House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Capital gains tax roll-over relief for small businesses

Amends Part IIIA of the Income Tax Assessment Act 1936 to:

•

extend the capital gains tax (CGT) small business roll-over relief, contained in Division 17A, to the disposal of certain shares in companies and units in unit trusts. Thus, in certain circumstances, a capital gain on the sale of a business will be allowed to be rolled over where this is done through the sale of shares or units;

•

allow certain shares and units to be nominated as replacement assets for the purposes of Division 17A;

•

make minor technical changes to ensure Division 17A operates as originally intended.

Date of effect: The extension of the roll-over relief to shares and units will apply to disposals of assets from 1 July 1997, which is also the date of effect for Division 17A. The technical amendments have various application dates.

Proposal announced: Treasurer's Press Release No. 20, 1997

Financial impact: The extension of the roll-over relief to shares and units is expected to cost the revenue $90 million per year. The technical amendments will have no impact on the revenue as they merely ensure Division 17A operates as intended.

Compliance cost impact: It will be necessary for taxpayers seeking roll-over relief under these measures to determine the market value and cost bases of underlying active assets of a company or unit trust that is to be disposed of. The information relating to cost bases is already required to be kept under the income tax law. However, a taxpayer would have to seek professional assistance in determining the market value of active assets.

Additional compliance costs would arise where shares or units are acquired as replacement assets. In these circumstances, taxpayers would have to seek professional assistance in determining the market value of the underlying assets of the company or trust.

Amendment of the Sales Tax Assessment Act 1992

This Bill amends the Sales Tax Assessment Act 1992 to insert a new Part to establish a new sales tax regime for the suppliers of personal computers and related goods.

The new regime will require people to be accredited and dealings to be authorised if goods are to be obtained free of sales tax.

Date of effect: The Bill provides for the following application dates:

•

Amendments made by Items 5 and 10 relating to untaxed goods and credits have an application to taxable dealings occurring and credits applied for after *23 October 1997 (the date of introduction of the Bill).

•

Divisions 3 and 4 of Part 7A, the authorisation and withholding provisions, apply to dealings on or after a date to be specified.

Proposal announced: The proposal was announced in the 1996-97 Budget.

Financial impact: It is estimated that the fraudulent activities of some members of the computer industry are costing the revenue approximately $80 million per annum.

Compliance cost impact: The Compliance Cost Impact Statement is incorporated into the Regulation Impact Statement which appears at the end of Chapter 2 of the Explanatory Memorandum.

Land transport facilities

Amends the income tax law to provide a rebate of tax on interest derived by a lender to an approved road or rail infrastructure project. The borrower will be denied a deduction to the extent that the interest paid to the lender is tax rebatable.

Date of effect: These measures will apply in relation to interest on infrastructure borrowings for the 1997-98 income year and subsequent years.

Proposal announced: Treasurer's Budget Press Release No. 55 of 13 May 1997.

Financial impact: The cost to the revenue of the rebate will be limited to $37.5 million for 1997-98 and $75 million per annum thereafter.

Compliance cost impact: The Compliance Cost Impact Statement is incorporated into the Regulation Impact Statement which appears at the end of Chapter 3 of the Explanatory Memorandum.

Removing exemption for CRAFT scheme payments

Amends the Income Tax Assessment Act 1997 to remove the income tax exemption of the rebates payable to employers under the Commonwealth rebate for apprentice full-time training (CRAFT) scheme.

Date of effect: 1 January 1998.

Proposal announced: Treasurer's press release No. 54 of 13 May 1997.

Financial impact: This measure will result in notional gains to the revenue arising directly from the conversion of the tax expenditure to outlays. They include the gain to revenue arising from removing the tax exemption of payments and from the additional payments designed to compensate recipients for the tax they will pay on the payments.

There is no gain to revenue in 1997-98. The gain to revenue in 1998-99 is $35 million, in 1999-2000 is $45 million, in 2000-2001 is $55 million and in 2001-2002 is $50 million.

Compliance cost impact: The Compliance Cost Impact Statement is incorporated into the Regulation Impact Statement which appears at the end of Chapter 4 of the Explanatory Memorandum.

Tax Law Improvement Project - drafting and technical corrections

Makes drafting and technical corrections to income tax and other legislation as re written by the Tax Law Improvement Project to correct errors made in the rewriting process and to improve the drafting style of the Income Tax Assessment Act 1997.

Date of effect: Generally applies to assessments for the 1997-98 and later income years.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: None.

Tax Law Improvement Project - update amendments

Amend income tax and other legislation to ensure that:

•

The rewrite of the income tax law reflects subsequently -enacted recent legislation; and

•

recent income tax and other legislation conversely reflects the rewrite of the income tax law.

Date of effect: Generally applies to assessments for the 1997-98 and later income years.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: Amendments to the deduction for carry forward losses will result in a slight decrease in compliance costs.

Chapter 1 - Capital gains tax roll-over relief for small businesses

Overview

1.1 Parts 1 and 2 of Schedule 1 of the Bill will amend Division 17A of Part IIIA of the Income Tax Assessment Act 1936 (the Act). Division 17A allows capital gains tax (CGT) roll-over relief for the disposal of some or all of the active assets of a small business where replacement active assets are acquired.

1.2 The proposed amendments will extend the roll-over relief to the disposal of certain shares in companies and units in unit trusts and will allow shares and units to be nominated as replacement assets.

1.3 The amendments will also make technical changes to ensure Division 17A operates as originally intended in relation to the disposal of active assets.

Summary of the amendments

Purpose of the amendments

1.4 The main purpose of the amendments is to enable individual taxpayers actively involved in managing their businesses through certain companies or unit trusts to obtain roll-over relief without separately selling active assets of the company or trust. The amendments will allow the sale of a business and roll-over where this is done through the sale of shares in a company or units in a unit trust. Other amendments to Division 17A will also be made to ensure the provisions operate as intended.

