposed of exceeds the consideration received on its disposal (subsection 160Z(1)). The amount of the tax benefit in such a case is so much of the capital loss as would not have been incurred if the scheme had not been entered into. [New paragraph 177C(1)(e) inserted by item 4]

1.63 Subsection 177C(2) sets out specific exclusions from the definition of a tax benefit to which Part IVA applies. The provision prevents Part IVA from applying to a tax benefit attributable to the making of a declaration, election or selection, giving of a notice or exercising of an option under a provision in the Act. Subsection 177C(2) only applies where the scheme was not entered into for the purpose of creating the conditions necessary for the making of the declaration, election, or selection, or the giving of a notice or exercising of an option.

1.64 New paragraph 177C(2)(c) is inserted by item 6 to extend this provision so that the incurring of a capital loss which is the result of the making of a declaration, election, or selection, or the giving of a notice or exercising of an option under a provision in the Act will not in itself constitute a tax benefit. New paragraph 177C(2)(c) only applies if the scheme was not entered into for the purpose of creating the conditions necessary for the declaration, election, etc., to be made. [New subparagraph 177C(2)(c)(ii)] Additionally, the protection offered by new paragraph 177C(2)(c) is not available where an asset is rolled over under section 160ZZO or a loss is transferred under section 160ZP.

1.65 As all or part of a capital loss may reduce a capital gain and thus reduce assessable income, paragraph 177C(2)(a) may apply to a capital loss to which new paragraph 177C(2)(c) also applies. Consequently, item 5 amends subparagraph 177C(2)(a)(i) so that it will not apply to an amount which has not been included in assessable income, where that benefit is attributable to a declaration, election or selection, giving of a notice or exercising of an option that was made under section 160ZP or 160ZZO.

1.66 The lack of protection under subsection 177C(2) to loss transfers or rollovers under sections 160ZP and 160ZZO could result in Part IVA cancelling the benefit granted by these provisions in 'normal' or 'ordinary' rollover situations. To avoid this occurring, new subsection 177C(2A) is inserted to provide that the making of an agreement under section 160ZP or an election under section 160ZZO does not itself constitute a scheme for the purposes of Part IVA. [Item 7] New paragraph 177C(2A)(a) applies to a tax benefit relating to a reduction of assessable income, and new paragraph 177C(2A)(b) applies to a tax benefit in relation to a capital loss being incurred. Consequently, Part IVA could only apply in such cases if the making of the agreement or election was part of a wider scheme which had as its sole or dominant purpose the creation of a capital loss which would not have existed if the wider scheme had not been entered into.

1.67 Subsection 177C(3) deems the non-inclusion of an amount in assessable income or the allowance of a deduction to be expressly attributed to a declaration, election or selection, giving of a notice or exercising of an option if, but for it, the amount would have been included in assessable income or the deduction not allowed. Item 8 repeals and replaces it with a new subsection 177C(3) which applies not only to the non-inclusion of income or the allowance of a deduction, but provides that the incurring of a capital loss will be attributable to a declaration, election or selection, giving of a notice or exercising of an option if the capital loss would not have been incurred if the declaration, election or selection, giving of a notice or exercising of an option had not been made.

Cancelling of Tax Benefits

1.68 If a scheme has been entered into for the sole or dominant purpose of obtaining a tax benefit then the Commissioner is authorised by subsection 177F(1) to cancel the whole or a part of the tax benefit. The Commissioner may also make compensating adjustments in favour of any taxpayer if it is fair and reasonable to do so (subsection 177F(3)). The power to make a compensating adjustment is given to the Commissioner in case a tax benefit is denied in accordance with Part IVA but, if the scheme had not been entered into, a different tax benefit would have arisen.

1.69 Item 9 inserts new paragraph 177F(1)(c) to authorise the Commissioner to cancel a tax benefit which is referable, in whole or part, to a capital loss. Where the Commissioner has made a determination under new subsection 177F(1)(c) , he or she is also authorised, by virtue of new subsection 177F(3)(c) , to make a compensating adjustment in favour of a taxpayer, in case the need should arise. [Item 13] That is, the Commissioner is given the power to make an adjustment if the Commissioner is of the opinion that the person concerned would have incurred a capital loss, but for the scheme, and that it is fair and reasonable that the taxpayer be allowed to incur either the whole or part of that capital loss.

1.70 Subsections 177F(2B) to (2G) deal with determinations in relation to withholding tax arrangements. Subsections 177F(2B) and (2C) require the Commissioner to provide written notification of a tax determination to the taxpayer. Items 10 and 11 amend subsections 177F(2B) and (2C) to require the Commissioner to provide a notice of a determination to cancel a tax benefit under new paragraph 177F(1)(c) .

1.71 A taxpayer is able to object against a determination relating to assessable income or allowable deductions, as the determination will be reflected in the relevant notice of assessment or amended assessment. A determination in relation to withholding tax or a capital loss is not reflected in a notice of assessment or amended assessment and therefore a taxpayer does not have that right of review. Subsection 177F(2G) provides that, if the taxpayer is dissatisfied with a determination, he or she may object against it, as set out in Part IVC of the Taxation Administration Act 1953. Item 12 amends subsection 177F(2G) to provide that taxpayer may also object against a determination in relation to the cancellation of a capital loss.

Chapter 2 - Fringe benefits tax

Overview

2.1 Schedules 2, 3 and 12 of the Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA), the Income Tax Assessment Act 1936 (ITAA36) and the Income Tax Assessment Act 1997 (ITAA97) to implement the Government's response to the recommendations concerning fringe benefits tax (FBT) made by the Small Business Deregulation Task Force (SBDTF) in November 1996.

2.2 The existing exemption for taxi travel will be extended and simplified so that taxi travel beginning or ending at an employee's place of work at any time qualifies for the exemption. [Schedule 3]

2.3 A new exemption from FBT for car parking benefits, other than car parking benefits provided in a commercial car park, will be provided for certain small business owners. This exemption will not extend to car parking benefits provided by government bodies or listed public companies and their subsidiaries. [Schedule 3]

2.4 The determination of whether an employer will be liable for FBT when benefits are provided to employees or their associates by a third party under the 'arranger' provisions will be simplified. [Schedule 3]

2.5 New Part XIA of the FBTAA will contain the legislative provisions to govern the proposed new record keeping exemption arrangements (RKEA). [Schedule 12]

2.6 The RKEA are specifically targeted at those employers whose base year fringe benefits do not exceed a threshold amount ($5,000 for the 1996-97 FBT year). The RKEA will provide a reduction in compliance costs for small FBT payers who do not make a material change in the value and type of benefits provided each year.

2.7 Certain benefits relating to approved student exchange programs are to be exempted from FBT. [Schedule 2]

2.8 These measures, the first four of which are specifically targeted at reducing compliance costs for small businesses, are explained in the following sections of this Chapter:

Section 1 Taxi travel

Section 2 Exemption for car parking provided by small business employers

Section 3 Arranger provisions

Section 4 Record keeping exemption arrangements

Section 5 Regulation Impact Statement for taxi travel and car parking measures

Section 6 Regulation Impact Statement for changes to the arranger provisions

Section 7 Regulation Impact Statement for the record keeping exemption arrangements

Section 8 FBT exemption for approved student exchange programs

2.9 The amendments to the FBTAA, ITAA36 and ITAA97 are in Schedules 2, 3 and 12 . The application provisions for the amendments being proposed are also in those schedules.

Section 1 Taxi travel

Summary of the amendments

Purpose of the amendments

2.10 The amendments will extend and simplify the existing exemption for taxi travel. Employers will only have to ascertain, for the purpose of the exemption, whether the taxi travel started or ended at the work place.

2.11 The time at which the travel commenced will no longer be relevant. Nor will it be necessary for the travel to be directly between the place of work and the employee's home. These changes will reduce compliance costs for employers.

Date of effect

2.12 The amendments will apply in relation to assessments for the FBT year commencing 1 April 1997 and all later FBT years. [Subitem 12(1)]

Background to the legislation

2.13 Currently section 58Z of the FBTAA exempts from FBT benefits arising from certain taxi travel. Subsection 58Z(1) exempts a benefit arising from taxi travel by an employee where the travel is directly between the employee's home and place of work and commences between 7 pm and 7 am.

2.14 Subsection 58Z(2) exempts benefits arising from certain taxi travel as a result of sickness or injury to an employee. This exemption is not affected by these amendments.

Explanation of the amendments

2.15 Subsection 58Z(1) is to be repealed and replaced with a new subsection 58Z(1) so that a benefit arising from taxi travel beginning or ending at an employee's place of work will be an exempt benefit. The travel must be a single taxi trip. For example, if an employee travels by taxi from work to a sporting event and then, when the event is over, by taxi home, only the taxi fare from work to the sporting event would be an exempt benefit. [Item 2 - new subsection 58Z(1)]

Section 2 Exemption for car parking provided by small business employers

Summary of the amendments

Purpose of the amendments

2.16 The amendments will remove FBT compliance costs for small business employers in respect of certain car parking fringe benefits. Employers who qualify for this car parking benefit exemption will no longer have to keep records or calculate the taxable value of the car parking benefits. The records required for car parking fringe benefits are generally not required for any other FBT purpose.

2.17 The proposed exemption will not extend to car parking benefits provided by small business employers in commercial car parks. Where an employer provides car parking facilities for employees or associates in a commercial car park, those car parking benefits will continue to be subject to FBT.

2.18 The restrictions on income tax deductions for car parking expenses incurred by self-employed persons, partnerships or trusts will be removed to ensure that the income tax and FBT treatment of car parking continues to be consistent.

Date of effect

2.19 The amendments to the FBTAA will apply in relation to assessments for the FBT year commencing 1 April 1997 and all later FBT years. The amendments to the ITAA36 and ITAA97 will apply in relation to expenditure incurred on or after 1 July 1997. [Subitems 12(1) and 12(3)]

Background to the legislation

Fringe benefits tax law

2.20 Division 10A of Part III of the FBTAA subjects car parking benefits to FBT. Subsection 39A(1) lists the conditions which must be met for a car parking fringe benefit to arise. In broad terms, a car parking fringe benefit will arise where an employer provides car parking for more than 4 hours for an employee's car that is used for travel between home and the workplace. Further, a commercial car park, which charges more than a specified amount for all-day parking ($5.25 for the FBT year starting 1 April 1998), must be located within a 1 kilometre radius from where the car is parked.

2.21 Where an employer knows the number of benefits provided, the employer may determine the taxable value of the car parking fringe benefits using the commercial parking station method, the market value method or the average cost method. Alternatively, an employer may elect to calculate the taxable value of all car parking fringe benefits provided during the year by using the statutory formula method or the 12 week record keeping method. Particular records are required for each of these methods.

Income tax law

2.22 Broadly, Division 4A of Part III of the ITAA36 reduces the amount of any deduction allowable for car parking expenses incurred by a self-employed person, a partnership or a trust. The deduction is reduced by an amount equivalent to the taxable value of the car parking fringe benefit that would have arisen if the car parking had been provided by an employer to an employee. Division 4A incorporates the valuation methods available to employers under the FBTAA for valuing car parking fringe benefits. The purpose of Division 4A is to ensure that there is consistency in the treatment of car parking expenses for employees and self-employed persons.

2.23 Division 4A replaced section 51AGB, which performed the same function, to take into account the new valuation methods for car parking fringe benefits introduced as part of the FBT Cost of Compliance Review measures. Section 51AGB applied to car parking expenses incurred from 1 July 1994 to 30 June 1995. Division 4A has applied to car parking expenses incurred from 1 July 1995.

Explanation of the amendments

Fringe benefits tax law

2.24 Under the proposed amendments certain car parking benefits will be exempt from FBT under new section 58GA [item 1] . The types of car parking benefits which qualify for exemption are explained below.

What kinds of car parking benefits qualify for exemption?

2.25 Car parking benefits other than those provided in a commercial car parking station will be covered by the exemption. [item 1 - new paragraph 58GA(1)(a)] A 'commercial car parking station' is defined in subsection 136(1) as, in general terms, a commercial car park that provides all-day parking to the public for a fee.

2.26 The employer of the employee in respect of whose employment the car parking benefit is being provided must not:

•

be a public company within the meaning of paragraph 103A(2)(a) of the ITAA36 or a subsidiary of such a company. This test must be satisfied on the day on which the car parking benefit is provided; or

•

be a government body; or

•

have a sum of ordinary income and statutory income of $10 million or more in the year of income ending immediately before the commencement of the FBT year in which the benefit is provided.

[Item 1 - new paragraphs 58GA(1)(b), (c) and (d)]

2.27 In broad terms, a public company under paragraph 103A(2)(a) is a company with shares listed on a stock exchange. 'Government body' is defined by subsection 136(1) of the FBTAA to mean the Commonwealth, a State, a Territory or an authority of the Commonwealth or of a State or Territory.

What is ordinary income and statutory income?

2.28 For the purpose of new section 58GA , ordinary income and statutory income have the same meaning as in the ITAA97. [item 1 - new subsection 58GA(3)] Ordinary income is defined in section 6-5 of ITAA97 as income according to ordinary concepts. Statutory income is defined in section 6-10 as, broadly, income that is not ordinary income but included in your assessable income by specific provisions. Ordinary income and statutory income include exempt income.

Phasing in arrangements for 'new' small businesses

2.29 Some employers will not have commenced their business at the start of the year of income which ends before the start of the FBT year in which a benefit is provided. A special provision is necessary to enable these employers to access the FBT exemption being proposed for car parking fringe benefits.

2.30 Under the amendments proposed, these employers, including tax-exempt employers, will be able to access the exemption based on a reasonable estimate of the sum of the ordinary income and statutory income they would have earned in the year (their business start-up year) assuming they commenced operations at the start of that year. They will be eligible for the exemption if the sum of their estimated ordinary income and statutory income is less than $10 million. [Item 1 - new subsection 58GA(2)] A tax-exempt employer is defined in new subsection 58GA(3) as an employer, all of whose income is exempt from tax.

2.31 If the estimate made by an employer for the purpose of new subsection 58GA(2) is not reasonable, the Commissioner of Taxation can make a reasonable estimate of the employer's ordinary and statutory income assuming the employer commenced operations at the commencement of the business start-up year. The Commissioner, based on this estimate, can then determine whether the car parking fringe benefit in question is exempt. If the amount of the Commissioner's estimate is $10 million or more, the employer will be liable to pay additional tax because an exemption was claimed when it should not have been. [Item 3 - new section 115B]

Income tax law

2.32 Amendments to the ITAA36 and ITAA97 are necessary to complement the introduction, in the fringe benefits tax law, of the new FBT exemption for car parking benefits provided by small businesses. The following amendments are contained in Parts 2 and 3 in Schedule 3 of the Bill:

•

repeal of section 51AGB and Division 4A of Part III (sections 89A to 89JC) of the ITAA36. [Items 8 and 9] The provisions in Division 4A, which deal with reducing certain deductions for self-employed persons, partnerships and trusts, replaced section 51AGB with effect from 1 July 1995. The repeal of Division 4A will ensure that the FBT and income tax treatment of car parking expenses continue to be consistent;

•

repeal of subsection 262A(4K) which currently refers to record keeping provisions in relation to the application of section 51AGB and section 89DB; and [item 10]

•

modify the entry for 'car parking' in the table in section 12-5 of the ITAA97 which currently refers to particular kinds of deductions including those in section 51AGB and Division 4A (sections 89A to 89JC) of the ITAA36. As these sections are being repealed, they need to be removed from the entry. [Item 11]

Section 3 Arranger provisions

Summary of the amendments

Purpose of the amendments

2.33 To simplify the application of the arranger provisions and reduce compliance costs for employers. These amendments are intended to make it easier for employers to determine whether they are liable for FBT for benefits provided to their employees by third parties.

Date of effect

2.34 The amendments will apply in relation to assessments for the FBT year commencing 1 April 1998 and for all later FBT years. [Subitem 12(2)]

Background to the legislation

2.35 A fringe benefit includes, in general terms, a benefit provided to an employee in respect of the employee's employment where the benefit is provided by a third party other than the employer (or an associate of the employer) under an arrangement between the third party providing the benefit and the employer (or an associate of the employer). The relevant provisions are paragraph (e) of the definition of 'fringe benefit' and the definition of 'arrangement' in subsection 136(1) of the FBTAA. These provisions and the third party providing the benefit are commonly referred to as the 'arranger provisions' and the 'arranger' respectively.