Date of effect

1.5 The extension of the roll-over relief to shares and units will apply to disposals of assets on or after 1 July 1997, which is also the date of effect for Division 17A. [Item 26]

1.6 The amendments relating to assets substantially improved or developed by the taxpayer and those relating to the application of a net roll-over amount will apply to disposals of assets after the date of introduction. [Subitem 58(1)]

1.7 The amendment relating to depreciable assets applies only to replacement assets acquired after the date of introduction of this Bill into Parliament. [Subitem 58(2)]

1.8 The other amendments will apply to assets disposed of on or after 1 July 1997, the effective date of the small business roll-over relief measures generally. [Subitem 58(3)]

Background to the legislation

1.9 Division 17A of Part IIIA was introduced into the Act by Taxation Laws Amendment Act (No.1) 1997, which received Royal Assent on 8 July 1997.

1.10 Division 17A is a roll-over relief regime whereby, in certain circumstances, the disposal of active assets of a small business will not attract an immediate capital gains tax liability if active replacement assets are acquired. To be eligible for roll-over relief, a taxpayer's total net business assets must not exceed $5 million. The capital gain on the disposal of an active asset will not be taxed in the disposal year but will instead be used to reduce the cost base of newly acquired active replacement assets.

1.11 An active asset is defined in the existing subsection 160ZZPL(3) as an asset used or held ready for use by a taxpayer in carrying on a business or an intangible asset that is inherently connected with a business. However, certain assets are not to be regarded as active assets. For example, paragraphs 160ZZPL(4)(a) and (b) provide that shares in companies and interests in trusts will not be active assets.

1.12 On 24 March 1997, the Prime Minister announced an extension to the Division 17A roll-over relief so that it would apply to the disposal of certain shares in companies and units in unit trusts. The existing Division 17A rules would continue to operate where applicable.

1.13 The extension of the Division 17A roll-over relief will now allow small business owners to either dispose of the underlying active assets of their business or alternatively, where the business is carried on through a company or unit trust, dispose of the shares or units and reinvest in new active assets or other shares or units.

Explanation of the amendments

Index

Roll-over relief for disposals of shares or units

Eligibility criteria

1.14 Division 17A will now provide roll-over relief where active assets or certain shares or units in unit trusts are disposed of and replacement active assets or certain shares or units in unit trusts are acquired.

1.15 Where shares or units are disposed of or acquired, they must be disposed of or acquired by a controlling individual taxpayer not acting as a trustee. Further, the company must be a resident private company and the trust must be a resident unit trust.

1.16 The amount of a capital gain that can be rolled over on the disposal of a share or unit will be dependent upon the underlying active assets of the company or trust in which the share or unit is being sold. Where a capital gain is to be rolled over into a replacement share or unit, the amount that can be rolled over will also be dependent upon the underlying active assets of the company or trust in which the share or unit is being acquired.

Other criteria in the existing Division 17A

1.17 Where compatible, the existing criteria in Division 17A are to be satisfied in addition to the criteria outlined above. Examples of the existing criteria are rules requiring a taxpayer to make a written election [paragraph 160ZZPQ(1)(f)] and stipulating the time period within which reinvestment must occur [paragraph 160ZZPT(1)(d)]. Another example is the rule preventing the capital gain on an asset from being rolled over where the asset was a replacement asset held by the taxpayer for less than five years [item 40 - new paragraph 160ZZPQ(1)(e)] .

Roll - over assets

1.18 To be eligible for CGT roll-over relief on the disposal of a share in a company or a unit in a unit trust, the share or unit must be a roll-over asset. The term 'roll-over asset' as currently defined in subsection 160ZZPL(7) will be extended by the new subsections 160ZZPL(8) and (9) to include certain shares in companies and units in unit trusts [item6 - amended subsection 160ZZPK(1); item 8 - new subsections 160ZZPL(8) and 160ZZPL(9)] . (Refer to paragraph 1.30 below for a discussion of the consequential amendment to subsection 160ZZPL(7)).

1.19 More specifically, a roll-over asset is extended to include a share in a company or a unit in a unit trust which is disposed of in a year of income by an individual taxpayer w ho is not disposing of the share or unit in the capacity as trustee if:

(a)

the company is a resident private company or the trust is a resident unit trust that is not a publicly traded unit trust [item 8 - new paragraphs 160ZZPL(8)(a) and 160ZZPL(9)(a)] ;

(b)

the taxpayer is the controlling individual of the company or unit trust [item 8 - new paragraphs 160ZZPL(8)(c) and 160ZZPL(9)(c)] at the time immediately before the disposal of the share or unit (disposal test time);

(c)

the taxpayer satisfies the $5 million threshold test at the disposal test time [item 8 - new paragraph 160ZZPL(8)(d) and new paragraph 160ZZPL(9)(d)] .

1.20 A private company is one defined in subsection 6(1) of the Act. Broadly, a company is a private company for tax purposes if it is not a public company under tests prescribed in section 103A of the Act. The term 'resident unit trust' is defined by reference to section 102Q of the Act [item 5 - amended subsection 160ZZPK(1)] .

Controlling individual

1.21 New section 160ZZPNA sets out the meaning of a controlling individual of a company and of a unit trust [item 3 - amended subsection 160ZZPK(1); item 9 - new subsection 160ZZPNA(2)] . The test will be broadly similar to the 'controlling individual' test contained in the CGT exemption on retirement measure (proposed subsection 160ZZPZP(2) of Taxation Laws Amendment Bill (No. 3) 1997).

1.22 An individual is the controlling individual of a company at a particular time if, at that time, the individual:

•

is a director and an employee of the company; and

•

holds all of the legal and equitable interests in shares that carry:

(i)

the right to exercise at least 50% of the voting power in the company;

(ii)

the right to receive at least 50% of any dividends that the company may pay; and

(iii)

the right to receive at least 50% of any distribution of the capital of the company. [Item 9 - new subsection 160ZZPNA(2)]

1.23 Redeemable shares will be disregarded for the purposes of determining who holds the legal or equitable interests in the shares of a company. [Item 9 - new subsection 160ZZPNA(5)]

1.24 An individual is the controlling individual of a unit trust at a particular time if, at that time, the individual:

is an employee of the trust; and

has, for his or her benefit, entitlements to at least a 50% share of the income and capital of the trust. [Item 9 - new subsection 160ZZPNA(3)]

1.25 An employee for the purposes of subsections 160ZZPNA(2) and 160ZZPNA(3) has the same meaning as in the Superannuation Guarantee (Administration) Act 1992 (the SGA), except that subsection 12(11) of that Act is disregarded. [Item 9 - new subsection 160ZZPNA(4)] The use of this term will ensure that only persons who are entitled to payment for the performance of duties as directors (as defined in subsection 12(2) of the SGA) will be allowed roll-over relief under these measures.

1.26 Where an individual becomes a director and employee of a company, or an employee of a trust within three months of acquiring a share or unit, the individual is taken to have been a director and employee of the company or an employee of the trust since acquiring the share or unit. [Item 9 - new subsection 160ZZPNA(6)]

Consequential amendments

1.27 An existing condition for roll-over relief, contained in paragraphs 160ZZPQ(1)(c) and (d), is that a roll-over asset must be an active asset at disposal time and must have been an active asset for more than half of the time the asset was owned by the taxpayer.

1.28 As a result of the extension to the definition of 'roll-over asset' to incl certain shares and units, the condition requiring an asset to be active will now be amended to apply only to a roll-over asset that is neither a share nor a unit. [Item 13 - new paragraph 160ZZPQ(1)(c)]

1.29 Nevertheless, such an amendment on its own would have meant that roll-over relief would be available in respect of any share or unit, whether or not the share or unit was disposed of by an individual taxpayer and whether or not the other criteria (discussed at paragraph 1.19 above) are satisfied.

1.30 Accordingly, item 7 will insert new paragraph 160ZZPL(7)(aa) in the definition of 'roll-over asset' to exclude a share in a company or a unit in a unit trust. This will restrict roll-over relief to only those shares and units that satisfy all the criteria as identified in new subsections 160ZZPL(8) and (9).

Reinvestment

1.31 Under the existing subsection 160ZZPT(1), a taxpayer who has one or more roll-over assets (ie: active assets) in a year of income and satisfies the relevant eligibility criteria is required to roll-over the capital gain on the roll-over assets into one or more replacement active assets.

1.32 This provision will be extended in the case of an individual taxpayer (not acting as trustee) to allow a capital gain to be rolled over into certain shares in a company (investee company) or units in a unit trust (investee unit trust). [Item 16 - new subsections 160ZZPT(1AA), (1AB) and (1AC)] (See paragraphs 1.40 to 1.49 below for discussion on the amount of capital gain that may be rolled over.)

1.33 This extension will allow an individual taxpayer to roll over a capital gain on an active asset into certain shares or units. Further, the extension of the term roll-over asset to certain shares and units (discussed at paragraphs 1.18 to 1.20 above) will effectively allow an individual taxpayer to roll over a capital gain on those shares or units into active assets.

1.34 The existing provisions restricting roll-over rel ief to the disposal and acquisition of active assets will continue to apply to a taxpayer who is not an individual or is an individual acting as trustee.

1.35 Active assets and shares or units into which a capital gain can be rolled over under these measures are referred to as approved assets. [Item 2 - amended subsection 160ZZPK(1)]

1.36 A share in a company will be an approved asset in respect of an individual taxpayer (not acting as trustee) if;

•

the company is a resident private company in respect of the year of income in which the share is acquired by the taxpayer (for meaning of 'resident private company', see discussion at paragraph 1.20 above);

•

the controlling individual of the company immediately after the share is acquired by the taxpayer (for meaning of 'controlling individual', see discussion at paragraphs 1.21 to 1.26 above); and

•

the total of the market values of all the active assets of the company at the time of the acquisition of the share is not less than 80% of the total of the market values of all the companys assets at that time. [Item 16 - new subsection 160ZZPT(1AB)]

1.37 Further, a unit in a unit trust will be an approved asset in respect of an individual taxpayer (not acting as trustee) if:

•

the unit trust is a resident unit trust, but not a publicly traded unit trust, in respect of the year of income in which the unit is acquired by the taxpayer (see discussion at paragraph 1.20 above);

•

the taxpayer is the controlling individual of the unit trust immediately after the unit is acquired by the taxpayer (for meaning of controlling individual, see discussion at paragraphs 1.21 to 1.26 above); and

•

the total of the market values of all the active assets of the unit trust at the time of the acquisition of the unit is not less than 80% of the total of the market values of all the trust assets at that time. [Item 16 - n ew subsection 160ZZPT(1AC)]

1.38 The requirement for at least 80% of the total market value of underlying assets of the company or trust to be represented by active assets stems from the Government's intention to encourage small businesses to invest in active assets.

Acquisition of approved asset within specified period

1.39 The capital gain on a roll-over asset in respect of a year of income will only be allowed to be rolled over into an approved asset or approved assets acquired within the specified period. The period begins one year before and ends two years after the last disposal of a roll-over asset in the year of income. Approved assets acquired within the specified period are referred to as replacement assets. [Item 15 - amended subsection 160ZZPT(1)]

For example:

•

Roll-over asset A was disposed of on 2 July 1997

•

Roll-over asset B was disposed of on 31 December 1997

Roll-over assets A and B are roll-over assets in respect of the 1997-98 year of income because they were both disposed of in that year.

To qualify as replacement assets under subsection 160ZZPT(1), approved assets must be acquired within the period beginning 1 January 1997 and ending 30 December 1999.

Amount of capital gain that may be rolled over

Gross non-goodwill roll-over amount

1.40 Upon a taxpayer satisfying the relevant eligibility criteria and making an election under paragraph 160ZZPQ(1)(f) for roll-over relief on the disposal of a roll-over asset (that is not goodwill), the gross non-goodwill roll-over amount must be determined.

1.41 New subsections 160ZZPQ(3) and 160ZZPQ(3A) provide the meaning of gross non-goodwill roll-over amount. [Item 4 - amended subsection 160ZZPK(1); item 14 - new subsections 160ZZPQ(3) and (3A)]

1.42 If the roll-over asset is not a goodwill asset and is not a share in a company or a unit in a u t trust, the capital gain [referred to as the notional capital gain in paragraph 160ZZPQ(1)(b)] that would have, but for this Division, accrued to the taxpayer on the disposal of the roll-over asset is the gross non-goodwill roll-over amount. [Item 14 - new subsection 160ZZPQ(3)]

1.43 If the roll-over asset is a share in a company or a unit in a unit trust, the gross non-goodwill roll-over amount will be the notional capital gain on the share or unit. However, the gross non-goodwill roll-over amount cannot exceed the proportion of the unrealised net capital gain in respect of underlying active assets of the company or trust attributable to the share or unit. [Item 14 - new subsection 160ZZPQ(3A)]

For example:

Company A has an issued capital of $200, comprising two $100 shares. Taxpayer B owns one share in company A. The market value of the share is $1000. Taxpayer B sells the share and, but for Division 17A, a capital gain of $900 would accrue (ignoring indexation).