2.36 The definition of arrangement, and therefore the scope of the arranger provisions, is potentially very wide. For example, an employer may currently be liable for FBT under the arranger provisions if the employer is aware that a third party is providing benefits to employees and does nothing to prohibit employees from accepting those benefits.

Explanation of the amendments

2.37 The definition of fringe benefit is to be amended so that there will be two ways in which a fringe benefit may arise where a benefit (a third party benefit) is provided to an employee, or an associate of the employee, in respect of the employee's employment, by a third party as described in paragraph 2.35 above. Under the amendments proposed, a benefit will be a fringe benefit only if:

•

the benefit is provided under an arrangement, which involves an agreement of some kind, between the employer and the third party; or

•

the employer is involved in a particular way in the provision of the benefit.

Benefits provided under an arrangement

2.38 Paragraph (e) of the current definition of 'fringe benefit' in subsection 136(1) of the FBTAA will be amended to confine the scope of this provision to arrangements covered by paragraph (a) of the definition of 'arrangement'. [Item 5] Paragraph (a) describes different kinds of arrangements and covers agreements, arrangements, understandings, promises and undertakings. In general terms, a fringe benefit will arise where a third party benefit is provided and there is some form of agreement between the employer and the third party.

2.39 A fringe benefit will not arise under paragraph (e) of the definition of fringe benefit unless there is an agreement of some kind between an employer and a third party. It will no longer be enough to look at the employer's action or course of conduct in relation to the provision of the third party benefit, nor will it be necessary to consider the other different kinds of arrangements described in paragraph (b) of the definition of arrangement.

Involvement by employer or associate of employer

2.40 In general terms, a fringe benefit will arise under new paragraph (ea) of the definition of fringe benefit where an employer or an associate of the employer participates, facilitates or promotes the provision or receipt of a third party benefit. A third party benefit will be a fringe benefit only if the employer knew, or ought to have known, that he or she was participating, facilitating or promoting the provision or receipt of the benefit. [Items 4 and 6]

2.41 A benefit will be a fringe benefit if the employer knowingly:

•

participates in or facilitates the provision or receipt of the benefit; or

•

participates in, facilitates or promotes the scheme involving the provision of the benefit.

2.42 An employer will be liable to FBT for the third party benefit where the employer, or the associate of the employer, actually knew that he or she was involved in the above way in relation to the benefit.

Alternatively, if the employer, or the associate of the employer, does not actually realise that they are involved, for example:

•

participating in or facilitating the provision or receipt of a third party benefit; or

•

participating in, facilitating or promoting the scheme involving the provision of the benefit;

liability to FBT for the third party benefit may still arise. It will arise where it is reasonable to conclude that the employer should have known that he or she was involved in a relevant way in relation to the benefit.

2.43 An employer will not be liable for FBT in respect of a third party benefit if the employer did not agree and is not involved in relation to the provision or receipt of the benefit, regardless of whether the employer knew that the benefit had been provided. For example, entertainment by way of meals provided to employees by a third party would not give rise to a fringe benefit unless the employer agreed to the benefit being provided or the employer was involved in a relevant way in providing the benefit.

2.44 An employer would not necessarily be liable for FBT for a third party benefit merely because the employer was involved in relation to the benefit. A third party benefit would be a fringe benefit only if the employer knew, or ought to have known, that he or she was involved in relation to a third party benefit. For example, an employer will not be able to avoid liability for a third party benefit simply by claiming that he or she did not know or realise that their involvement resulted in a third party providing benefits to the employer's employees or associates of employees and that any involvement in the provision or receipt of the benefit was unintentional. If it would be reasonable to conclude that the employer or associate of the employer should have known that he or she was involved in relation to the benefit because for example it is customary in the industry concerned, a fringe benefit would arise.

2.45 On the other hand, an employer would not be liable for FBT for a third party benefit if the employer was involved in relation to the benefit but did not realise that he or she was involved and could not reasonably be expected to know that he or she was involved.

2.46 The following flow chart outlines the steps involved in determining whether an employer is liable to FBT under the simplified arranger provisions. The chart should be read in conjunction with the above discussion.

Section 4 Record keeping exemption arrangements

Summary of the amendments

Purpose of the amendments

2.47 The proposed RKEA will reduce compliance costs by allowing certain employers:

•

not to keep FBT records for an FBT year; and

•

to have their FBT liability for that FBT year determined from the aggregate fringe benefits amount of an earlier base year in which FBT records were kept.

Date of effect

2.48 The record keeping exemption aspect of this measure will apply in relation to benefits provided from the day Royal Assent is received. The concessional liability aspect of the RKEA will apply in respect of the 1998-99 and later FBT years. [Item 4 of Schedule 12]

Background to the legislation

Current FBT record keeping requirements

2.49 The general record keeping requirement is set out in section 132. An employer is required to keep records that explain all transactions and other acts that are relevant for ascertaining the employers FBT liability. An employer must retain those records for a period of 5 years after the completion of the transactions or acts to which they relate.

2.50 Where an associate of an employer provides benefits to the employers employees, the associate must keep and retain those records for a period of 5 years and provide a copy of those records to the employer, who must also retain those records for 5 years.

2.51 In addition, an employer is required under section 123 to retain substantiation records, called statutory evidentiary documents, that are required to support the substantiation rules. Where an employer fails to retain a statutory evidentiary document for 5 years, that document is deemed never to have been given to the employer. For example, an employer would be unable to reduce the taxable value of a fringe benefit under the otherwise deductible rule if the relevant substantiation records had not been retained.

Calculation of FBT liability

2.52 An employers FBT liability for a year is determined from the aggregate fringe benefits amount for the year. This amount is defined in subsection 136(1), broadly, as the sum of the taxable values of all fringe benefits provided by an employer during the FBT year. Section 66 imposes FBT in respect of an employers fringe benefits taxable amount. The fringe benefits taxable amount is defined in section 136AA, broadly, as the grossed up amount of the aggregate fringe benefits amount of the employer.

Explanation of the amendments

2.53 All employers will be eligible for the RKEA except employers who are:

•

government bodies as defined in subsection 136(1); or

•

exempt from income tax on all of their income at any time during the year.

[New paragraph 135E(2)(b) and section 135J]

2.54 Table 1 at the end of this section provides an overview of how the RKEA will operate. New Part XIA which contains the proposed RKEA provisions has 3 Divisions as follows:

Division 2: Conditions to be satisfied to qualify for the RKEA

2.55 To qualify for the RKEA for an FBT year (the current year), an employer must satisfy two conditions in new section 135B . The two conditions are that the employer must:

•

have established an FBT base year; and

•

not have been given a notice from the Commissioner of Taxation under new paragraph 135E(2)(c) during the FBT year immediately before the current year requiring the employer to resume record keeping.

First condition: need to establish a base year

Establishing a base year

2.56 A base year will be established for an employer in relation to the current FBT year where either:

•

the FBT year immediately before the current FBT year was a base year; or [New paragraph 135B(2)(a)]

•

an earlier FBT year was a base year and the employers FBT liability for every FBT year after that base year and before the current year was determined under new section 135G by using the employers aggregate fringe benefits amount for that earlier FBT year. [New paragraph 135B(2)(b)]

2.57 If an employer who has qualified for the RKEA by establishing a base year chooses to have the FBT liability determined from the aggregate fringe benefits amount for the current year, the employer will not be able to rely on that base year in the year following the current year. This is because the continuity between the base year and the year following the current year would be broken. The employer would have to establish a new base year to qualify for the RKEA again. It should be noted that, in these circumstances, the current year could be a base year in relation to the following FBT year if the requirements in new section 135C (which are discussed below at paragraph 2.59) are satisfied.

2.58 As a transitional measure, employers will be able to use either the 1996-97 or the 1997-98 FBT year, or a later FBT year, as their first base year. An employer who wishes to qualify for the RKEA in the 1998-99 FBT year will only be able to use the 1996-97 FBT year as the base year if the aggregate fringe benefits amount in the 1997-98 FBT year is not more than 20% greater than the aggregate fringe benefits amount for the 1996-97 base year. This tolerance rule, which is set out in new section 135K , is explained below at paragraphs 2.72-2.82. [Item 5 of Schedule 12]

When will an FBT year be a base year?

2.59 An FBT year will be a base year in relation to an employer if:

•

the employer has carried on business operations throughout the FBT year; [New paragraph 135C(1)(a)]

•

the employer has lodged an FBT return for the FBT year. [New paragraph 135C(1)(b)] Some employers provide fringe benefits but the aggregate fringe benefits amount of the fringe benefits is nil, for example, because of employee contributions. These employers are not generally required to lodge returns. However, these employers would need to lodge an annual return to 'enter' the RKEA;

•

all the records for the FBT year have been kept and retained as required under section 132. [New paragraph 135C(1)(c)] Employers who are relying on section 132A to obtain the necessary documentary evidence within a reasonable time are still able to treat a year as a base year where that documentary evidence is obtained;

•

the aggregate fringe benefits amount for the FBT year does not exceed the exemption threshold; and [New paragraph 135C(1)(d)]

•

the employers FBT liability for the FBT year is worked out from the aggregate fringe benefits amount for that year and not an earlier base year. [New paragraph 135C(1)(e)] This condition will ensure that a base year will continue to be relevant until an employer's FBT liability is determined from the aggregate fringe benefits amount for the current year. The FBT years following a base year will not become base years simply because the other requirements of new sections 135B and 135C are satisfied in relation to those years.

Chart 1 at the end of this section shows how to work out whether an FBT year is a base year.

The exemption threshold

2.60 The exemption threshold for the FBT year commencing on 1 April 1996 is $5,000. The threshold for a later FBT year will be the previous year's threshold as adjusted by a factor equal to the percentage increase, if any, in the Consumer Price Index for the year ending on the previous 31 December. The increase is worked out by dividing the sum of the index numbers for the four quarters ending 31 December by the sum of the corresponding index numbers for the previous year. The index number is to be calculated to three decimal places. [New subsections 135C(2) to (8)]

2.61 The increased threshold amounts for the 1997-98 and 1998-99 FBT years are $5,130 and $5,145 respectively. These amounts reflect CPI movement factors referred to in new subsection 135C(4) of 1.026 and 1.003 respectively for the years ending 31 December 1996 and 1997.

Second condition: Commissioners notice

2.62 The second condition necessary to qualify for the RKEA for a current year is set out in new subsection 135B(3) . The condition is that an employer must not have been given a notice from the Commissioner under new paragraph 135E(2)(c) requiring the employer to resume record keeping during the FBT year immediately before the current year. It is envisaged that the Commissioner would issue a notice when there is reason to suspect that the value of benefits provided by an employer had increased well above the limit allowed for remaining in the RKEA and an employer had insufficient records available to refute that position. On receipt of a new paragraph 135E(2)(c) notice, an employer would not be eligible to re-enter the RKEA until the employer had established a new base year.

Division 3: Consequences of qualifying for the RKEA

2.63 The main consequences of qualifying for the RKEA for a current FBT year are that employers:

•

will not be required to keep or retain FBT records for that year in accordance with subsection 132(1), subject to certain exceptions; and [New section 135E]

•

may have their FBT liability for the current year determined under new section 135G from their aggregate fringe benefits amount from an earlier base year in which FBT records were kept.

When will records still need to be kept?

2.64 New subsection 135E(2) describes the circumstances when employers, despite qualifying for the RKEA by satisfying the conditions in new section 135B , will still need to keep and retain FBT records. The circumstances include those described in:

•

new paragraph 135E(2)(a) which covers copies of records that an associate of the employer provides to the employer under subsection 132(2). These records relate to benefits provided by the associate to the employers employees;

•

new paragraph 135E(2)(b) which covers situations where an employers status changes to either an income tax exempt body or a government body. In such cases, records would be required to be kept from the day the employers status changed; and

•

new paragraph 135E(2)(c) which covers situations where an employer receives a notice from the Commissioner requiring the employer to recommence keeping and retaining records. This requirement will apply from the date the employer is given such a notice.

How long do records have to be kept?

2.65 An employer will be required to keep records for a base year for a period of 5 years after the end of the last FBT year for which the base year is relevant in determining the employers liability. Examples of the operation of this rule are set out in Chart 2 at the end of this section. [New section 135F]

How to work out FBT liability under the RKEA

2.66 Subject to certain exceptions, an employers FBT liability for the current year will be worked out using the employers aggregate fringe benefits amount for the employers most recent base year instead of the current year. [New section 135G]

2.67 Employers who cease business during the current year will also be able to take advantage of the concessions available under the RKEA under new section 135L . Employers in these circumstances who do not wish to have their FBT liability determined using the aggregate fringe benefits amount for the current year will be able to pro rate their base year aggregate fringe benefits amount in accordance with the proportion of the current year during which they were in business. New section 135L is discussed in more detail at paragraph 2.83.

What are the exceptions to determining the FBT liability for the current year under section 135G?

2.68 There are three exceptions which will result in an employers FBT liability for a current year being determined using the employers aggregate fringe benefits amount for the current year rather than the aggregate fringe benefits amount for the base year. These exceptions are provided in new sections 135H, 135J and 135K , which are discussed below at paragraphs 2.70 2.82.

2.69 There is an important consequence for employers where new sections 135H, 135J and 135K apply. While these employers will continue to be exempt from the record keeping requirement for the current year under subsection 132(1), they will not be exempt from the operation of section 123. They would need to obtain and retain any relevant substantiation records if they wish to rely on any exemptions or reductions in the taxable value of fringe benefits. Of course, employers in these circumstances are given some protection against the operation of section 123 by section 123B, under which the substantiation rules do not apply if an employer has alternative evidence that is acceptable to the Commissioner.

Exception 1: Employer chooses to use the current year actual aggregate fringe benefits amount

2.70 An employer may choose under new section 135H to use the aggregate fringe benefits amount for the current year rather than the aggregate fringe benefits amount for the base year. An employer might choose the current year aggregate fringe benefits amount when that amount is less than the base year amount.

Exception 2: Employer is a government body or an income tax exempt body

2.71 An employer will not be able to use the aggregate fringe benefits amount for a base year where the employer is a government body or an income tax exempt body at any time during the current year. [New section 135J]

Exception 3: Aggregate fringe benefits amount in current year increases too much

2.72 An employer will not be able to use the aggregate fringe benefits amount from a base year when the aggregate fringe benefits amount in the current year is more than 20% greater than the amount in the employers most recent base year. [New subsection 135K(1)]

2.73 A concession is provided for employers whose aggregate fringe benefits amount in the base year is less than $500. These employers will be able to exceed the 20% test in the current year and still have their current year FBT liability determined from their base year aggregate fringe benefits amount providing the difference between the aggregate fringe benefits amounts in the current and base year is $100 or less.

Example: The aggregate fringe benefits amount of an employer in the base year is $150. In the current year for which the employer has qualified for the RKEA, the aggregate fringe benefits amount is $200 (an increase of 33%). Although the increase of $50 represents more than 20%, it is less than $100. This employer would not be disqualified from remaining in the RKEA in the following year and could continue to use the same aggregate fringe benefits amount for determining the employer's FBT liability.

Special rules to assist employers to work out whether their aggregate fringe benefits amount has increased too much

2.74 Given that employers who qualify for the RKEA are not required to keep FBT records, they may experience some difficulties in determining the aggregate fringe benefits amount in a current year for the purpose of applying the 20% tolerance test described above.

2.75 The RKEA are specifically targeted at employers whose fringe benefits do not significantly alter in amount each year. Further, the onus of proof will be on the employer to show that the level of benefits has remained within the 20% tolerance limit.

2.76 Against this background, special rules are proposed to assist employers in determining their aggregate fringe benefits amount for a current year even though FBT records may not have been kept. These rules, which deal with the retention of statutory evidentiary documents and the valuation of car fringe benefits, are discussed in more detail below. [New subsection 135K(2)]

Statutory evidentiary documents

2.77 Section 123 provides that these documents are deemed never to have been maintained where an employer fails to retain them for the required retention period. The effect of section 123 is to be disregarded for the purpose of determining the aggregate fringe benefits amount in the current year. This rule will ensure that the aggregate fringe benefits amount for a current year is not higher than it would have been had substantiation records been kept. [New subsection 135K(3)]

Car benefits

2.78 Special rules apply in calculating the taxable value of car fringe benefits under the statutory formula and cost basis methods to determine whether the aggregate fringe benefits amount in a current year has exceeded the 20% tolerance limit.