The unrealised net capital gain in respect of the underlying active assets of company A is $1500. The proportion of the unrealised net capital gain attributable to the share sold by taxpayer B is:

1500 x 1000/2000 = $750


Taxpayer B will have a gross non-goodwill roll-over amount of $750 (i.e.: the lesser of $750 and $900)

1.44 Any amount of capital gain on the share or unit in excess of the allowed proportion of the unrealised net capital gain (discussed below) is taken to be a capital gain accruing to the taxpayer in the year of income in which the share or unit was disposed of. [Item 14 - new subsection 160ZZPQ(3B)]

Unrealised net capital gain

1.45 The unrealised net capital gain in respect of underlying active assets of a company or trust is the total amount of capital gains, net of capital losses, that would have been realised by the company or trust if all the active assets of the company or trust were disposed of at their market value at the time the share or unit was disposed of ('disposal time'). [Item 14 - new subparagraph 160ZZPQ(3C)(a)(i)]

1.46 For the purposes of working out the unrealised net capital gain, certain assets which were not active assets at the disposal time would be included. These are assets of a company or trust that had stopped being active assets because of the cessation of the business of the company or trust and the cessation occurred within the 12 months before disposal time. [Item 14 - new subparagraph 160ZZPQ(3C)(a)(ii)]

1.47 An underlying asset that was nominated by the company or trust as a replacement asset within 5 years before the disposal time would not be included as an active asset for the purposes of working out the unrealised net capital gain. [Item 14 - new subsection 160ZZPQ(3D)]

1.48 Also excluded are assets which were not active for more than half of the period in which they were owned by the company or trust. [Item 14 - new paragraph 160ZZPQ(3C)(b)]

Net non-goodwill roll-over amount

1.49 The existing rules in Division 17A will require the gross non-goodwill roll-over amounts calculated under new subsections 160ZZPQ(3) and 160ZZPQ(3A) for a year of income to be added together and then taken into account in calculating the net non-goodwill roll-over amount. Broadly, by section 160ZZPR, the net non-goodwill roll-over amount is the gross non-goodwill roll-over amount reduced by prior year capital losses that had not been offset already and current year capital losses.

Application of net roll-over amount

1.50 Where a taxpayer who has a net non-goodwill roll-over amount nominates a replacement asset or replacement assets, the roll-over amount must be apportioned to the nominated replacement assets.

1.51 The existing subsections 160ZZPV(2) and (3) and subsections 160ZZPW(3) to (6) allow a net non-go odwill roll-over amount to be apportioned to replacement assets in reduction of the cost bases of those assets (see paragraphs 1.119 to 1.125 below for discussion of relevant technical amendments).

1.52 Nevertheless, there is proposed to be a limitation on the amount of a net non-goodwill roll-over amount that can be apportioned to a replacement asset that is a share in a company or a unit in a unit trust. [Item 17 - new subparagraph 160ZZPV(2)(a)(ii); item 18 - new subparagraph 160ZZPW(5)(a)(ii)]

1.53 The maximum amount of a net non-goodwill roll-over amount that a taxpayer can apportion to an asset that is a share or a unit is the amount equal to the proportion of the total market value of underlying active assets of the company or trust attributable to the share or unit. [Item 17 - new subsection 160ZZPV(3); item 18 - new subsection 160ZZPW(6)]

For example, taxpayer A has a net non-goodwill roll-over amount of $1500. Taxpayer A purchases 50 shares in company B for $500 (ie: each share cost $10). Taxpayer A now owns 50% of company B. Company B has underlying active assets with a market value of $800.

The maximum amount that taxpayer A can apportion to each share is the lesser of the cost base of each share ($10) and the amount calculated as follows:

800 x 10/1000 = $8


Thus, taxpayer A can apportion $8 of the net non-goodwill roll-over amount to each share purchased.

1.54 For this purpose, active assets are assets of the company or trust that were active at the time of the acquisition of the share or unit. Further, the market value of the share or unit is determined at the time of acquisition of the share or unit.

1.55 Any net non-goodwill roll-over amount not able to be apportioned to shares in a particular investee company or units in a particular investee trust may then be rolled over into either shares in another investee company or active assets of the taxpayer. Any part of a net roll-over amount not apportioned to replacement assets will treated as a capital gain that accrued to the taxpayer during the year of income to which the net roll-amount relates [item 17 - new paragraph 160ZZPV(2)(d); item 18 - new paragraph 160ZZPW(5)(d)] . As is the case under the existing Division 17A, the taxpayer would be liable to pay interest under section 170AA on an increase in the taxpayer's liability to tax in respect of the relevant year of income arising because of this provision.

Cessation of taxpayer's control over investee company

1.56 In certain circumstances, the provisions apply to tax as a capital gain, a net non-goodwill roll-over amount previously apportioned to a share in an investee company or a unit in an investee trust [item 19 - new section 160ZZPXA] . The existing section 160ZZPX also applies in a similar manner to replacement assets that are shares or units - see paragraphs 1.126 to 1.129 below for further discussion.

1.57 New section 160ZZPXA applies where a share in a company or a unit in a unit trust was nominated as a replacement asset under section 160ZZPT in respect of a net roll-over amount, and at a time (change time) after the nomination was made, one of the following occurs:

(a)

the taxpayer ceases to be the controlling individual of the company or trust [item 19 - new subparagraph 160ZZPXA(1)(e)(i)] ; or

(b)

the total of the market values of the active assets of the company or trust falls below 80% of the total of the market values of all the assets of the company or trust [item 19 - new subparagraph 160ZZPXA(1)(e)(ii)] ; or

(c)

if the replacement asset was a share, the company ceases to be a resident private company in respect of a year of income after the share was acquired [item 19 - new subparagraph 160ZZPXA(1)(e)(iii)] ; or

(d)

if the replacement asset was a unit, the trust ceases to be a resident unit trust or becomes a publicly traded unit trust in respect of a year of income after the unit was acquired [item 19 - new subparagraph 160ZZPXA(1)(e)(iii)] .