2.79 Where an employer used the statutory formula method under section 9 to determine the taxable value of a car fringe benefit, the annualised number of kilometres travelled by the car during that year is relevant in determining the appropriate statutory fraction under paragraph 9(2)(c).

2.80 When determining whether the aggregate fringe benefits amount for a current year is within the 20% tolerance allowed, the taxable value of the car may be determined by reference to the statutory fraction used in the first year that the car benefit is provided, which may be the base year, providing the annualised number of kilometres travelled in the current year is at least 80% of the annualised number of kilometres travelled in that first year that the car benefit is provided. This concession provides an additional safeguard when an employer is determining the aggregate fringe benefits for a current year. [New subsections 135K(4) and (6)]

Example: An employer provides only a car fringe benefit during the base year and uses the statutory formula method. The base value of the car is $25,000 and the car has travelled 15,500 km. The taxable value of the car fringe benefit would be $5,000 ($25,000 x 0.20). In a later year (the current year), for which the employer has qualified for the RKEA, the car travels 13,100 km.

But for this 80% margin, the taxable value of the car fringe benefit would be $6,500 ($25,000 x 0.26). However, as the number of kilometres travelled by the car (13,100 km) is at least 80% of the number of kilometres in the base year (80% x 15,500 = 12,400 km), the taxable value of the car fringe benefit is $5,000 for the purpose of determining whether the aggregate fringe benefits amount for the current year is within the tolerance limit.

2.81 Where an employer uses the cost basis method under section 10, a parallel concession will apply to the business use percentage under subsection 10(2).

2.82 When determining the aggregate fringe benefits amount for a current year, the employer may use the business use percentage for the first year that the car benefit is provided, which may be the base year, if the business use percentage for the current year is not more than 20 percentage points lower than the business use percentage for that first year that the car benefit is provided. [New subsections 135K(5) and (6)]

Example: An employer qualified for the RKEA in a base year when the business use percentage was 70%. In a later FBT year the actual business use percentage drops to 55%.

As the business use percentage has dropped by 15 percentage points (ie., not more than 20 percentage points) in relation to the base year, the employer can use a business use percentage of 70% to determine the aggregate fringe benefits amount for the current year.

Employer not in business throughout current year

2.83 New section 135L will assist those employers who have qualified for the RKEA but who cease to carry on business operations during the current year. This provision is necessary to enable those employers to remain in the RKEA for part of an FBT year and have their liability determined from a proportion of the aggregate fringe benefits amount in the employers most recent base year. These employers would also be able to choose to have their FBT liability determined from the current (part) year aggregate fringe benefits amount using new section 135H .

Example: An employer has been using the RKEA for a few years and having the FBT liability determined using the base year aggregate fringe benefits amount of $4,800. The employer ceases business operations after 146 days of the current year. New section 135L will apply so that:

•

the 20% tolerance limit under new subsection 135K(1) for the purposes of comparing the aggregate fringe benefits for the current year with the base year amount will be $2,304 (146/365 x 4800 x 1.2); and

•

providing the current year aggregate fringe benefits amount is not more than $2,304, the FBT liability under new section 135G will be determined assuming aggregate fringe benefits of $1,920 (146/365 x $4,800).

TABLE 1

What is the exemption threshold?

The exemption threshold is:

•

$5000 for the FBT year beginning on 1 April 1996, and

•

for later years, the threshold for the privious year indexed in accordance with the Consumer Price Index for the 12 months ending 31 December; that is:

•

$5130 for the year beginning on 1 April 1997; and

•

$5145 for the year beginning on 1 April 1998.

Section 5 Regulation Impact Statement for taxi travel and car parking measures

Policy objective

2.84 The policy objective of these measures is to reduce the cost of record keeping by small business. First, by simplifying the existing exemption for taxi travel, and second, by exempting benefits arising from car parking provided by small business employers.

2.85 These measures will involve amendments to the fringe benefits tax legislation and the income tax legislation.

Background

2.86 The proposed measures implement the Government's response to the SBDTF's recommendations concerning the treatment of car parking and taxi travel under the fringe benefits tax law. The SBDTF recommended in November 1996 that all benefits relating to taxi travel and car parking be exempt from FBT.

2.87 Under the existing FBTAA, benefits arising from certain taxi travel are exempt from FBT. To qualify for exemption, the travel must be directly between the employee's home and place of work and commence between 7 pm and 7 am. Taxi travel arising because of sickness or injury to an employee is also exempt in certain circumstances.

2.88 Car parking is subject to FBT broadly where an employer provides car parking, essentially in the central business district, for more than 4 hours for an employee's car that is used for travel between home and the work place. Where car parking expenses are incurred by a self-employed person, a partnership or a trust, the amount of any income tax deduction is reduced to ensure that the income tax and FBT treatment of car parking is consistent.

Implementation options

2.89 There were no options for implementing these measures.

The FBTAA will be amended to simplify the existing exemption for benefits arising from taxi travel to cover taxi travel beginning or ending at an employee's place of work at any time of the day. The exemption for taxi travel arising from sickness or injury will remain unchanged.

2.90 The FBTAA will also be amended to exempt car parking benefits provided by certain employers unless the parking is in a commercial car park. Employers other than government bodies, listed public companies and subsidiaries of such companies will be eligible for the exemption if their ordinary income and statutory income (ie. gross income) for the year of income ended before the start of the FBT year in which the car parking benefits are provided is less than $10 million.

2.91 Where employers have not commenced business operations before the start of that year, they will be required to make a reasonable estimate of the ordinary and statutory income they would have derived if they had commenced operations at the start of the year of income during which they commenced operations. While the rules for employers in these circumstances require them to make an estimate and therefore will involve some compliance costs, the rules are necessary to ensure that genuine small business employers will have access to the exemption from the day they commence operations.

2.92 The income tax law will be amended to remove the restrictions on deductions for car parking expenses incurred by self-employed persons, partnerships or trusts.

2.93 The FBT changes will apply for the FBT year commencing 1 April 1997 and all later FBT years. The income tax changes will apply to car parking expenses incurred on or after 1 July 1997.

Assessment of impacts (costs and benefits)

Impact group

2.94 The exemption for certain car parking benefits will affect employers, other than government bodies or listed public companies and their subsidiaries, whose ordinary income for the relevant year of income is less than $10 million and who provide car parking for employees other than in a commercial car park.

2.95 The change to the exemption for benefits arising from taxi travel will affect all employers who provide taxi travel arriving at or leaving from the work place for their employees.

2.96 These measures will not have a significant impact on the Government, the Australian Taxation Office, tax agents or accountants.

Costs and benefits

2.97 The FBT liability and compliance costs of employers who qualify for these exemptions will be reduced. The SBDTF referred to 'The Working Overtime Survey' which showed that a substantial reduction in compliance costs is likely to result in increased business activity and higher profitability.

2.98 Employers who provide taxi travel will no longer be required to distinguish between taxi travel undertaken directly between the employee's home and place of work commencing between 7 pm and 7 am and other taxi travel. They will not have to ascertain all destination and departure points and the time of travel. Further, employers will not need to ascertain that the travel was direct. Employers will only need to ensure that taxi travel begins or ends at the place of work.

2.99 Employers who qualify for the car parking exemption will no longer have to compile and keep the records necessary to calculate the taxable value of the car parking benefits. The valuation rules for car parking benefits are complex. Employers sometimes experience difficulties in counting the number of car parking fringe benefits provided during an FBT year or in determining the taxable value of car parking fringe benefits.

2.100 Where an employer knows the number of benefits provided, the employer may determine the taxable value of the car parking fringe benefits using the commercial parking station method, the market value method or the average cost method. Alternatively, an employer may elect to calculate the taxable value of all car parking fringe benefits provided during the year by using the statutory formula method or the 12 week record keeping method. Records are required for each of these methods which, in some cases, are not required for any other purpose.

Financial impact

2.101 The revenue impact of the simplified taxi travel exemption is not quantifiable but is not expected to be large. The exemption for car parking provided by small business employers is expected to have an on-going revenue cost of around $35 million from 1997-98.

Conclusion

2.102 These measures offer a reduction in compliance costs for all employers who provide taxi travel arriving at or leaving from the work place for employees and for certain small business employers who provide car parking for their employees. The Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system, on an ongoing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and business associations through taxpayer forums.

Section 6 Regulation Impact Statement for changes to the arranger provisions

Policy objective

2.103 To implement the Government's response to the Small Business Deregulation Task Force's recommendation concerning the arranger provisions in the FBTAA. The proposed changes to the arranger provisions aim to reduce the compliance problems for employers arising from the arranger provisions.

Background

2.104 A fringe benefit includes, in general terms, a benefit provided to an employee in respect of the employee's employment where the benefit is provided by a person other than the employer under an arrangement between the person providing the benefit and the employer. The relevant provisions in the FBTAA are commonly referred to as the 'arranger provisions'.

2.105 The current definition of arrangement is very wide. The Australian Taxation Office (ATO)'s view, set out in taxation rulings and determinations, is that an employer is liable for FBT if the employer is aware that a third party is providing benefits to employees and the employer does not prohibit employees from accepting the benefits.

2.106 Compliance problems arise under the arranger provisions when benefits are initiated and provided by a third party. It is often difficult for an employer to determine the FBT liability as often the employer does not know the value of benefits provided to employees during the year. These circumstances typically arise when benefits are provided to employees under product promotion schemes or when employees are entertained, for example, through the provision of meals.

2.107 The Small Business Deregulation Task Force (the Task Force) recommended in November 1996 that the arranger provisions in the FBTAA be changed from the 1998-99 financial year so that the onus of paying FBT lies with the supplier of the benefit. The Government asked the ATO to consult with business through representatives of the FBT Subcommittee of the Commissioner of Taxation's National Taxation Liaison Group (NTLG FBT Subcommittee) in the light of the Task Force's recommendation and report to Government by 30 June 1997 on the best means of addressing concerns with the arranger provisions.

Implementation option

2.108 The implementation of the Government's policy objective involves amending the FBTAA to simplify the application of the arranger provisions. As a result of the proposed changes, an employer will be liable for FBT for benefits provided at the initiative of a third party only where there is an agreement between the employer and the third party or where the employer participates in, or facilitates, the provision of benefits by the third party.

2.109 Employers will still have to determine whether they are liable for FBT in these circumstances but this measure will make that determination easier and more certain.

2.110 This measure will be effective from 1 April 1998.

Assessment of impacts (costs and benefits)

Impact group

2.111 This measure will affect employers whose employees receive benefits from third parties where there is not an agreement between the employer and third party. It can be difficult for employers in these circumstances to determine whether they are liable to pay FBT in respect of the benefit. This option will make it significantly easier for those employers to determine whether they are liable to pay FBT for such benefits.

Costs and benefits

2.112 This measure will significantly reduce the compliance costs of employers in determining whether they are liable to pay FBT.

2.113 In particular, this measure will result in meals provided to employees at the initiative of third parties generally not being subject to FBT. The imposition of FBT to the benefits arising from meals provided in these circumstances under the existing law creates compliance problems for employers.

2.114 Where employers are liable for FBT for benefits provided to employees by third parties, some difficulties may remain for employers in obtaining from third parties the information about the value of the benefits. However, it is assumed that an employer would not enter into an agreement with a third party for the provision of benefits to employees, or participate in the provision of benefits to employees by a third party, where the employer will be exposed to a FBT liability without being provided with the relevant information by the third party.

2.115 The commencement date of 1 April 1998, which is the start of the 1998-99 FBT year, would minimise any disruption for employers.

2.116 The proposed changes will not have any significant impact on ATO administration costs.

Financial impact

2.117 The revenue implications of this measure are negligible.

Consultation

2.118 As requested by the Government, the ATO consulted with business through the NTLG FBT Subcommittee to clarify the concerns of business with the arranger provisions.

Conclusion

2.119 This measure offers a significant reduction in compliance costs for employers by clarifying their FBT liability where benefits are provided to employees at the initiative of third parties.

2.120 Feedback can be provided on this measure through the NTLG FBT Subcommittee and other taxpayer consultation forums.

Section 7 Regulation Impact Statement for the record keeping exemption arrangements

Policy objective

2.121 The policy objective of this measure is to reduce the compliance costs of record keeping for small business by exempting employers from the requirement to keep records for FBT purposes in certain circumstances.

Background

2.122 The measure was announced in a statement by the Prime Minister entitled More Time for Business on 24 March 1997 in response to the recommendations of the Small Business Deregulation Task Force.

2.123 The general record keeping requirement is set out in section 132 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). An employer is required to keep records that explain all transactions and other acts that are relevant for ascertaining the employers liability to FBT. An employer must retain those records for a period of 5 years after the completion of the transactions or acts to which they relate.

2.124 Where an associate of an employer provides benefits to the employers employees, the associate must keep and retain those records for a period of 5 years and provide a copy of those records to the employer. The employer must retain those records for 5 years.

2.125 In addition, an employer is required under section 123 of the FBTAA to retain documents, called statutory evidentiary documents, to support the substantiation rules. Where an employer fails to retain a statutory evidentiary document in relation to a fringe benefit for 5 years, the document is deemed never to have been given to the employer (and hence the employer is unable to rely upon it when determining the taxable value of the fringe benefit). For example, the taxable value of a fringe benefit can be reduced under the otherwise deductible rule only if an employer has complied with the substantiation rules.

Implementation option

2.126 There is only one option for implementing this measure. That is to amend the FBTAA.

2.127 Employers, other than government bodies and tax exempt bodies, who provide fringe benefits with an aggregate fringe benefits amount not greater than a threshold amount in a particular year, the base year, ($5,000 in the 1996-97 FBT year) will be able to elect not to keep FBT records for future FBT years. The amount of $5,000 will be adjusted annually for the 1997-98 FBT year and later FBT years in line with movements in the Consumer Price Index.

2.128 For an FBT year that the record keeping exemption arrangements (RKEA) apply, an employers FBT liability will generally be the same as the employers liability in the base year. However, if there is a material increase in the value of benefits provided during the year, the employers liability will be calculated in the normal way. A material increase in the value of benefits would be an increase in the aggregate fringe benefits amount of more than 20% of the base year (unless the increase is $100 or less).

2.129 This measure will apply from the day Royal Assent is received. An employer who qualifies for the RKEA will not be required to keep FBT records from the day that Royal Assent is received for the amending legislation. Further, an employer will be able to use either the 1996-97 FBT year or the 1997-98 FBT year as the first base year for the RKEA.

Assessment of impacts (costs and benefits)

Impact group

2.130 This measure will affect employers, other than government bodies and tax exempt bodies, who provide fringe benefits with an aggregate fringe benefits amount not greater than the threshold amount in a particular FBT year and maintain a similar level of benefits in later years.

2.131 Those employers who are eligible for the RKEA will be able to elect not to keep most FBT records in later years provided there is not a material change in the value of benefits provided. Employers would still have to retain records which they receive from associates in respect of benefits provided to their employees by those associates.

2.132 Around 30,000 small businesses lodging returns and paying FBT may fall within the exemption threshold. However, it is difficult to estimate the number of employers that will use the RKEA. Some employers may have the scope to reduce the level of fringe benefits they provide below the exemption threshold. Others providing fringe benefits may not lodge returns (for instance, because the value of the fringe benefits is reduced to nil by employee contributions).

2.133 Some employers who would be eligible for the RKEA may continue to keep records because they may not be certain that the value of benefits will fall within the limits of the exemption. Other eligible employers who currently do not lodge FBT returns may continue to keep records because they do not wish to start lodging FBT returns.

2.134 This measure will not have a significant impact on the Government. This measure will impact on tax agents and accountants to the extent that they will need to familiarise themselves with the measure and advise employers as to whether they should utilise the RKEA.

2.135 The Australian Taxation Office will have to make minor changes to forms and systems to administer the RKEA.

Costs and benefits

2.136 The compliance costs of employers who qualify for the RKEA as proposed will be reduced because of the reduction in reporting costs, for example, that would be incurred in obtaining and storing FBT substantiation records.

2.137 However, employers would need to recommence record keeping when there is a material variation in the value of the benefits being provided. In addition, employers would need to retain records relating to benefits provided by associates.

2.138 The reduction in compliance costs would mainly be for those employers who maintain the same type and level of benefits year after year.

2.139 There would be some additional costs to the extent that employers will need to learn about the changes to the law and determine whether they qualify for the RKEA. However, these additional costs would be more than offset by the time saved by employers in preparing, storing and accessing the fringe benefits source documents, as they are currently required to do for FBT purposes. Therefore, there will be an overall saving in compliance costs.

Financial impact

2.140 This measure is expected to result in a loss to revenue of $5 million in the 1998-99 financial year, $25 million in 1999-2000 and $20 million in 2000-2001 and 2001-2002.

Conclusion

2.141 This measure will reduce the compliance costs for employers who qualify for the record keeping exemption arrangements. The Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system, on an ongoing basis. Feedback can be provided on this measure through the Department of Treasury and the Australian Taxation Office in the usual manner.

Section 8 FBT exemption for approved student exchange programs

Summary of the amendment

Purpose of the amendment

2.142 The amendments in Schedule 2 of the Bill will provide an exemption from FBT for benefits consisting of places in an approved student exchange program where an employer (or an associate of the employer) does not select, or participate in the selection of, the recipient of the benefit.

Date of effect

2.143 The amendment will apply in relation to assessments for the FBT year commencing on 1 April 1996 and all later FBT years. [Item 2]

Background to the legislation

2.144 Some student exchange bodies invite employers to purchase places in student exchange programs for their employees or their children. Under the existing law, a fringe benefit arises where an employer provides a place in a student exchange scheme for an employee or an associate of an employee.

Explanation of the amendment

2.145 New section 58ZB is inserted in Division 13 of Part III of the FBTAA to exempt from FBT benefits consisting of places in student exchange programs where certain conditions are satisfied. [Item 1]

2.146 For a benefit consisting of a place in a student exchange program to be an exempt benefit, the conditions set out in new subsection 58ZB(1) must be satisfied. In particular, new paragraph 58ZB(1)(c) stipulates that an employer (or an associate of the employer) must not select, or take part in the selection of, the recipient of the benefit. An employer would be considered to have taken part in the selection process where the employer controlled or influenced the selection of the recipient. A benefit will qualify for exemption only where the recipient is selected independently by the student exchange body.

2.147 A further condition is that the student exchange program must be an approved student exchange program. An approved student exchange program is defined in new subsection 58ZB(2) as a student exchange program run by a student exchange body registered with the relevant State or Territory body in accordance with the National Guidelines for Student Exchange. These guidelines are published by the National Co-ordinating Committee for International Secondary Student Exchange.

Chapter 3 - Effect of bankruptcy on carrying forward tax offsets

Overview

Purpose of the amendments

3.1 The proposed amendments seek to achieve greater consistency of taxation treatment between those taxpayers who claim tax offset and those who claim a deduction for capital expenditure in cases of bankruptcy.

Background to the legislation

3.2 The Bill implements the Governments commitment outlined in the document, Reviving the Heartland, to 'give farmers a choice between accelerated deductions for Landcare works under Subdivisions 387-A and 387-B of the 1997 Act or a tax rebate/credit set at the marginal tax rate of 34 cents in the dollar for qualifying expenditure'.

3.3 On 1 July 1997, the Minister for Primary Industries and Energy announced that there would be a tax incentive for landcare in the form a carry forward rebate for capital expenditure incurred under Subdivisions 387-A and 387-B of the 1997 Act. The Treasurer and the Minister for Primary Industries and Energy provided further details in their 12 May 1998 announcement.

3.4 If you claim a deduction under either Subdivision 387-A or 387-B and do not have sufficient income with which to absorb those deductions, the amounts of any unabsorbed deduction will be carried forward as a loss. However, if you are declared bankrupt and you have carry forward losses from income years prior to your bankruptcy declaration, you cannot apply those carry forward losses in an income year in which your bankruptcy was annulled. The proposed amendments seek to put taxpayers who claim the landcare and water facility tax offset and become bankrupt in the same position as those who claim the deductions and become bankrupt.

Explanation of the amendments

Bankruptcy

3.5 Item 1 proposes to insert new sections 65-50 and 65-55 . The first of these sections prevents a taxpayer who has been declared a bankrupt from applying any carry forward rebate amounts from an earlier income year. You cannot apply your unused rebate amounts even if your bankruptcy is annulled.

3.6 If, in the current year, you pay an amount for a debt incurred in an earlier income year, you can claim as a deduction for that amount so much of the amount that was taken into account in calculating the rebate. The amount that you can deduct cannot exceed the amount of your deductions for earlier debts and the expenditure that was taken into account in calculating the rebate and would have been applied in reducing your net exempt income for the current year or earlier year. [New section 65-55]

3.7 These provisions are comparable with those that would apply had you claimed the alternative deductions. Then any unused deductions would produce carry forward losses, which are subject to the same restrictions in the event of your bankruptcy.

Application provision

3.8 Item 2 seeks to insert the application provision for the amendments contained in Item 1 of Schedule 4. The tax offset alternative will apply to assessments for the 1997-98 income year and later income years. Paragraph 388-55(2)(b) of the Income Tax Assessment Act 1997 ensures that expenditure for which the tax offset alternative is available must be incurred before the end of the 2000-01 income year. Where that expenditure is on water facilities, related tax offsets may therefore be first claimed as late as the 2002-03 income year.

Chapter 4 - Payments of tax by small companies

Overview

4.1 Schedule 5 of the Bill amends the Income Tax Assessment Act 1936 (the Act) to allow instalment taxpayers classified as small (including companies, corporate unit trusts, public trading trusts, superannuation funds, approved deposit funds and pooled superannuation trusts) that balance on 30 June to pay:

•

their estimated tax liability on 15 December following the income year; and

•

the balance of their tax liability, if any, on the following 15 March.

Corresponding dates will apply to small companies that balance on dates other than 30 June.

4.2 Schedule 5 will also amend the system of classification of taxpayers as small, medium, or large so that, in the absence of any estimates being made, or tax return for the preceding year being lodged, before 1 March, a companys classification for the current income year will be determined on the earlier of the date of lodgment of the return for the preceding year and 15 March. Corresponding dates will apply to companies that balance on dates other than 30 June.

4.3 Schedule 5 will also make a minor clarificatory amendment to the definitions of small, medium and large taxpayer so that they operate as intended.

Summary of the amendments

Purpose of the amendments

4.4 The purpose of the amendments is to:

•

assist small companies by allowing instalment taxpayers classified as small to pay their final tax liability for an income year later than currently required; and

•

ensure that a companys classification can be based on its most recent years income tax return.

Date of effect

4.5 The proposed amendments to the instalment schedule are to take effect from the 1996-97 income year. The proposed amendments to the classification system are to take effect from the 1997-98 income year. The proposed clarificatory amendment to the definitions of small, medium and large taxpayers are to take effect from the 1994-95 income year for companies classified as small and medium, and the 1995-96 income year for companies classified as large. [Items 5 and 16]

Background to the legislation

4.6 Subsection 221AZK(2) of the Act prescribes the timing and amount of tax instalments payable by instalment taxpayers, including companies. In the case of instalment taxpayers classified as small (ie. instalment taxpayers with likely tax of less than $8000), the Act currently provides that tax is to be paid in one instalment on the first day of the eighteenth month following the commencement of the income year. For instalment taxpayers that balance on 30 June this will be 1 December following the end of their income year. The amount of the instalment is equal to the total amount assessed as payable for the current year.

4.7 Likely tax is determined by a companys own estimate of tax payable for the current income year or, where no estimate has been made, the amount of tax assessed in a previous income year. The date on which classification is currently determined is the first day of the ninth month of the current year of income (ie. 1 March of the current income year for instalment taxpayers balancing on 30 June).

4.8 The due date for lodgment of returns by instalment taxpayers is the date notified by the Commissioner of Taxation in the Commonwealth of Australia Gazette, as prescribed by section 161 of the Act. Unless the Commissioner provides an extension, the due date for lodgment of company income tax returns coincides with the due date for the payment of a companys final tax instalment.

Explanation of the amendments

How will the instalment schedule change?

4.9 The amendment will provide that instalment taxpayers classified as small that balance on 30 June will be required to pay:

•

their likely tax on 15 December following the income year; and

•

the balance of their tax liability, if any, on the following 15 March.

Corresponding dates will apply to small companies that balance on dates other than 30 June. [Items 7, 8, 9, 10, and 11; amended subsection 221AZK(2)]

4.10 For a small company with a 30 June balance date this will mean that likely tax is payable on 15 December following the end of the income year and the balance of their tax liability, if any, is payable on 15 March following the end of the income year.

4.11 This concessionary instalment schedule will apply only to instalment taxpayers that are genuinely small. As a result, the amendment will not apply to instalment taxpayers that are classified as small but whose actual tax payable for the income year exceeds $300,000. In these circumstances instalment taxpayers will continue to pay their full tax liability on the first day of the eighteenth month following the commencement of the income year (ie. 1 December following the end of the income year for companies that balance on 30 June). [Item 13; new subsection 221AZK(3A)]

What are the changes to the system of classification?

4.12 Deferring the final instalment date for instalment taxpayers classified as small to 15 March will have the effect of extending the due date for lodgment of returns to 15 March. Amendments to the system of classification are necessary because, without amendment, lodgment of the prior year return would occur after the current classification date. This would not be an appropriate outcome because the payment schedule should be based on the most recent years tax return.

4.13 As a result, the Act is to be amended to provide that, in the absence of an estimate, or tax return for the preceding year, lodged before the first day of the ninth month of the current income year, a companys classification will be determined on the reckoning day, namely, the earlier of the date of lodgment of the previous years return and the fifteenth day of the ninth month of the current income year (ie. the deferred date for payment of a small companys final tax liability). For small companies that balance on 30 June, classification will be determined either on or before 15 March of the current year. [Items 5, 8, and 12; amended section 221AZH, amended subsection 221AZK(2), and substituted paragraph 221AZK(3)(a)]

4.14 Consistent with the operation of the current classification system, where a company lodges an estimate of its likely tax on or before 1 March, that estimate will be used as the basis for determining the classification of the company.

Are the grouping provisions affected?

4.15 These amendments will not affect the operation of the grouping provisions under section 221AZMA. As a result, the determination of whether an instalment taxpayer is part of an instalment taxpayer group will continue to take place on the first day of month 9 of the current income year (ie. 1 March for 30 June balancing companies).

Consequential amendments

4.16 As a result of the changes to the instalment schedule and the system of classification two consequential amendments will also be made. Firstly, the definition of final instalment in section 221AZH will be amended to reflect the fact that instalment taxpayers classified as small will now pay tax in two instalments with their final instalment due on the fifteenth day of month 21 of the current income year. The definition will be further amended to take into account that, for instalment taxpayers classified as small but whose actual tax payable for the income year exceeds $300,000, a single instalment of tax is required on the first day on the month 18 of the current income year. [Item 1; amended section 221AZH]

4.17 Secondly, section 221AZKA, which deals with circumstances where a taxpayer attempts to gain an undue deferral of tax instalments by lodging two estimates, will be amended to reflect the changes to the system of classification. As a result, references to the term:

•

first day of month 9 will be omitted and replaced with the term reckoning day [Item 14; amended section 221AZKA] ; and

•

first day of month 11 will be omitted and replaced with the term end of two months after that day (for example, if a companys reckoning day is, say, 10 March, the relevant period runs until the end of 10 May) [Item 15; amended subsection 221AZKA(1)] .

4.18 The second consequential amendment will ensure that the changes made to subsection 221AZK(2) relating to the new system of classification (and in particular the introduction of the term reckoning day) will have the appropriate flow-on effect for the operation of section 221AZKA.

Minor clarificatory amendment

4.19 Schedule 5 of the Bill will also make a minor clarificatory amendment to the definitions of small, medium and large taxpayers in section 221AZH. As a result, the definition of:

•

large taxpayer will be amended so that it includes companies classified as large under the anti-avoidance provision contained in section 221AZKA; [Item 2; amended section 221AZH]

•

medium taxpayer will be amended so that it operates subject to section 221AZKA, or includes companies classified as medium under the anti-avoidance provision contained in section 221AZKA; [Items 3 and 4; amended section 221AZH] and

•

small taxpayer will be amended so that it operates subject to the anti-avoidance provision contained in section 221AZKA. [Item 6; amended section 221AZH]

Regulation Impact Statement

Specification of policy objective

4.20 The policy objective of this measure is to assist small companies in managing their cash flow by extending the time in which they can meet their tax obligations.

Identification of implementation options

Background

4.21 Under the company tax instalment system a companys classification (ie. small, medium or large) and the instalment amount that it is required to pay is based on its likely tax (ie. a companys estimate of tax payable for the current income year or, where no estimate has been made, the amount of tax assessed in a previous income year).

4.22 For companies classified as small (ie. likely tax of less than $8,000), the Act currently provides that a single instalment of tax equal to the tax assessed for the income year is due on 1 December following the end of their income year (for 30 June balancing companies). Corresponding dates apply to companies that balance on dates other than 30 June.

4.23 Special administrative arrangements have applied to instalment taxpayers classified as small for the 1994-95 and 1995-96 income years. The effect of these arrangements is that, for companies balancing on 30 June, these companies pay their likely tax on 15 December and the balance, if any, together with lodgment of their return on 1 March. The Commissioner of Taxation has relied upon his discretion under section 206 of the Act to allow these administrative arrangements.

4.24 For companies classified as medium (ie. likely tax between $8,000 and $300,000) or large (ie. likely tax greater than $300,000), quarterly instalments of tax are required to be paid earlier than the payment schedule that applies to companies classified as small.

4.25 In its response to the report of the Small Business Deregulation Task Force, the Government announced that the Act will be amended to provide more time for small companies to meet their tax obligations. They will be allowed to pay:

•

their likely tax on 15 December; and

•

their final tax liability, if any, together with lodgment of their returns on 15 March.

4.26 Corresponding dates will apply to small companies that balance on dates other than 30 June.

Implementation option

4.27 To achieve this policy objective there is one implementation option only.

4.28 This is to extend and codify the special administrative arrangements that have applied to instalment taxpayers classified as small for the past two income years (see above).

4.29 Because these changes will result in the returns for some small companies being lodged after the 1 March classification date that applies under the existing law, it is also necessary to change the system of classification. As a result, in the absence of any estimate, or tax return for the preceding year, being lodged before 1 March, a companys classification for the current income year will be determined on the earlier of the date of lodgment of the return for the preceding year and 15 March. Corresponding dates will apply to companies that balance on dates other than 30 June.

Assessment of impacts (costs and benefits) of the implementation option

Impact group identification

4.30 The policy objective will positively affect taxpayers classified as small under the company tax instalment system (ie. likely tax under $8,000). This group will include companies, corporate unit trusts, public trading trusts, superannuation funds, approved deposit funds and pooled superannuation trusts who are classified as small for the purposes of the company tax instalment system.

4.31 The policy objective may also positively affect tax agents and accountants who help the above taxpayers meet their tax obligations.

Analysis of the costs and benefits of the implementation option

4.32 The primary advantage of the implementation option is that it provides taxpayers with certainty because the instalment schedule will be specified in the Act. This will result in reduced compliance costs which cannot be quantified.

4.33 Importantly, this implementation option allows a more generous instalment schedule because necessary amendments can also be made to the system of classification. The more generous instalment schedule will also assist small companies manage their cash flow.

4.34 Members of the tax profession have, in the past, expressed concern about the uncertainty associated with relying on a Commissioners discretion to establish the payment schedule for companies. Some members have argued that this would allow the Commissioner to change the instalment schedule each year and, consequently, create uncertainty and impose additional compliance costs. These costs are not capable of being quantified.

Taxation revenue

4.35 This implementation option will defer only a small amount of tax and, as a result, the interest cost to the revenue is expected to be insignificant. The amendment to the classification system will result in a small bring forward in revenue, resulting in a small interest gain to the revenue.

Consultation

4.36 The Tax Office consulted with representatives of the tax profession in various forums (including the Commissioners National Tax Liaison Group). Representatives of the tax profession argued that small companies should be able pay their final tax liability and lodge their tax returns on 15 March (in the case of 30 June balancing companies).

Conclusion

4.37 The implementation option achieves the objective of allowing instalment taxpayers classified as small more time to meet their tax obligations. It will also provide greater certainty and give instalment taxpayers classified as small a more generous instalment schedule than under the existing law (or under the Commissioners administrative arrangements).