1.58 For this provision to apply, the share or unit must be owned by the taxpayer immediately after the change time [item 19 - new paragraph 160ZZPXA(1)(f)] . This will ensure a capital gain would only arise under section 160ZZPXA in relation to a replacement share or unit held by the taxpayer at that time. A net roll-over amount previously apportioned to a replacement asset no longer held by the taxpayer would have been brought to tax when the asset was disposed of.

1.59 Notwithstanding paragraph 1.57(b) above, section 160ZZPXA will not apply if the total of the market values of the active assets referred to fell below 80% of the value of all assets only because of changes in the market value of assets owned by the company or trust when the share or unit was nominated as a replacement asset. [Item 19 - new subsection 160ZZPXA(2)]

For example:

Taxpayer A purchases all of the shares in company A on 1/7/97. At that time, company A was worth $10 000 and had 10 active assets worth $8000 and two passive assets worth $2000. No additional assets are acquired during the year of income.

On 31/12/97, the value of four of its active assets dropped significantly such that the total market values of active assets of the company fell to $3 000 while the values of all other assets remained unchanged.

Accordingly, the total market value of active assets constitute only 60% of the total market values of all assets [ie: $3000/($3000 + $2000)].

Notwithstanding this, section 160ZZPXA will not apply because the 80% rule was failed only because of the changes in the market value of assets owned by the company at nomination time.

Consequences

1.60 Where section 160ZZPXA applies, the a mount (adjustment amount) of the net roll-over amount previously apportioned to the replacement share or unit under section 160ZZPV or 160ZZPW is taken to be a capital gain that accrued to the taxpayer in the year of income in which the change occurred. [Item 19 - new subsection 160ZZPXA(3)]

1.61 To prevent a roll-over amount already taxed as a capital gain at the change time from being taxed again when the replacement share or unit is eventually disposed of, the cost base in respect of the share or unit is increased by the adjustment amount. This increase is to occur at the change time [item 19 - new subsection 160ZZPXA(4)] . Accordingly, any indexation in respect of the increased amount of consideration occurs from the change time. (See paragraph 1.130 below for discussion of technical amendment to this provision.)

Roll-over of replacement asset upon death - consequential amendment

1.62 Section 160ZZPZ currently applies so that where a nominated replacement asset that is a share or a unit forms part of the estate of a deceased person and is passed on the legal personal representative (LPR) of the deceased person, the actions of the deceased person will be taken to be the actions of the LPR for the purposes of Division 17A. This provision 'preserves' a net roll-over amount previously rolled over into a particular replacement asset (even though the asset has been disposed of to the LPR) by effectively treating the LPR as the deceased person.

1.63 Under the existing paragraph 160ZZPZ(1)(b), this rule would only apply if section 160ZZPX (relating to the change of status of replacement assets - discussed below at paragraphs 1.126 to 1.129) had never applied to the deceased taxpayer in relation to a particular replacement asset. Where section 160ZZPX had applied, the deceased taxpayer would have effectively been taxed on a net roll-over amount previously apportioned to the particular replacement asset. In these circumstances, it would be irrelevant if the asset changed its nature while it was held by the LPR.

1.64 An amendment to section 160ZZPZ will ensure that the actions of the deceased person in relation to a replacement asset will be taken to be the actions of the LPR if new section 160ZZPXA had never applied to the deceased taxpayer in relation to that asset [item 56 - amended paragraph 160ZZPZ(1)(b)] . New section 160ZZPXA applies similarly to section 160ZZPX to effectively tax a net roll-over amount previously apportioned to a replacement asset. Accordingly, as with section 160ZZPX, there would not be a need to deem the actions of the deceased person to be the actions of the LPR where section 160ZZPXA had applied to the deceased person.

1.65 Similarly, where the replacement asset is passed on to a beneficiary of the deceased estate, the actions of the deceased person and the LPR will be taken to have been the actions of the beneficiary for the purp of Division 17A. An amendment will ensure that the actions of the deceased person and the LPR will only be taken to be the actions of the LPR if new section 160ZZPXA had never applied to the deceased taxpayer in relation to the particular asset [item 57 - amended paragraph 160ZZPZ(2)(b)] .

CGT exemption where small business assets are used for retirement - consequential amendments Restriction to active assets

Restriction to active assetts

1.66 Broadly, a capital gain accruing on the disposal of an active asset by a small business is exempt from CGT under proposed Division 17B of Part IIIA, (contained in Taxation Laws Amendment Bill (No. 3) 1997), if the proceeds from disposal are used in connection with the retirement of an individual taxpayer who controls the business.

1.67 While CGT roll-over relief under Division 17A will be extended by these amendments to certain disposals of shares in a company or units in a unit trust, the CGT retirement exemption under proposed Division 17B will continue to be available only where active assets are disposed of.

1.68 The relevant eligibility criteria for the CGT retirement exemption will be amended to effectively require the disposal of a roll-over asset within the meaning of subsection 160ZZPL(7) as amended by this Bill. [Item 21 - new paragraph 160ZZPZD(1)(aa); item 23 - new paragraph 160ZZPZH(2)(aa); item 25 - new paragraph 160ZZPZI(2)(aa)]

1.69 Without these amendments, the extension to the meaning of the term 'roll-over asset' to certain shares and units by new subsections 160ZZPL(8) and (9) (discussed at paragraphs 1.18 to 1.20 above) would effectively enable disposal of those shares and units to be eligible for the CGT exemption under proposed Division 17B.

Changes to section references of the roll-over relief provisions

1.70 The eligibility criteria under the CGT retirement exemption under proposed Division 17B has been drafted by reference to the CGT roll-over relief provisions because of the similarity between the eligibility criteria for both the measures.

1.71 Amendments will be made to the relevant eligibility criteria for the CGT retirement exemption to reflect the fact that the criteria for roll-over relief relating to active assets contained in the existing paragraphs 160ZZPQ(1)(c) and (d) will be consolidated by these amendments and reflected in new paragraph 160ZZPQ(1)(c). [Item 20 - amended paragraph 160ZZPZD(1)(a); item 22 - amended paragraph 160ZZPZH(2)(a); item 24 - amended paragraph 160ZZPZI(2)(a)]

Technical amendments

1.72 Part 2 of Schedule 1 of the Bill introduces the following technical amendments.

Threshold test

1.73 Section 160ZZPP of Division 17A contains the threshold test to be satisfied before roll-over relief will apply to the disposal of an asset by a taxpayer. By subsection 160ZZPP(4), the sum of the net values of the assets of:

•

the taxpayer (paragraph 160ZZPP(4)(a));

•

any entities connected with the taxpayer (paragraph 160ZZPP(4)(b)); and

•

where the taxpayer, an associate of the taxpayer or either of those persons is a partner in a partnership not connected to the taxpayer, their share of the net value of the assets of the partnership (paragraphs 160ZZPP(4)(c) and 160ZZPP(4)(d));

must not exceed $5 million. According to subsection 160ZZPN(1), an entity is connected with a taxpayer if the taxpayer controls or is controlled by the entity, or if the taxpayer and the entity are under common control.

1.74 The intention of the provision is to ensure that the $5 million threshold is applied not just to the net value of the taxpayer's directly owned assets but also takes into account the net values of assets of any entities connected with the taxpayer.

1.75 However, where the taxpayer is a partner in a partnership, the current effect of subsection 160ZZPP(4) is to double count the net value of the assets of the taxpayer. This occurs where the partnership is not connected with the taxpayer (for instance, because the taxpayer does not control the partnership). The taxpayer's share in the net value of the assets of the partnership will be included in the threshold test twice - once as assets of the taxpayer under paragraph 160ZZPP(4)(a) and again as the taxpayer's share of partnership assets under paragraph 160ZZPP(4)(c).

1.76 Accordingly, paragraph 160ZZPP(4)(c) will be repealed to rectify this problem of double counting. [Item 39]

1.77 There is also duplication between the threshold requirements in subsection 160ZZPP(2) and paragraph 160ZZPP(4)(a). By subsection 160ZZPP(2), a threshold criterion for accessing roll-over relief is that the net value of the taxpayer's assets must not exceed $5 million. However, paragraph 160ZZPP(4)(a) also includes the net values of the assets of the taxpayer in the threshold test.

1.78 Subsection 160ZZPP(2) will be repealed to remove the duplication. [Item 36]

1.79 By subsection 160ZZPP(4), if a taxpayer or an associate of the taxpayer is a partner in a partnership and an asset of the partnership is disposed of, the net value of the partnerships assets must not exceed $5million. Subsection 160ZZPP(3) will be amended to remove the highlighted words because they add no meaning to the subsection. [Item 37 - amended subsection 160ZZPP(3)]

1.80 Finally, a note will be inserted after paragraph 160ZZPP(4)(a) to make it clear that the total of the net values of the assets of a taxpayer under that paragraph specifically excludes any interest of the taxpayer in the net values of the assets of any entities that are connected with the taxpayer [item 38] . This exclusion is provided by subsection 160ZZPL(2).

Application

1.81 The amendments contained in items 35-38 will apply to disposals of assets on or after 1 July 1997. [Subitem 58(3)]

Calculation of net roll-over amounts

1.82 Section 160ZZPR contains the rules for calculating a net non-goodwill roll-over amount. Broadly, subsection 160ZZPR(2) provides that a gross non-goodwill roll-over amount must be applied to the maximum extent possible in reduction of the following amounts in order:

•

any capital losses that the taxpayer incurred in the disposal year of income (paragraph 160ZZPR(2)(a)); and

•

any net capital losses that the taxpayer incurred in respect of years of income earlier than the disposal year of income (paragraph 160ZZPR(2)(b)).

1.83 The intention of paragraph 160ZZPR(2)(b) is ensure that a gross non-goodwill roll-over amount is applied against any available but unrecouped net capital losses of a prior year before roll-over relief is allowed.

1.84 However, the effect of the current operation of paragraph 160ZZPR(2)(b) is that the full amount of a net capital loss incurred in a prior year will be offset against a gross non-goodwill roll-over amount without taking into account any amount of the net capital loss which has already been recouped and regardless of whether the loss is eligible for recoupment.

1.85 New paragraph 160ZZPR(2)(b) will ensure that only the amount of a net capital loss which has not been recouped, and which is eligible for recoupment, will be applied against the gross non-goodwill roll-over amount. [Item 41]

1.86 Subsection 160ZZPS(2), which contains similar rules for calculating a net goodwill roll-over amount, will also be amended to provide the same effect. [Item 42 - amended paragraph 160ZZPS(2)(b)]

Application

1.87 The amendments contained in items 41 and 42 will apply to assets disposed of on or after 1 July 1997. [Subitem 58(3)]

Depreciable assets

1.88 The effect of existing paragraph 160ZZPQ(1)(e) is that where the cost base of an asset was reduced under a previous application of Division 17A, the taxpayer must hold the asset for more than five years before roll-over relief under the Division would be available in respect of the asset. The provision gives effect to the Government's policy that roll-over relief under Division 17A be available in respect of a particular asset only once every five years.

1.89 However, this policy is not achieved in relation to a replacement asset that is a depreciable asset. The five year restriction does not apply where a capital gain is rolled over into a depreciable asset because the cost base of the depreciable asset is not reduced. Instead, by paragraphs 160ZZPV(2)(c), 160ZZPV(3)(c), 160ZZPW(5)(c) or 160ZZPW(6)(c), the net roll-over amount is taxed in full when the depreciable asset is subsequently disposed of, unless further roll-over relief is allowable.

1.90 Accordingly, new paragraph 160ZZPQ(1)(e) will have the effect that if an asset was nominated as a replacement asset under a previous application of Division 17A, roll-over relief would only be available in respect of the asset if the asset had been acquired more than five years before its disposal [item 40] . This will ensure that gains rolled into depreciable assets will be prevented from being rolled over again within five years.

Application

1.91 This amendment will apply to roll-over assets acquired after the date of introduction of the Bill into Parliament. [Subitem 58(2)]

Connected entities

1.92 As mentioned at paragraph 1.74 above, the net value of assets of any entities connected with a taxpayer are included for the purposes of the $5 million threshold. According to subsection 160ZZPN(1), an entity is connected with a taxpayer if the taxpayer controls or is controlled by the entity, or if the taxpayer and the entity are under common control. Subsection 160ZZPK(1) defines an entity as an individual, a partnership, a company or a trust.