4.38 The ATO and the Treasury will monitor this taxation measure, as part of the whole taxation system, on a continuing basis. In particular, the ATO will closely monitor developments to detect any significant revenue loss/deferral or unreasonable compliance costs arising from this proposal. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and small business associations and other taxpayer bodies.

Chapter 5 - Dividend imputation and RSAs

Overview

5.1 Schedule 6 of the Bill amends the Income Tax Assessment Act 1936 (the Act) to prevent franking credits or debits arising from the payment or refund of tax where those amounts are attributable to the Retirement Savings Account (RSA) business of a life assurance company.

Summary of the amendments

Purpose of the amendments

5.2 The purpose of the amendments is to ensure that no franking credit or debit arises from the payment or refund of tax where those amounts are attributable to the RSA business of a life assurance company.

Date of effect

5.3 The amendments are to apply to franking credits and debits arising for life assurance companies after the date of introduction of this Bill. [Item 28]

Background to the legislation

Scheme of imputation provisions affecting life assurance companies

5.4 Under the imputation system non-mutual life assurance companies receive franking credits and franking debits on the same basis as other companies with shareholders.

5.5 However, franking credits and franking debits that are attributable to statutory fund income are reduced by offsetting franking debits and credits to take into account that there is a limit on the portion of statutory fund income that can be distributed to shareholders because of various prudential rules.

5.6 Reducing franking debits and credits (eg. sections 160AQCCA and 160APVA of the Act) are calculated using formulas which exclude from the franking credits and debits so much of the credit or debit as is attributable to the statutory fund income. The formulas also distinguish the statutory fund income from other income components so that the franking credits and debits attributable to the statutory fund income can be calculated by reference to the special life company tax rate of 39 per cent (eg. subsections 160APVH(2) and 160AQCN(2)).

5.7 Until an assessment of tax payable for an income year is made, a life assurance company will not know the actual tax payable on its statutory fund and other components of taxable income. For franking credits and debits that arise before this time there is an interim reducing credit or debit based on the previous years assessed tax. When the actual tax payable on the statutory fund and other components becomes known, the interim reducing credit or debit is reversed (eg. sections 160APVB and 160AQCCB) and the permanent reducing credit or debit is calculated.

Retirement Savings Accounts

5.8 The Government announced in the 1996 Budget that it would allow the establishment of RSAs by banks, building societies, credit unions and life assurance companies to provide superannuation products to customers directly without the need for a separate trust structure. The Government also announced that RSAs would, broadly speaking, be taxed in the same way as complying superannuation funds. Legislation to give effect to the tax element of these changes was contained in the Retirement Savings Account (Consequential Amendments) Act 1997 (the RSA Act).

5.9 As part of the tax treatment of RSAs, no franking credit or debit arises in a companys franking account where the tax is attributable to the RSA business of the company. However, although the amendments introduced in the RSA Act prevent franking credits and debits arising for ordinary companies where the tax is attributable to the RSA business of the company, the same outcome is not achieved for life assurance companies.

Explanation of the amendments

5.10 Schedule 6 of the Bill replaces references to the term general fund component in the formulas that are relevant to life assurance companies in the calculation of franking credits and debits with references to standard component. As a result, no franking credit or debit arises from the payment or refund of tax where those amounts are attributable to the RSA business of a life assurance company. [Items 4 to 13 and 15 to 26; amended sections 160APVA, 160APVC, 160APVD, 160AQCCA, 160AQCD, 160AQCE, and subsections 160APVBA(2), 160APVBB(2), 160AQCJ(2), 160AQCK(2), and 160AQCL(2)]

5.11 Schedule 6 of the Bill also amends the operation of the formulas to ensure the appropriate calculation of franking credits and debits for tax attributable to the statutory fund component of taxable income. [Items 14 and 27; new paragraphs 160APVH(2)(c), 160APVH(5)(c), 160AQCN(2)(c), and 160AQCN(2AB)(c)]

5.12 To apply the formulas that calculate franking credits and debits for life assurance companies it may be necessary to apply rebates against components of taxable income in a certain order. Schedule 6 of the Bill will make two consequential amendments to ensure that the order in which rebates are applied is appropriate. [Items 2 and 3; amended section 160APHB]

5.13 Schedule 6 of the Bill will also insert a definition of standard component. The term standard component will have the same meaning as provided in Division 8 of Part III of the Act. That is, the standard component is the amount remaining in the general fund component of a life assurance companys taxable income after deducting the RSA component. [Item 1; amended section 160APA]

Chapter 6 - Deductible expenditure and CGT cost bases

Overview

6.1 The amendments contained in Schedule 7 of the Bill will amend the capital gains tax (CGT) cost base provisions in Part IIIA of the Income Tax Assessment Act 1936 (1936 Act) and the Income Tax Assessment Act 1997 (1997 Act). Broadly, the amendments will reduce the cost base and indexed cost base of an asset to the extent of any net revenue deductions allowable for expenditures included in the cost base. Cost base reductions will also apply where a heritage conservation rebate or a landcare and water facility tax offset is obtained in respect of the expenditure as an alternative to claiming a deduction.

6.2 Net revenue deductions are deductions allowable in respect of expenditure incurred on an asset less any amounts included in the taxpayers assessable income which effectively reverse those deductions by inclusion of a balancing adjustment.

Part A: Summary of the amendments to the 1936 Act

Purpose of the amendments

6.3 In principle, an item of expenditure should either be deductible for income tax purposes or included in the cost base of an underlying asset for CGT purposes, but not both.

6.4 The amendments are designed to prevent taxpayers from including an amount of expenditure in the cost base or indexed cost base of an asset to the extent that they would be able to claim a deduction for that expenditure.

Date of effect

6.5 The amendments, announced by the Treasurer in the 1997-98 Budget, will apply to assets acquired after 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997. [Subitem 8(1)]

6.6 However, expenditure incurred before 1 July 1999 in respect of underlying land or buildings acquired on or before 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997 will not be subject to these amendments. [Subitem 8(2)]

6.7 Further, the amendments will only apply to expenditure to the extent that they relate to the period after 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997. [Subitem 8(4)]

6.8 Moreover, CGT cost base or indexed cost base will be reduced for a heritage conservation rebate or a landcare and water facility tax offset is taken as an alternative to a deduction only where the relevant expenditure is incurred on or after this Bill is introduced into Parliament. [Subitem 8(3)]

Background to the legislation

6.9 Part IIIA of the 1936 Act taxes capital gains from disposals of assets acquired on or after 20 September 1985. A capital gain accrues to a taxpayer where the sale proceeds from the disposal of an asset exceeds the assets indexed cost base (or cost base if the asset is held for less than 12 months). A capital loss, however, arises when the sale proceeds are less than the assets reduced cost base.

Cost base

6.10 The cost base of an asset is defined in subsection 160ZH(1) of the 1936 Act. The components of the cost base of an asset are broadly, consideration in respect of acquisition, non-capital costs to the taxpayer of ownership, capital expenditure incurred to enhance the value or to defend the asset and incidental costs of acquisition or disposal.

6.11 Subsections 160ZH(6) and (8) exclude an amount of incidental cost from the cost base of an asset to the extent that the amount has been or is allowable as a deduction to the taxpayer. Similarly, subsection 160ZH(6B) excludes from the cost base, non-capital costs to the extent that the amount has been or is allowable as a deduction to the taxpayer.

6.12 There is, however, nothing in the existing law that prevents an amount of consideration in respect of the acquisition of an asset or expenditure in respect of the asset that is allowable as a deduction to the taxpayer from being included in the cost base.

Indexed cost base

6.13 The indexed cost base of an asset is defined in subsection 160ZH(2) of the 1936 Act. Broadly, the indexed cost base of an asset is the cost base of an asset indexed for inflation.

Reduced cost base

6.14 The reduced cost base of an asset is defined in subsection 160ZH(3) and largely reflects the components of the cost base of the asset.

6.15 Section 160ZK, however, provides that in calculating the reduced cost base of an asset, an amount of any consideration, incidental cost or expenditure in respect of an asset is reduced by any deductions allowable in respect of those amounts. Section 160ZK equally provides for such a reduction in the reduced cost base where a heritage conservation rebate or a landcare and water facility tax offset is obtained in respect of the expenditure as an alternative to claiming a deduction.

6.16 The existing law does not required similar adjustments to be made in respect of such amounts in working out the cost base or indexed cost base of an asset. These amendments will rectify this anomaly by requiring the relevant adjustments to be made when working out the cost base or indexed cost base of an asset.

Explanation of the amendments

Adjustments to the 'cost base' and 'indexed cost base'

Cost base

6.17 New subsection 160ZJA(1) will reduce the amount of consideration and expenditure to be included in the cost base of an asset under subsection 160ZH(1). The amount of consideration and expenditure will be reduced to the extent of any deductions that are allowable to the taxpayer in respect of those amounts.

6.18 Deductions that are allowable to a taxpayer include a situation where the taxpayer receives a heritage conservation rebate or a landcare and water facility tax offset in respect of the expenditure as an alternative to claiming a deduction.

Indexed Cost base

6.19 New subsection 160ZJB(1) will mirror the amendments as discussed in relation to the cost base. Below is an example of how the amendments would affect the current calculation of the indexed cost base of an asset.

Example

6.20 Building acquired 1 July 1999 for consideration of $100,000

Building write off at 2.5% per year (therefore $2,500 for 2 years = $5,000)

CPI 5%

Expenditure incurred by another taxpayer

6.21 In certain circumstances, a taxpayer is entitled to a deduction for capital expenditure incurred by another taxpayer. The new sections 160ZJA and 160ZJB will ensure that such deductible expenditure also reduces the amount of consideration and expenditure in respect of the cost base or indexed cost base of an asset owned by the taxpayer entitled to the deduction.

For example, expenditure incurred by a former owner of a building may be deductible as a building write-off to the new owner under Division 10C and 10D of Part III of the 1936 Act (or Division 43 of the 1997 Act). The new owner will need to reduce the cost base of the asset by such deductible expenditure even though the new owner did not incur that expenditure.

Deemed acquisition of an asset

6.22 Where an asset has been deemed to be acquired after 13 May 1997 the asset is subject to the measures in this Bill. New paragraphs 160ZJA(1)(d) and 160ZJB(1)(d) ensure that the new measures only apply to deductions allowed or allowable to the taxpayer after the deemed acquisition of the asset.

6.23 An example of such a deemed acquisition is if there is a change in the majority underlying ownership of an asset. The asset is deemed to have been acquired at the time of change in the majority underlying ownership of the asset (section 160ZZS and related provisions of the 1936 Act).

Rebates and tax offsets

6.24 The heritage conservation rebate and the landcare and water facility tax offset allows a taxpayer to obtain a rebate or a tax offset from tax for expenditure incurred on an asset. The rebate or tax offset is already taken into account under section 160ZK of the 1936 Act as a reduction to the reduced cost base of an asset. New paragraphs 160ZJA(1)(d) and 160ZJB(1)(d) ensure that the cost base and indexed cost base rules are consistent with the reduced cost base rules.

Assessable income

6.25 New paragraphs 160ZJA(1)(b) and 160ZJB(1)(b) will ensure that the consideration and expenditure in respect of an asset is included in the cost base to the extent the allowable deduction is effectively reversed by an amount being included in the taxpayers assessable income.

6.26 For example, an amount of assessable income equal to the excess of sale proceeds over the written down value of depreciable plant is required to be included in assessable income under subsection 59(2) of the 1936 Act or its equivalent in subsection 42-190(2) of the 1997 Act. This effectively reverses depreciation deductions allowable in respect of expenditure incurred on the plant where the expenditure is recouped upon disposal.

6.27 In working out the cost base of the depreciable plant, new paragraph 160ZJA(1)(b) will include the balancing adjustment in the cost base as the balancing adjustment is effectively reversing a previously allowable deduction. Similarly, new paragraph 160ZJB(1)(b) will have the same effect for indexed cost base.

6.28 In certain circumstances, an election to offset what would have been a balancing adjustment against the cost of either a replacement plant or other depreciable plant can be made. In this case, the balancing adjustment is not required to be included in the taxpayer's assessable income.

6.29 The effect of new subsections 160ZJA(2) and 160ZJB(2) is to treat an amount of balancing adjustment offset as if it were included in the assessable income of the taxpayer. The new provisions recognise that although such a balancing adjustment is not actually included in assessable income at the time of disposal, the amount is effectively assessed over the life of the replacement plant, or where relevant, other depreciable plant. This is because depreciation deductions in respect of the replacement plant or depreciable assets are based on the cost of the plant or depreciable assets as reduced by the balancing adjustment.

6.30 In certain circumstances a balancing adjustment may be deferred from being included in a taxpayers assessable income. This is known as a balancing adjustment rollover relief. New paragraphs 160ZJA(2)(d) and 160ZJB(2)(d) prevent potential double taxation arising from the interaction of the mechanism of the balancing adjustment rollover relief and the cost base adjustment provisions of this Bill. These provisions ensure that the deferred balancing adjustments does not reduce the cost base or indexed cost base of an asset at the time of the balancing adjustment rollover.

Partnerships

6.31 New subsections 160ZJA(3), (4) and 160ZJB(3), (4) apply where a partner in a partnership disposes of an interest in a partnership asset. These subsections mirror the effect of subsections 160ZJA(1), (2) and 160ZJB(1), (2) on the cost base and indexed cost base of an asset as discussed above.

6.32 These new provisions recognise that some deductions are allowable to the partnership while others are allowable to the individual partners. Some examples of expenditure that are taken into account in working out the net income or loss of a partnership are:

•

expenditure in establishment of grape vines (section 75AA); and

•

expenditure eligible for building write off (Division 10C and 10D of Part III of the 1936 Act or Division 43 of the 1997 Act).

6.33 The effect of the provisions is that the cost base or indexed cost base of the partners interest in the partnership asset will be reduced by that partners share of the partnerships allowable deduction.

Date of effect

6.34 The amendments made by Schedule 7 apply to assets acquired after 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997. [Subitem 8(1)] The acquisition date of assets is determined by section 160U of the 1936 Act.

Transitional rule

6.35 However, the amendments made by Schedule 7 do not apply to expenditure incurred before 1 July 1999 where certain conditions are met. The conditions of this transitional rule are satisfied where:

•

that expenditure gives rise to a separate asset (deemed asset) from the underlying asset by virtue of section 160P;

•

the underlying asset is land or a building acquired by the taxpayer at or before 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997; and

•

the deemed asset is acquired by the taxpayer after 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997 but before 1 July 1999.

6.36 Where a taxpayer satisfies the above conditions, this measure will not apply to adjust the cost base or indexed cost base of the asset by any allowable deductions in respect of the expenditure. [Subitem 8(2)]

Example 1

6.37 A taxpayer acquires land in 1990. In March 1998 the taxpayer signs a contract for a building to be constructed on their land. By December 1998, the building is completed and at that time, the taxpayer incurs the expenditure for the building's construction. The taxpayer's expenditure on the building is eligible for building write off under Division 43 of the 1997 Act. The new building is deemed to be a separate asset by virtue of section 160P.

6.38 The deductions for building write off will not be deducted from the cost base or indexed cost base of the building. This is because the taxpayer's expenditure on the building satisfies the conditions of the transitional rule.

Part B: Summary of the amendments to the 1997 Act

Overview

6.39

Summary of the new law

Division 110

What the Division does

Division 110 sets out the general rules for working out the cost base or reduced cost base of a CGT asset. These are key components determining whether a taxpayer makes a capital gain or capital loss. There are also special rules about cost base and reduced cost base in Division 112.

Costs not included in cost base for assets acquired before 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997.

Some costs are not included in the cost base. These are:

•

expenditure in elements 2 and 3 which is an allowable deduction;

•

any expenditure recouped that is not included in assessable income.

[Sections 110-40 and 110-43]

Costs not included in cost base for assets acquired on or after 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997.

Some costs are not included in the cost base. These are:

•

expenditure in any element which are allowable deductions;

•

any expenditure recouped that is not included in assessable income;

•

heritage conservation expenditure giving rise to a tax offset;

•

landcare and water facilities expenditure giving rise to a tax offset.

This section reflects the amendments to the cost base rules announced by the Treasurer in the 1997-98 Budget. [Sections 110-45, 110-50 and 110-55]

Generally, the measure will apply to CGT assets acquired on or after 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997. [Sections 110-45 and 110-50]

Special application rule for tax offsets

Amendments affecting expenditure that qualifies for the heritage conservation rebate and landcare and water facility tax offset apply only to such expenditure incurred on or after the day on which these amendments are introduced into Parliament. [Subsection 110-53(2) and subitem 14(2)]

Special application rule for the period from 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997 to 30 June 1999

Certain expenditure on capital improvements on land and building treated as separate assets. Generally, such separate assets are treated as having been acquired when the expenditure was incurred.

A special application rule ensures that the amendments do not apply to expenditure incurred before 1 July 1999 in respect of underlying land or a building acquired before the Budget even though the expenditure is deemed to give rise to a separate asset acquired after the Budget. [Subsection 110-53(3)]

Finding Table - New Law to Old Law

Finding Table Old Law to New Law

Finding Table - 1997 Act to amended 1997 Act

Regulation Impact Statement

Policy objective

6.40 As part of the 1997-98 Budget, the Government announced that amounts of expenditure included in the cost base of assets for capital gains tax (CGT) purposes would be adjusted to take into account net revenue deductions allowable in respect of those expenditures.

6.41 The principle underlying this measure is that an item of expenditure should be either deductible for income tax purposes, or included in the CGT cost base of an underlying asset, but not both.

6.42 According to the Government's announcement, the amendments are to apply to the disposal of assets acquired after the Budget at 7.30 pm AEST on 13 May 1997.

Implementation option

Budget measure

6.43 Only one implementation option was considered for the implementation of the Budget measure. This option involves reducing the cost base and indexed cost base of assets to the extent of any net revenue deductions that result from expenditure in respect of those assets. A taxpayer would obtain a net revenue deduction in respect of a particular expenditure if the sum of the allowable deductions in respect of the expenditure exceed the sum of any amounts required to be included in assessable income. These amounts of assessable income are limited to those included in a taxpayer's assessable income, which effectively seek to reverse the deductions previously allowed.

Transitional rule for the Budget measure

6.44 Subsequent to the Budget announcement the Government has decided that certain expenditure incurred after 13 May 1997 but before 1 July 1999 will not be subject to the Budget measure.

6.45 This is because under the existing CGT provisions, expenditures qualifying for some of the various capital allowances covered by the measure can be treated as creating assets that are separate from the underlying land or building they seek to improve or modify. Consequently, expenditure incurred after the Budget on underlying land or a building acquired before the Budget (pre-Budget land or building) might be subject to the measure.

6.46 Whilst such expenditures give rise to the double deductions sought to be removed by this measure, it has been argued that the expenditures may generally be perceived as being in respect of the pre-Budget land or building.

6.47 The following implementation options were considered to limit the effect of the separate asset treatment under the existing law:

Option A: an open-ended transitional rule that would exclude from the measure all expenditure incurred in respect of pre-Budget land or buildings;

Option B: a transitional rule that would exclude from the measure expenditure incurred on pre-Budget land or buildings only if the expenditure was incurred before 1 July 1999.

Assessment of impacts (costs and benefits) of each implementation option

Impact group identification

6.48 Taxpayers who are allowed net revenue deductions in respect of expenditure included in the cost base or indexed cost base of an asset acquired after the Budget.

6.49 Taxpayers acquiring income producing assets after the Budget that are eligible for building write off will be the main group subject to the measure. However, other taxpayers claiming various capital allowances and deductions in respect of assets may also be subject to the Budget measure.

6.50 The Australian Taxation (ATO) will be responsible for administering the measure.

Analysis of costs and benefits associated with each implementation option

Compliance costs

6.51 The Budget measure will increase taxpayers' compliance costs marginally as taxpayers will need to keep records of deductions claimed in respect of expenditure until at least five years after the asset is disposed of. Records in relation to the expenditure itself are already required to be kept, as the expenditure is relevant to the cost base of the underlying asset. The compliance costs of the Budget measure have not been quantified.

Administration costs

6.52 The revenue estimates of the budget measure above do not take into account the costs to the Australian Taxation Office of administering the Budget measure. However, these costs are likely to be small. The administrative costs of the Budget measure have not been quantified.

Transitional rule for the Budget measure

6.53 Option A would open up a potential loophole through which certain taxpayers could avoid the measure. Moreover, the option would be difficult to justify on equity grounds as it is unlikely that a taxpayer who incurs relevant expenditure on their pre-Budget land or building in, say, five to ten years' time, actually intended at the time of the Budget to incur such expenditure. Finally, the option may introduce distortions by providing an incentive for taxpayers to retain pre-Budget underlying land or buildings in order to claim double deductions in respect of those assets.

6.54 Option B runs the risk that it would rule out some expenditure that was genuinely in train at the time of the Budget announcement but was not incurred until after 1 July 1999. However, advice from the construction industry on the delays typically involved in obtaining building and zoning approvals for substantial redevelopment suggests that a transitional rule of two years is reasonable. Hence, Option B would ensure such projects are unaffected.

6.55 Taxpayer compliance costs will be further increased as a result of the Government's decision to implement a transitional rule. However, it is considered that the increased compliance cost will be limited to the small group of taxpayers who satisfy the conditions of the transitional rule.

6.56 Likewise the additional administrative costs arising from administering the transitional rule will be small as the affected group of taxpayers is small.

Taxation revenue

6.57 The CGT cost base adjustment measure is expected to provide a gain to the revenue over the five years 1997-98 to 2001-02 of $325 million. This is down from the original Budget estimate of $460 million over the same period. This reduction represents the estimated cost of proceeding with Option B. Option A was not costed, but its cost was considered to be prohibitive.

Consultation

6.58 The Government has received representations from the building and property industries to the effect that it would be unfair for the measures to apply to expenditures incurred in respect of pre-Budget assets. The transitional provisions contained in the proposed legislation are a result of those representations.

Conclusion

Budget measure

6.59 The Budget measure will be implemented as announced on Budget night.

Transitional rule for the Budget measure

6.60 Both Options A and B would deal with the perceived anomaly that arises because certain expenditure in respect of pre-Budget underlying land or buildings could be treated as giving rise to separate assets.

6.61 However, Option B is preferred because it provides for a reasonable transitional period to protect expenditure genuinely intended at the time of the Budget announcement. In contrast, Option A is inequitable, open to abuse and would cause economic distortions.

6.62 The Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system, on an ongoing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional associations and through other taxpayer consultative forums.

Chapter 7 - Passive income of insurance companies

Overview

7.1 Schedule 8 of the Bill will replace the formulae contained in subsections 446(2) and (4) of the Income Tax Assessment Act 1936 (the Act) used to calculate the passive income of life assurance and general insurance companies, respectively.

Summary of the amendments

Purpose of the amendments

7.2 The purpose of the amendments is to correct a deficiency in the current formulae used to calculate the passive income of the controlled foreign companies (CFCs) of Australian life and general insurance companies.

7.3 The amendments will replace the existing formulae used to calculate the passive income. The new formulae will exclude from a company's passive income only the income derived on assets that are referable to insurance policies owned by non-residents that are not related to the company.

Date of effect

7.4 The amendments will apply to passive income derived on or after 1 July 1997.

Background to the legislation

7.5 Special rules are contained in the CFC measures (Part X of the Act) to provide concessional treatment to Australian taxpayers who are shareholders of foreign life assurance and general insurance companies which are CFCs. The concessional treatment reduces the amount of passive income that may be attributed to those shareholders under the CFC measures. The rules for calculating the passive income of life insurance companies are contained in subsections 446(2) and (3) and those for calculating the passive income of general insurance companies are contained in subsections 446(4) and (5).

7.6 In the case of life assurance companies, the formula contained in subsection 446(2) reduces the passive income of a life assurance CFC by the proportion of its calculated liabilities that relate to policies owned by unrelated non-residents. (Such policies do not give rise to tainted services income (paragraph 448(1)(c)). Thus, only the passive income derived from assets that are employed to meet the calculated liabilities of policy holders who are associates of the company or Australian residents is passive income for the purposes of Part X of the Act.

7.7 The passive income of general insurance CFCs is reduced in a similar way using the formula in subsection 446(4). Under this formula, the passive income is reduced by the proportion of the outstanding claims that relate to policies owned by unrelated non-residents. (Such policies do not give rise to tainted services income (paragraphs 448(1)(d) and (e)). Thus, only the passive income derived from assets that are set aside to meet the outstanding claims of policy holders who are associates of the company or Australian residents is passive income for the purposes of Part X of the Act.

7.8 The deficiency in each existing formula is that it excludes passive income derived from assets that are held by the CFC which are in excess of those needed to meet the calculated liabilities of policy holders of life assurance CFCs, or those needed to be set aside to meet outstanding claims of general insurance CFCs. The problem with each existing formula is that if none of the policies give rise to tainted income (that is all the policies are held by unrelated non-residents) there are no tainted calculated liabilities (in subsection 446(2)) and no tainted outstanding claims (subsection 446(4)). Where this is the case, the numerator of each formula is zero and the result is there is no passive income, even if the company has derived passive income on assets in excess of those referable to insurance policies.

Explanation of the amendments

7.9 The existing formulae in subsections 446(2) and (4) will be replaced. The new formulae will include in the passive income of life assurance and general insurance companies the passive income derived on assets held:

•

to meet liabilities on policies that give rise to tainted services income; and

•

that are in excess of the assets required to meet the liabilities referable to policies.

Life assurance companies

7.10 The passive income of a life assurance company will be reduced by the proportion of total assets that relate to insurance policies that do not give rise to tainted services income of the company. The life assurance policies that give rise to tainted services income are those where the owner of the policy is an associate of the company or an Australian resident (paragraph 448(1)(c)).

7.11 The proportion of a life assurance company's assets that will be taken into account in the formula for calculating passive income is the excess of the company's total assets over the average calculated liabilities that are referable to policies that do not give rise to tainted services income. [New subsection 446(2)]

7.12 The untainted average calculated liabilities of a life assurance company is the amount of the total average calculated liabilities of the company that relates to insurance policies owned by unrelated non-residents. [New subsection 446(2)]

7.13 Total average calculated liabilities has the same meaning as in Division 8 (which deals with the taxation of life assurance companies). The total average calculated liabilities of a life assurance company for an income year is the sum of the average calculated liabilities for each category of policies under new section 114B. [New subsection 446(3)]

7.14 Total assets will also be taken into account on an average basis and will be the average of the company's total assets for the statutory accounting period calculated on a reasonable basis. [New subsection 446(2)]

Example

7.15 A life assurance company has total assets of $100,000 and total average calculated liabilities of $50,000 of which $25,000 relate to policies that give rise to tainted services income. The company derives passive income of $4,000 during the statutory accounting period.

The passive income of the company is:

Adjusted passive income x Total assets - Untainted average calculated liabilities/Total assets
= $4,000 x $100,000 - $25,000/$100,000
= $3,000.


General insurance companies

7.16 The passive income of a general insurance company will be reduced by the amount of passive income that is derived on assets referable to policies owned by non-residents who are not related to the company.

7.17 The company's passive income will be reduced by the proportion of total assets that relate to insurance policies that do not give rise to tainted services income of the company. However, in the case of general insurance companies there is no item which is a reasonable estimate of the amount of the company's liability in respect of a particular policy. It is therefore necessary for the formula to contain additional items to arrive at an estimate of the proportion of the company's assets that are referable to policies that give rise to tainted services income.

7.18 The proportion of a general insurance company's assets that will be taken into account in the formula for calculating passive income is the sum of the net assets and tainted outstanding claims reduced by an amount referred to as the solvency amount. [New subsection 446(4)]

7.19 Net assets is the excess of total assets over total liabilities. [New subsection 446(4)]

7.20 Tainted outstanding claims is the amount of outstanding claims at the end of the statutory accounting period that is referable to general insurance policies that give rise to tainted services income. [New subsection 446(4)]

7.21 Insurance policies (other than life assurance policies) give rise to tainted services income (under paragraph 448(1)(d))) where:

•

the insured person is an associate of the company or an Australian resident;

•

the insured property, at the time of the making of the contract, was situated in Australia; or

•

the insured event is one that can only happen in Australia.

7.22 Reinsurance policies also give rise to tainted services income where the risks of an associate are being reinsured by the company or where the insurer dealing directly with the company is an associate or an Australian resident (paragraph 448(1)(e)).

7.23 The outstanding claims of a company is the amount which it is necessary for the company to set aside at the end of the statutory accounting period which, when invested by the company, will provide sufficient funds to pay the outstanding claims of the statutory accounting period. The amount of outstanding claims should be reduced by any amounts recoverable by the insurer in respect of the claims. [New subsections 446(4) and (5)]

7.24 The solvency amount represents a concession which recognises that the amount of assets referable to policies that give rise to tainted services income is greater than the assets held to support the outstanding claims on those policies. This solvency amount will be calculated under a separate formula. [New subsection 446(5)]

7.25 The items to be used in calculating the solvency amount, minimum solvency and maximum event retention , are terms in common usage in the general insurance industry. General insurance companies under the supervision of the Insurance and Superannuation Commissioner, that is insurance companies carrying on general insurance business in Australia, are required to furnish information concerning these matters in their annual returns to the Commissioner.

7.26 Minimum solvency is the greater of:

•

20 per cent of the company's premium income during the statutory accounting period; or

•

15 per cent of the company's outstanding claims at the end of the statutory accounting period.

Premium income has the same meaning as in the Insurance Act 1973. [New subsection 446(5)]

7.27 The maximum event retention amount for a statutory accounting period is the amount the company has determined, on the basis of a reasonable and proper estimate, would be payable to the owners of policies from the happening of one event. This amount is the maximum possible loss (net of re-insurance) in respect of any one event and is the sum of the maximum possible loss for each particular class of business from that event. [New subsection 446(5)]

7.28 The solvency amount will be reduced by the proportion of the company's outstanding claims that relate to tainted outstanding claims. If none of the company's outstanding claims relate to policies that give rise to tainted services income, the solvency amount will not be reduced. If all of the company's outstanding claims relate to policies that give rise to tainted services income, the solvency amount will be nil. Similarly, if 50 per cent of the company's outstanding claims relate to policies that give rise to tainted services income, the solvency amount will be reduced by 50 per cent.

Example

7.29 A general insurance company has net assets of $50,000, total assets of $100,000, outstanding claims of $50,000 of which $25,000 relate to policies that give rise to tainted services income. The company derives passive income of $4,000 during the year of income and the premium income for that year is $30,000. The company has calculated that its maximum probable loss across all classes of business from the happening of one catastrophe is $2,500.

(1)Calculate the solvency amount:

(Minimum solvency + Maximum event retention) x (1 - Tainted outstanding claims )/Outstanding claims Minimum solvency = greater of 20% of premium income (20% of $30,000 = $6,000) and 15% of outstanding claims (15% of $50,000 = $7,500). Minimum solvency = $7,500 Solvency amount = ($7,500 + $2,500) x (1 - $25,000 )/$50,000 = $10,000 x 0.5 = $5,000


(2)Calculate passive income:

Adjusted passive income x (Net assets + Tainted outstanding claims - Solvency amount)/Total assets = $4,000 x ($50,000 + $25,000 - $5,000)/$100,000 = $4,000 x $70,000/$100,000 = $2,800.


Chapter 8 - Average calculated liabilities of life assurance companies

Overview

8.1 Schedule 9 of the Bill will amend Division 8 of Part III of the Income Tax Assessment Act 1936 to require life companies to use average calculated liabilities as the basis for determining:

•

the amount of income that relates to immediate annuity policies;

•

the amount of income that is attributable to policies issued by overseas branches; and

•

the amount of income and capital gains to be allocated to each class of assessable income.

Summary of amendments

Purpose of amendments

8.2 The purpose of the amendments is to ensure that average calculated liabilities, rather than calculated liabilities at the end of the year of income, are used by a life company to determine:

•

the amount of income that relates to immediate annuity policies;

•

the amount of income that is attributable to policies issued by overseas branches; and

•

the amount of income and capital gains to be allocated to each class of assessable income.

8.3 The use of average calculated liabilities will provide a more accurate reflection of the liabilities a life company has for policies held during the income year to be used in the assessment of income tax.