1.93 Paragraph 160ZZPN(2)(c) deems the trustee of a discretionary trust or an entity which has the power to determine the manner of distribution from a discretionary trust to control the discretionary trust. An exception to paragraph 160ZZPN(2)(c) is provided by subsection 160ZZPN(3). The effect of subsection 160ZZPN(3) is that where the discretionary trust is the taxpayer seeking roll-over relief and a beneficiary of that trust is taken to control the trust, then the trustee (or the entity who has the power of determination as referred to above) would not be deemed to control the trust. However, the exception in subsection 160ZZPN(3) will only apply if the controlling beneficiary is an associate of the trust (paragraph 160ZZPN(3)(c)). 'Associate' is defined in section 160ZZPM and includes, where the taxpayer is an individual who is not acting as trustee, the spouse of the taxpayer or a child under 18 years of age of the taxpayer.

1.94 On the contrary, the exception should only apply if that beneficiary is not an associate of that trust or of any person who has the power of determination referred to above. If they are not associates, treating both the beneficiary and the trustee as controllers of the trust would impact too harshly on the trust because it would mean that the net value of assets of both the trustee and the beneficiary would have to be included for the purposes of the $5 million threshold.

1.95 Paragraph 160ZZPN(3)(c) will be amended to rectify this unintended consequence. [Item 34]

Application

1.96 The amendment will apply to discretionary trusts disposing of assets on or after 1 July 1997. [Subitem 58(3)]

Public trustees

1.97 The connected entity rules outlined above could have unintended consequences for public trustees, who typically could administer a large number of discretionary trusts.

1.98 Under subparagraph 160ZZPN(2)(c)(i), a public trustee would be taken to control all of the discretionary trusts administered by him. An unintended consequence is that a public trustee who seeks roll-over relief in respect of an active asset of a business carried on by him in his personal capacity would be required to value the assets of all of those trusts for the purposes of determining whether the net value of his assets exceed $5 million.

1.99 Another unintended consequence is that all the discretionary trusts administered by a public trustee would qualify as connected entities by virtue of the fact that they have a common controller, the public trustee. From a policy perspective, such a result would not be appropriate unless the particular trusts are associated in some other way, for example because each of them are controlled by the same beneficiaries.

1.100 Accordingly, new subsection 160ZZPN(2A) will have the effect that , notwithstanding subparagraph 160ZZPN(2)(c)(i), a discretionary trust is not deemed to be controlled by the trustee of the trust where the trustee is acting in that capacity as the public trustee of a State of Territory [item 33] . This will ensure the unintended consequences outlined are avoided.

Application

1.101 This amendment will apply to discretionary trusts disposing of assets on or after 1 July 1997. [Subitem 58(3)]

Nomination of replacement asset

1.102 Where a taxpayer elects for roll-over relief for a capital gain, subsection 160ZZPT(1) provides that the taxpayer may nominate one or more assets that are active assets and which are acquired within a specified time period. Where the nomination is made, subsection 160ZZPT(4) outlines the consequences for the taxpayer. Where the nomination is not made, subsection 160ZZPT(5) outlines the consequences for the taxpayer.

1.103 However, section 160ZZPT does not specify when the nomination is to be made. Potentially, a taxpayer could defer the nomination indefinitely.

1.104 This is inconsistent with what was intended. The provisions were meant to require taxpayers to acquire and nominate replacement assets within two years of the disposal of a roll-over asset and then allocate the roll-over amount to those assets. A capital gain equal to any unallocated roll-over amount was then to be taxed as a capital gain at the end of the two year period. By deferring the nomination of replacement assets indefinitely, a rolled over capital gain might never be brought to account as assessable income.

1.105 New subsection 160ZZPT(1A) will provide that a nomination of a replacement asset must be made before the end of two years after the last disposal by the taxpayer of any roll-over asset in the year of income to which the net roll-over amount relates. [Item 43]

Application

1.106 This amendment will apply to disposals of assets on or after 1July 1997. [Subitem 58(3)]

Active assets

Assets which are substantially improved or developed

1.107 Subsection 160ZZPL(3) provides the meaning of active asset for the purposes of Division 17A. By subsection 160ZZPL(4), certain assets are not to be regarded as active assets. Paragraph 160ZZPL(4)(c) provides that these include assets whose predominant use is to derive rent, royalties and other types of income.

1.108 An exception to paragraph 160ZZPL(4)(c) is provided by subsection 160ZZPL(5) which allows an asset to be an active asset regardless of paragraph 160ZZPL(4)(c) if the asset had been substantially improved or developed by the taxpayer such that its market value has been substantially enhanced. The Explanatory Memorandum for Taxation Laws Amendment Act (No. 1) 1997 which introduced Division 17A gave the example of a trade name created and developed by the taxpayer and then licensed out, as a situation of where subsection 160ZZPL(5) would apply.

1.109 However, tangible assets such as real property could fall within subsection 160ZZPL(5). For example, if a taxpayer substantially developed a rental property, it could then become an active asset. This was not the intention of the provision which was to allow roll-over relief only in respect of intangible assets which would qualify as active assets as defined. The active business of building up or renting such intangibles can be readily distinguished from the capital investment involved in building up real estate.

1.110 Consequently, subsection 160ZZPL(5) will be amended to provide that only intangible assets will be eligible for the exception to paragraph 160ZZPL(4)(c). [Item 32]

Application

1.111 This amendment will apply to the disposal of active assets after the date of introduction of the Bill into Parliament. [Subitem 58(1)]

Primary producers

1.112 Subsection 160ZZPL(3) provides that an asset owned by a taxpayer is an active asset if it is used by the taxpayer in the course of carrying on a business or is an intangible asset that is inherently connected with a business carried on by a taxpayer. Where a business is carried on through a trust structure, it was intended that only the trustee of the trust, being the legal owner of assets and the taxpayer who is carrying on the business, would be entitled to roll-over relief where an asset of the business was sold.

1.113 Division 16 of Part III of the Act deals with averaging of income for primary producers. Subsection 157(3) of Division 16 states that where the trustee of a trust estate carries on a business of primary production, a beneficiary of the trust estate who is presently entitled to the income of the estate will be deemed to be carrying on a business of primary production. The intention of subsection 157(3) was to ensure that such a beneficiary was entitled to the benefit of income averaging.