Date of effect

8.4 The amendments apply from the first year of income that commences on or after 29 April 1997. However, the amendments will apply to the preceding year of income if a significant event occurred in one of the insurance funds of a life company in the period from 29 April 1997 to the end of that year of income. [Item 10]

Background to the legislation

8.5 Division 8 contains specific provisions that relate to life companies. These provisions include formulae a life company must use to determine how much of its income is exempt from tax because it relates to immediate annuity policies or that is attributable to policies issued by overseas branches (subsections 112A(1) and 112C(2) respectively). Division 8 also includes formulae that must be used to allocate capital gains and non-exclusive assessable income to the four classes of assessable income of a life insurance company (subsections 116CB(2) and 116CE(5) respectively).

8.6 All of these formulae use calculated liabilities at the end of the year of income as their basis. Calculated liabilities are an equalisation of the actuarial valuation of liabilities to ensure uniform treatment between life companies. The valuation of liabilities is the amount which, given a range of assumptions, would provide the amount required to pay in full on maturity the company's life insurance liabilities.

8.7 Using calculated liabilities at the end of the income year can cause distortions to the calculation of a life company's assessable income if the proportion of calculated liabilities for the various classes of policies at the end of the year of income does not reflect the respective proportions of calculated liabilities for those classes of policies held during the year of income. The use of average calculated liabilities as a basis for these formulae will remove these distortions.

Explanation of the amendments

Purpose of the amendments

8.8 The purpose of the amendments is to ensure that average calculated liabilities, rather than calculated liabilities at the end of the year of income, are used by a life company to determine:

•

the amount of income that relates to immediate annuity policies;

•

the amount of income that is attributable to policies issued by overseas branches (that is, by foreign permanent establishments); and

•

the amount of income and capital gains to be allocated to each class of assessable income.

What are average calculated liabilities?

8.9 Item 7 inserts new section 114A which sets out the steps that will be used to work out average calculated liabilities for a category of policies. [New subsection 114A(1)] A category of policies comprises all types of policies issued by a life company. It includes any policies that are in a class of assessable income, exempt policies and eligible non-resident policies.

8.10 The steps that will be used to calculate average calculated liabilities are:

•

divide the year of income into periods [New subsection 114A(2)] ;

•

work out the average calculated liabilities for a category of policies for each period [New subsection 114A(3)] ; and

•

work out the average calculated liabilities for a category of policies for the income year [New subsection 114A(4)] .

Step 1 - Divide the income year into periods

8.11 The income year is divided into periods for each of the insurance funds (which is defined in subsection 110(1) to mean the Australian statutory funds of a life company and any other funds it maintains in respect of it's life insurance business) according to the timing of significant events (if any) in that fund.

8.12 That is, the income year is divided so that:

•

the first period starts at the start of the income year;

•

each later period starts immediately after the last day of the previous period;

•

each period (except the last) ends immediately before the first day on which a significant event occurs in relation to the insurance funds in which policies of the category are held; and

•

the last period ends at the end of the year of income.

[New subsection 114A(2)]

8.13 For example, if no significant events occur in any of the insurance funds of a life company during an income year, the income year will consist of one period which begins on 1 July and ends on 30 June.

8.14 If, on the other hand, two significant events occur in one of the insurance funds of a life company during an income year , the income year for that fund is divided into three periods:

•

period 1 - from 1 July until the day before the first significant event;

•

period 2 - from the day the first significant event occurred until the day before the second significant event;

•

period 3 - from the day the second significant event occurred until 30 June.

Step 2 - work out the average calculated liabilities for each period

8.15 The average calculated liabilities for a category of policies for each period is the amount worked out using the formula:

Calculated liabilities (start of period) + Calculated liabilities (end of period) X Days in period/Days in year of income


8.16 Calculated liabilities of a life company for a category of policies at the start of the period are:

•

if the period is the first period - the calculated liabilities at the start of the income year (this will generally be the amount used as the value of calculated liabilities at the end of the previous income year);

•

otherwise - the calculated liabilities on the day after the significant event that caused the new period to start.

8.17 Calculated liabilities of a life company for a category of policies at the end of the period are:

•

if the period is the last period - the calculated liabilities at the end of the income year (this will generally be the amount used as the value of calculated liabilities at the start of the subsequent income year);

•

otherwise - the calculated liabilities on the day before the significant event that caused the period to end.

[New subsection 114A(3)]

Step 3 - work out the average calculated liabilities for the income year

8.18 The average calculated liabilities for a category of policies for the income year is the sum of the amounts worked out under new subsection 114A(3) for the category of policies. [New subsection 114A(4)]

8.19 If a life company does not experience a significant event during the income year, average calculated liabilities is simply the average of the calculated liabilities at the start and end of the income year.

What are the total average calculated liabilities?

8.20 The total average calculated liabilities of a life company for an income year is the sum of the average calculated liabilities for each category of policies for the income year. [New section 114B]

What is a significant event?

8.21 A significant event, in relation to any of the insurance funds maintained by a life company, will be any event that causes an abnormal change in the amount of the company's policy liabilities in that insurance fund.

8.22 Events that generally do not cause an abnormal change in the amount of a life company's policy liabilities include:

•

policy maturities;

•

new business;

•

death claims;

•

policy transfers under the contract that are initiated by the customer (eg. switching investment units and rollovers to immediate annuities); and

•

changes in the publicly quoted value of units in unit linked funds as a result solely of changes in values of investment incomes and expenses.

8.23 Events that may cause an abnormal change in the amount of a life company's policy liabilities in an income year include:

•

the sale or transfer of a significant amount of the policies to another entity;

•

the transfer of all or a significant amount of the policies of a class of assessable income from an insurance fund; or

•

the transfer of all or a significant amount of the policies of a class of assessable income to an insurance fund.

[Item 1 - definition of significant event]

Exemption of income relating to immediate annuity policies

8.24 Section 112A exempts from tax that part of the income derived by a life company that is referable to, generally, immediate annuity policies. Section 112A is amended so that the basis of calculation of exempt income relating to immediate annuity policies is changed from calculated liabilities at the end of the income year to average calculated liabilities. [Items 2 and 3]

Exemption of income relating to eligible non-resident policies

8.25 Section 112C exempts from tax that part of the income derived by a life company that is referable to eligible non-resident policies. Section 112C is amended so that the basis of calculation of exempt income relating to eligible non-resident policies is changed from calculated liabilities at the end of the income year to average calculated liabilities. [Item 4]

Meaning of calculated liabilities

8.26 Subsection 114(1) defines the term calculated liabilities for the purposes of the 1936 Act. The definition is currently based on an actuarial valuation of the life company's liabilities at the end of the income year. Generally, subsection 114(1) provides that calculated liabilities will be an amount less than that valuation where the basis of the valuation is compound interest at rate of less than four per cent.

8.27 Subsection 114(1) is amended to recognise that a valuation of liabilities may need to be made at any time in the income year because calculated liabilities need to be worked out if a significant event occurs during the income year. [Item 5]

8.28 Subsection 114(2) provides a basis for working out an actuarial valuation of liabilities at the end of an income year if an actual actuarial valuation of liabilities is not made at that time. Subsection 114(2) is redrafted to recognise that an actuarial valuation of liabilities may need to be made at any time in the income year because calculated liabilities need to be worked out if a significant event occurs during the income year. [Item 6]

Apportionment of gains and losses arising from the disposal of fund assets

8.29 A life company's assessable income is divided into four classes of assessable income. Section 116CB apportions gains and losses arising from the disposal of fund assets of a life company between those classes of assessable income. Subsection 116CB(2) is amended so that the basis of apportionment of gains and losses arising from the disposal of fund assets between the classes of assessable income is changed from calculated liabilities at the end of the income year to average calculated liabilities. [Item 8]

Allocation of income to classes of assessable income

8.30 Section 116CE allocates assessable income derived by a life company to the four classes of assessable income. Subsection 116CE(5) provides a basis for allocating assessable income between the classes of assessable income if that income is not specifically allocated to a class of assessable income under another provision . Subsection 116CE(5) is amended so that the basis of allocation of assessable income that is not specifically allocated under another provision is changed from calculated liabilities at the end of the income year to average calculated liabilities. [Item 9]

Example

8.31 A life company has one insurance fund with two categories of policies (category A policies and category B policies). No significant events occur in relation to category A policies during the income year. However, on 12 September 1997, a significant number of policies are transferred to category B. The total income for the company for the 1997-98 income year is $642.

8.32 The values of the calculated liabilities for each category of policy on the relevant dates are as follows:

8.33 No significant events occurred in relation to category A policies during the year of income, thus average calculated liabilities for category A policies (ACL(A)) is:

ACL(A) = 150 + 120 / 2 = $135


8.34 As a significant event occurred in relation to category B policies during the year of income, average calculated liabilities for category B policies (ACL(B)), is:

Step 1 - divide the income year into periods

•

Period 1 is from 1 July 1997 to 11 September 1997 (the day before the significant event), that is, 73 days;

•

Period 2 is from 12 September 1997 (the day after the end of the first period) to 30 June 1998, that is, 292 days.

Step 2 - work out the average calculated liabilities for each period

ACL(B) for period 1 = 50 + 60 /2 X 73/365 = $1
ACL(B) for period 2 = 75 +95 /2 X 292/365 = $68


Step 3 - work out average calculated liabilities for the income year

8.35 Average calculated liabilities for category B policies (ACL(B)), is the sum of the average calculated liabilities for each period:

ACL(B) = 11 + 68 = $79


Total average calculated liabilities

8.36 The total average calculated liabilities for the life company is $214 (ie. $135 + $79).

Allocate income to categories of policies

8.37 The amount of income apportioned to category A policies is:

135/214 x $642 = $405


8.38 The amount of income apportioned to category B policies is:

79/214 x $642 = $237


Regulation Impact Statement

Specification of policy objective

8.39 The policy objective is to remove distortions in calculating a life company's calculated liabilities for the purposes of the Income Tax Assessment Act 1936 (the Tax Act). Amendments to the Tax Act will require life companies to use average calculated liabilities for life insurance policies held during the income year, rather than calculated liabilities at the end of the year of income, as the basis for determining:

•

the amount of income that relates to immediate annuity policies;

•

the amount of income that is attributable to policies issued by overseas branches; and

•

the amount of income and capital gains to be allocated to each class of assessable income.

Background

8.40 The Government announced the proposal on 29 April 1997 because using calculated liabilities at the end of the year of income distorts these calculations if the proportion of calculated liabilities for all policies at the end of the income year does not reflect the respective proportions for these groups of policies held during the income year.

8.41 The proposed measure will require life insurers to value calculated liabilities annually except where there is a significant event which substantially alters the value of calculated liabilities. If a significant event occurs, the life insurance company will be required to do an additional valuation of calculated liabilities at that time. Average calculated liabilities will be worked out on the basis of the value of calculated liabilities at the start and the end of the income year except where there is a significant event.

Identification of implementation options

8.42 Only one implementation option is feasible to give effect to the proposal. That implementation option is outlined in the paragraph 8.41. This approach was proposed in the Treasurer's press release for the transitional year (ie. the year of income in which 29 April 1996 occurred) and will continue to apply to future years.

Assessment of impacts (costs and benefits) of option:

Impact group identification

8.43 Life companies, the ATO, the Insurance and Superannuation Commission (which examines life company annual returns and other financial information for solvency and reporting policies), actuaries and accountants.

Assessment of costs

8.44 Life companies currently are required to obtain an actuarial valuation of calculated liabilities for tax purposes at the end of each financial year. An additional actuarial valuation of calculated liabilities will be required only if the life company has a significant event during the income year which substantially alters the calculated liabilities belonging to a particular category of policies.

8.45 The number of life companies that will encounter a significant event in an income year will vary from year to year depending on the amount of restructuring in the industry. In a particular income year it is expected that the number of life companies that have a significant event will be less than 5 (but could be zero) out of the 52 companies currently registered under the Life Insurance Act 1995.

8.46 Performance of actuarial valuations is considered to be time consuming, costly and inconvenient. However, because of the limited number of life companies involved, and because such a calculation is likely to be required for prudential and accounting purposes, the cost of compliance of the proposal is expected to be small.

8.47 All life companies will be required to do additional calculations to work out average calculated liabilities each year using set formula. These additional calculations will require minimal resources and impose no significant compliance costs.

8.48 The ATO will not incur any significant additional costs as a result of the proposal.

Assessment of benefits

8.49 The proposal will ensure that the income derived by life companies is allocated more accurately for tax purposes between the different categories of life insurance policies and will remove some uncertainty in the income tax law. It will protect the revenue and life companies from anomalous results arising from the use of calculated liabilities at the end of the income year as the basis of these allocations.

8.50 The measure is expected to protect revenue in the order of $100 million.

Consultation

8.51 The Life, Investment and Superannuation Association (LISA) were consulted on the proposed implementation method and agree that the approach of valuing calculated liabilities annually except where there is a significant event should be used as the basis for working out average calculated liabilities. LISA suggested that the concept of a significant event should be exhaustively defined and should apply to future years as well as the transitional year. LISA raised concerns about the application of the changes to life companies with substituted accounting periods. Those concerns are addressed in the application date for the amendments. Finally, LISA raised some practical concerns about valuing calculated liabilities.

Conclusion

8.52 The Government considers that the method of valuing calculated liabilities annually except where there is a significant event as the basis for working out average calculated liabilities achieves the policy objectives with minimal regulation impact on life companies.

8.53 The Treasury and the ATO will monitor the measure as part of the whole taxation system on an ongoing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from life insurance industry representative bodies.

Chapter 9 - Depreciation

Overview

9.1 The amendments contained in Schedule 10 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) to insert new section 61A to clarify the operation of the depreciation provisions in circumstances when an entity the income of which is exempt becomes, for any reason, subject to tax on any part of its income under the provisions of the Act.

Summary of the amendments

Purpose of the amendments

9.2 The amendments will ensure that the depreciable assets of tax exempt entities which become taxable are brought into the tax system, for the purposes of the depreciation provisions, at their notional written down values as if they had always been used wholly for the purposes of producing assessable income. The provisions will apply to Government exempt entities which are privatised either by legislation or by sale to private interests and non-Government exempt entities which cease to be exempt.

Date of effect

9.3 The amendments will apply to entities which became taxable earlier than 3 July 1995 but not earlier than the start of the year of income in which 1 July 1988 occurred. The amendment is required to provide certainty with respect to entities which became subject to taxation before 3 July 1995.

Background to the Legislation

9.4 When an entity changes from exempt to taxable status, an important taxation issue which arises is the appropriate basis for calculating depreciation deductions and balancing charges for depreciable assets owned by the entity at the time of transition to taxable status ('transitional plant').

9.5 This taxation issue which arises is the same for both private and Government owned entities changing from exempt to taxable status. For example:

•

a privately owned entity that is exempt, under paragraph 23(g) for the promotion of sport, might lose its exempt status if it starts to be carried on for other purposes;

•

complying superannuation funds became taxable with the repeal of the exemption contained in the Act as from their year of income in which 1 July 1988 occurred;

•

a Commonwealth Government Business Enterprise (GBE) will become taxable when the Commonwealth Government legislates to make the GBE taxable even without any change of ownership, for example Telecom (now Telstra) and Australia Post as from 1 July 1990;

•

a GBE (either State or Commonwealth owned) will also cease to be exempt when it is wholly or partially transferred to private beneficial ownership.

9.6 The general scheme of the depreciation provisions of the Act is to allow annual deductions for depreciation based on the historical cost of an item of plant and spread over the effective life of that plant. This scheme is supported by a system of balancing charges when the taxpayer disposes of the plant (eg. section 59) and apportionment rules in the event that the plant is used by the taxpayer only partly for assessable purposes (eg. section 61).

9.7 The long standing, and generally accepted, view of the Commissioner of Taxation is that when an entity changes from exempt to taxable status, its transitional plant is brought into the tax system, for the purposes of the depreciation provisions, at its notional written down value (NWDV). The Commissioner has consistently administered section 61 on the basis that, in such circumstances, NWDV is calculated using effective life rates (including any applicable loadings under the former section 57AG) and on the assumption that the transitional plant was always used by the entity wholly for the purposes of producing assessable income throughout the entire period of its ownership by the entity. This basis is referred to as the 'NWDV including section 57AG loadings basis'. The High Court decision in FC of T v Anderson (1956)
11 ATD 115 provides strong support for this approach.

9.8 Prior to the enactment of Schedule 2D, Division 57 of the Act, legislation modifying the Act has been introduced on a 'case by case' approach for certain exempt entities that have become taxable. The usual practice was not to include specific provisions in such transitional legislation requiring the use of the NWDV including section 57AG loadings basis for the purposes of calculating depreciation deductions and balancing charges.

9.9 In recent years, some challenges have emerged to the Commissioner's interpretation and administration of section 61 in respect of transitional plant when a tax exempt entity becomes taxable. Division 57 has removed any doubts caused by these challenges about the use of the NWDV including section 57AG loadings basis in circumstances when an exempt entity becomes taxable on or after 3 July 1995. These amendments will make it clear that the NWDV including section 57AG loadings basis applies to transitional plant in circumstances when an exempt entity became taxable earlier than 3 July 1995 but not earlier than the start of the year of income in which 1 July 1988 occurred.

Explanation of the amendments

Entities to which the section applies

9.10 Item 1 ensures that section 61 of the Act has effect subject to new section 61A . Item 2 inserts new section 61A . New subsection 61A(1) sets out the circumstances in which new section 61A applies. New subsection 61A(1) provides a test to work out if new section 61A applies to an entity. This test is the same as the test that is used in Division 57 of the Act (see section 57-5).

9.11 New section 61A applies if at any time :

•

all of the income of an entity is fully exempt from income tax; and

•

immediately afterwards, any of its income becomes assessable to any extent.

[New paragraphs 61A(1)(a) and (b)]

9.12 An entity to which new section 61A applies because at least part of its income has become at least partly assessable, is termed the 'transition taxpayer' . The time at which at least part of its income becomes assessable to at least some extent is the 'transition time' [New paragraphs 61A(1)(c) and (d)] . Although the term 'transition taxpayer' is used, the term applies to identify the entity in relation to matters arising before, at, and after the transition time.

9.13 Under new paragraph 61A(1)(e) the year of income of the newly taxable entity in which the transition time occurs, that is, in which at least a part of its income becomes at least partly assessable, is called the 'transition year' for the entity.

9.14 The provisions apply to a taxpayer for which a transition time occurs. It is possible for a taxpayer to be wholly exempt from income tax at the end of one year of income and commence to be assessable at the beginning of the following year of income. In that case, the transition time occurs at the beginning of the year in which the taxpayer commences to be assessable, and that year is the 'transition year'. The operative provisions of new section 61A are designed so that such a transition time does not hinder their operation. There is always a transition year, because the time when at least part of an entity's income becomes at least partly assessable always occurs in a year of income.

Depreciation deductions for transitional plant

9.15 New subsection 61A(2) ensures that the NWDV including section 57AG loadings basis applies in working out the depreciation deductions allowable to a transition taxpayer after the transition time in respect of transitional plant. The elements of the NWDV including section 57AG loadings basis are contained in new subsections 61A(3) to (9) .

Notional Written Down Value - when transitional plant is not acquired from a predecessor Government entity

9.16 New subsection 61A(7) ensures that transitional plant is notionally written down to reflect the fact that it has been used by the transition taxpayer in the period before the transition time. Notional depreciation is assumed to have been allowed to the transition taxpayer on the assumption that the unit was used wholly for the purposes of producing assessable income by the transition taxpayer from the date of the unit's acquisition or construction by the transition taxpayer.

Notional Written Down Value - when transitional plant is acquired from a predecessor Government entity

9.17 Certain transition taxpayers may have acquired transitional plant from a predecessor Government entity or from a succession of such entities. For instance, an item may have been originally constructed by a Commonwealth Government department and later transferred to a corporatised Commonwealth GBE which is later made taxable by Commonwealth Government legislation. In such circumstances, the unit's NWDV at the transition time is determined by applying notional depreciation to the original construction cost of the unit to the Commonwealth Government department from the time of the unit's construction until the transition time. [New subsections 61A(3),(4) and 7] The transition taxpayer is assumed to have acquired the unit at the time, and for the cost, it was acquired or constructed by the first 'exempt government entity' . (This result is the same whether or not the transition taxpayer has provided consideration in respect of its acquisition of the unit.) The transition taxpayer is then assumed to have been allowed notional depreciation on this assumed cost from this assumed acquisition date. The term 'exempt government entity' is defined in new subsection 61A(13) .

Calculations of notional depreciation and actual depreciation deductions

9.18 New subsections 61A(3) to (9) provide for the calculation of notional depreciation assumed to have been allowed to the transition taxpayer in respect of a unit and of actual depreciation deductions allowable to the transition taxpayer after the transition time.

9.19 A transition taxpayer can choose either the prime cost or diminishing value method of depreciation. However, the amendments will ensure that the method used for notional depreciation purposes to obtain the unit's NWDV at the transition time is the method used for the remainder of the life of the unit. [New subsection 61A(8)] This ensures that the taxpayer receives the same treatment that other taxpayers receive when making an election under section 56 of the Act.

9.20 The rates of depreciation, both for the purposes of notional depreciation and actual depreciation, are determined by making a notional estimate of the unit's effective life at the time when it was acquired or constructed by the transition taxpayer, or at the time of its assumed acquisition by the transition taxpayer in circumstances when there is a predecessor Government entity. [New subsection 61A(5)] In making this notional estimate, the transition taxpayer is assumed to have made any election that would have been available under subsection 54A(1) to adopt any determination by the Commissioner of the unit's effective life. [New subsection 61A(6)] The transition taxpayer cannot make another estimate of the unit's effective life or remaining effective life at the transition time in order to determine the rate of depreciation for actual depreciation purposes.

9.21 In determining the rate of depreciation for notional depreciation purposes, any applicable loadings under former section 57AG are taken into account but any applicable accelerated rates under former section 57AL are disregarded. [New subsection 61A(9)]

9.22 The following example demonstrates the operation of new subsections 61A(2) to (9) :

Example

On 1 July 1986, a Commonwealth Government department acquires a depreciable asset at a cost of $100,000. If the Commissioner had made an estimate of the unit's effective life at 1 July 1986, he would have estimated it to be 10 years. On 1 July 1989 the unit is transferred to a corporatised Commonwealth GBE for consideration of $90,000. The Commonwealth Government legislates to make the GBE taxable commencing on 1 July 1990. The GBE uses the unit wholly for the purposes of producing assessable income in the 1991 year of income. The GBE elects to use the prime cost method of depreciation for the unit and estimates the unit's remaining effective life, at 1 July 1990, to be 3 years.

The GBE is a transition taxpayer. The GBE is assumed to have acquired the unit on 1 July 1986 at an assumed cost of $100,000. The GBE is assumed to have been allowed notional depreciation for the period 1 July 1986 to 30 June 1990. The rate of depreciation for notional depreciation purposes is 11.8% (base rate of 10% + section 57AG loading of 18% of base rate) using the prime cost method applied to the assumed cost of $100,000. This same rate and method applied to the assumed cost are also used for actual depreciation purposes for the 1991 year.

Depreciation balancing adjustments on the disposal of transitional plant

9.23 The amendments ensure that the NWDV including section 57AG loadings basis applies when working out the amount of any balancing adjustment to be made when a transition taxpayer disposes of transitional plant. Balancing adjustments in these circumstances are worked out under new subsections 61A(11) and (12) , and not under subsections 59(1) and (2). [New subsection 61A(10)]

Including an amount in assessable income

9.24 New subsection 61A(11) provides for an amount to be included in the transition taxpayer's assessable income if the consideration receivable in respect of the disposal of a unit exceeds the unit's 'depreciated value' . Depreciated value is defined in new subsection 61A(13) . In circumstances when there is a predecessor Government entity, the assumed cost of the unit to the transition taxpayer is used to calculate the unit's depreciated value.

9.25 For instance, in the Example in paragraph 22, the depreciated value of the unit owned by the GBE at 30 June 1991 is $88,200 (assumed cost of $100,000 less actual depreciation deductions allowable of $11,800). If the GBE were to dispose of the unit on 30 June 1991 for consideration receivable of $92,000, an amount of $3,800 ($92,000 - $88,200) would be included in the GBE's assessable income for the 1991 year of income.

Deducting an amount

9.26 New subsection 61A(12) provides a formula for determining the amount to be allowed as a deduction to the transition taxpayer if the consideration receivable on the disposal of a unit is less than the unit's 'notional depreciated value' . Notional depreciated value is defined in new subsection 61A(13) . The definition takes into account the amounts of notional depreciation assumed to have been allowed to the transition taxpayer before the transition time, the amount of actual depreciation deductions allowable to the transition taxpayer after the transition time, and any further amounts of notional depreciation in respect of any use of the unit for non-assessable purposes after the transition time. In circumstances when there is a predecessor Government entity, the assumed cost of the unit to the transition taxpayer is used to calculate the unit's notional depreciated value.

9.27 The formula for determining the amount of the balancing adjustment deduction under new subsection 61A(12) is as follows:

difference X actual deductions /actual deductions + notional deductions


Each of the terms 'difference', 'actual deductions' , and 'notional deductions' is defined in new subsection 61A(12) . The effect of the formula is to limit the amount of the deduction allowable to that part of the 'difference' which reflects the extent to which the unit was actually used for assessable purposes during the entire period of its ownership, or assumed ownership by the transition taxpayer.

9.28 For instance, in the Example in paragraph 22, the notional depreciated value of the unit owned by the GBE at 30 June 1991 is $41,000 (assumed cost of $100,000 less notional depreciation before the transition time of $47,200 less actual depreciation deductions allowable of $11,800). If the GBE were to dispose of the unit on 30 June 1991 for consideration receivable of $26,000, the GBE would be allowed a deduction in the 1991 year of:

($41,000 - $26,000) x $11,800 /$11,800 + $47,200 = $3,000


Making no adjustment

9.29 If the amount of consideration receivable in respect of the disposal of transitional plant is between the unit's depreciated value and the unit's notional depreciated value, a balancing adjustment on the disposal is not required.

9.30 For instance, in the Example in paragraph 22, the depreciated value is $88,200 and the notional depreciated value is $41,000. If the GBE were to dispose of the unit on 30 June 1991 for consideration receivable of $60,000, no amount would be included in the GBE's assessable income or allowable to it as a deduction.

Application

9.31 The amendments will apply to entities which became taxable earlier than 3 July 1995 but not earlier than the start of the year of income in which 1 July 1988 occurred. The amendment is required to provide certainty with respect to entities which became subject to taxation before 3 July 1995. [Item 3]

Chapter 10 - Company tax instalments

Overview

10.1 Schedule 11 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) by excluding superannuation funds, approved deposit funds, and pooled superannuation trusts from the grouping provisions contained in the company tax instalment system.

Summary of amendments

Purpose of amendments

10.2 The purpose of the amendments is prevent the inappropriate application of the grouping provisions contained in the company tax instalment system to superannuation funds, approved deposit funds, and pooled superannuation trusts.

Date of effect

10.3 The amendments will apply from the 1995-96 income year.

[Item 2 of Schedule 11]

Background to the legislation

10.4 The timing of an entity's company tax instalment depends on whether the entity is classified as large, medium, or small. Broadly speaking, entities classified as small pay instalments later than medium entities and medium entities pay later than large entities.

10.5 There are grouping provisions within the company tax instalment system that can reclassify a medium entity as large if it is part of a group of entities that, when consolidated, would be a large entity.

10.6 The grouping provisions are an anti-avoidance measure designed to prevent large entities arranging themselves into several medium entities to gain a more concessional payment schedule.

10.7 However, the current grouping provisions can inappropriately group employer companies and their superannuation funds when a large company could not arrange itself into, say, a medium company and a medium superannuation fund. Similarly they could also inadvertently operate to group approved deposit funds and pooled superannuation trusts with the company that established them.

Explanation of amendments

10.8 Item 1 of Schedule 11 of the Bill amends paragraph 221AZMC(b) of the Act by excluding superannuation funds, approved deposit funds, and pooled superannuation trusts from the grouping provisions contained in the company tax instalment system. [Item 1 of Schedule 11; amends paragraph 221AZMC(b)]

10.9 Therefore, a medium-sized company and the medium-sized employer superannuation fund that it established will not be grouped together to form a large entity for the purposes of the company tax instalment system.

10.10 However, where a superannuation fund, approved deposit fund, or pooled superannuation trust is individually classified as large, the entity will continue to pay instalments of tax under the instalment schedule applying to large entities.

Regulation Impact Statement

Specification of policy objective

10.11 Implement the Governments announcement to exclude superannuation funds, approved deposit funds, and pooled superannuation trusts from the application of the grouping provisions contained within the company tax instalment system.

Identification of implementation options

Background

10.12 Under the company tax instalment system a companys classification (ie. small, medium or large) and the instalment amount that it is required to pay is based on its likely tax. Likely tax is a companys estimate of tax payable for the current income year or, where no estimate has been made, the amount of tax assessed in a previous income year.

10.13 For companies classified as small (ie. likely tax of less than $8,000) and who balance on 30 June, the law currently provides that a single instalment of tax equal to the tax assessed for the income year is due on 1 December following the end of that income year. For companies classified as medium (ie. likely tax between $8,000 and $300,000) or large (ie. likely tax greater than $300,000), quarterly instalments of tax are generally required to be paid earlier than the payment schedule that applies to companies classified as small.

10.14 There are grouping provisions in the law that treat a medium entity as large if it is part of a group of entities that, when consolidated, would be a large entity.

10.15 The grouping provisions apply, broadly speaking, where one entity controls another entity or entities. Where the grouping provisions apply, the likely tax for each group member is added together. If the total is greater than $300,000, each member of the group is classified as a large unless an entity within the group is individually classified as small.

10.16 The grouping provisions are designed to prevent large entities arranging themselves into a group of smaller entities so as to obtain a more concessional payment and lodgment schedule. However, the law, as it currently stands, can inappropriately apply in circumstances where entities have not set out to obtain such an advantage. For example, a company and its employer sponsored superannuation fund may both be inappropriately classified as large notwithstanding that each entity is individually classified as medium.

10.17 To remove this inappropriate outcome there is one implementation option, namely, to amend section 221AZMA of the Income Tax Assessment Act 1936 by excluding superannuation funds, approved deposit funds, and pooled superannuation trusts from the application of the grouping provisions contained within the company tax instalment system. The amendments will apply from the 1995-96 income year.

Assessment of impacts (costs and benefits) of the implementation option

Impact group identification

10.18 The proposed amendment may benefit companies, superannuation funds, approved deposit funds and pooled superannuation trusts who pay tax under the company tax instalment system.

10.19 The proposed amendment may also benefit tax agents and accountants who advise the above taxpayers of their tax obligations (eg. tax agents would have an extra three months to prepare the tax return of affected taxpayers).

Analysis of the costs and benefits associated with the implementation option

10.20 The advantage of the implementation option is that it will prevent superannuation funds, approved deposit funds and pooled superannuation trusts coming within the operation of the grouping provisions contained in the company tax instalment system. Furthermore, companies will not have to consider whether the grouping provisions apply to superannuation funds, approved deposit funds or pooled superannuation trusts that they control. For this reason the implementation option will reduce compliance costs.

10.21 However, where a superannuation funds (or approved deposit fund or pooled superannuation trust) likely tax exceeds $300,000 at the time of classification, the fund will continue to be classified as a large instalment taxpayer.

Taxation revenue

10.22 For those superannuation funds, approved deposit funds, and pooled superannuation trusts who did not previously apply the grouping provisions contained in the company tax instalment system there will be no revenue impact. For those entities, if any, that did apply the grouping provisions there would be a permanent deferral of revenue equal to the amount of one instalment. The impact of this deferral cannot be quantified but is expected to be insignificant.

Consultation

10.23 The Australian Tax Office consulted with representatives of the tax profession in various forums. No concerns were raised during consultations about the implementation measure.

Conclusion

10.24 The implementation option has the objective of excluding superannuation funds, approved deposit funds, and pooled superannuation trusts from the application of the grouping provisions contained within the company tax instalment system.

10.25 The proposed amendment is the only way of implementing the Governments policy objective. It is expected to result in lower compliance costs for certain companies and superannuation funds, approved deposit funds, and pooled superannuation trusts.

10.26 The ATO and the Treasury will monitor this taxation measure, as part of the whole taxation system, on a continuing basis. In particular, the ATO will closely monitor developments to detect any significant revenue loss/deferral or unreasonable compliance costs arising from this proposal. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and small business associations and other taxpayer bodies.