1.114 However, it is arguable that the scope of subsection 157(3) can be extended to Division 17A. Thus, where a beneficiary of a trust estate owns an asset which is being used by the trustee of the trust estate in a primary production business, the beneficiary would be entitled to Division 17A roll-over relief for any capital gain realised when the asset was disposed of. This is because the asset is deemed to be used by the beneficiary in the course of carrying on a business of primary production, for averaging purposes.

1.115 This result is inconsistent with the way the roll-over relief measures operate in relation to non primary production businesses carried on by trustees of trust estates. In relation to a non primary production business carried on within a trust, the provisions would allow roll-over relief to the trustee of a trust estate, being the legal owner of active assets. A beneficiary of a trust, however, would not be considered to be carrying on the business of the trustee but would be treated as a passive investor.

1.116 There is no policy justification for roll-over relief to be available to beneficiaries of trust estates in the primary production business on a different basis to that applying to beneficiaries of trust estates carrying on other types of businesses.

1.117 Consequently, new subsection 160ZZPL(3A) will provide that in determining whether a taxpayer is carrying on a business for the purposes of section 160ZZPL, subsection 157(3) of the Act will be disregarded. [Item 31]

Application

1.118 This amendment will apply to assets disposed of on or after 1July 1997. [Subitem 58(3)]

Application of roll-over amount

1.119 Where a taxpayer has nominated a replacement asset or replacement assets, the amount of a capital gain eligible for roll-over relief (i.e. the net roll-over amount) must be allocated to the replacement assets in accordance with sections 160ZZPU, 160ZZPV or 160ZZPW. These provisions state that the taxpayer must apportion the roll-over amount among replacement assets and that the cost base of the asset is taken to have been reduced by the amount apportioned to that asset. The term 'cost base' has the meaning given by subsection 160ZH(1).

1.120 However, where an asset is owned for more than 12 months, it is the indexed cost base (and not the cost base as reduced by these provisions) that is used to calculate the capital gain made on disposal. Further, it is the reduced cost base that is used to calculate the capital loss made on disposal. Consequently, where a replacement asset owned for more than 12 months is disposed of, the capital gain or loss will be calculated without taking into account the apportionment of the net roll-over amount to the asset.

1.121 Amendments will be made to ensure that the net roll-over amount will not be applied in reduction of the cost base of a replacement asset but will instead reduce the consideration in respect of the acquisition of the asset and the incidental costs to the taxpayer of the acquisition of the asset. Both these amounts are taken into account in calculating the cost base, indexed cost base and reduced cost base of an asset. By reducing these amounts, a net roll-over amount allocated to a replacement asset will be reflected in the calculation of a capital gain or loss arising from the disposal of the asset.

1.122 The terms consideration in respect of the acquisition of an asset and the incidental costs to a taxpayer of the acquisition of an asset have the meaning given by section 160ZH of the Act [items 27 and 28 - amended subsection 160ZZPK(1)] . The amounts that would be the consideration and incidental costs (ignoring this Division) are to be reduced from the time of acquisition of the asset. Accordingly, for the purposes of calculating the indexed cost base, it is the reduced amounts that are indexed from that time. [Item 44 - amended paragraph 160ZZPU(2)(b); item 45 - amended subsection 160ZZPU(3)(b); item 47 - new subsection 160ZZPV(2A); item 48 - subsection 160ZZPW(3)(b); item 49 - subsection 160ZZPW(4)(b); item 51 - new subsection 160ZZPW(5A)]

1.123 Further, the amounts of consideration or costs referred to are the sum of the amounts incurred by the time of acquisition of the replacement asset. [Item 44 - amended paragraph 160ZZPU(2)(a); item 45 - amended subsection 160ZZPU(3)(a); item 47 - new subsection 160ZZPV(2B); item 48 - subsection 160ZZPW(3)(a); item 49 - subsection 160ZZPW(4)(a); item 51 - new subsection 160ZZPW(5B)]

1.124 Where relevant, the net roll-over amount will be allocated between the consideration and incidental costs in such a manner as the taxpayer determines.

1.125 The following provisions have been amended to replace the references to cost base with consideration in respect of the acquisition of an asset and incidental costs to a taxpayer of the acquisition of an asset:

•

subsection 160ZZPK(1) [item 29] ;

•

paragraphs 160ZZPU(2)(a) and (b) [item 44] ;

•

paragraphs 160ZZPU(3)(a) and (b) [item 45] ;

•

paragraphs 160ZZPV(2)(a) and (b) [item 46] ; new subsection 160ZZPV(2B) [item 47] ;

•

paragraphs 160ZZPW(3)(a) and (b) [item 48] ;

•

paragraphs 160ZZPW(4)(a) and (b) [item 49] ;

•

paragraphs 160ZZPW(5)(a) and (b) [item 50]; new subsection 160ZZPW(5B) [item 51] .

As a result of the above amendments, the existing definition of 'total non-goodwill roll-over amount is no longer necessary. [Item 30]

Change of status of replacement asset

1.126 Under the existing section 160ZZPX, a capital gain will accrue to the taxpayer in the year of income in which a replacement asset changes its nature by ceasing to be an active asset. The capital gain is equal to the net roll-over amount ('adjustment amount') previously apportioned to the asset when the asset was nominated as a replacement asset. There will be a similar consequence if the replacement asset becomes an asset whose disposal will not be affected by the CGT provisions in Part IIIA or if the asset becomes an asset used solely for the purpose of producing eligible exempt income.

1.127 The provision will be amended, firstly, to confine the requirement for a replacement asset to remain an active asset to a replacement asset that is not a share or a unit [item 52 - amended subparagraph 160ZZPX(1)(d)(i)] . This is consistent with the fact that shares and units are not active assets and that they are incapable of being active assets.

1.128 A further amendment relates to a consequence of a capital gain arising because of a replacement asset changing its nature as described above. Subsection 160ZZPX(3) will be amended to increase the amount that was the consideration in respect of the acquisition of a replacement asset that is not a depreciable asset by the adjustment amount. The consideration in respect of the acquisition to be increased is the amount of consideration as previously reduced under section 160ZZPU, 160ZZPV or 160ZZPW. [Item 53 - new subsection 160ZZPX(3)]

For example:

A net non-goodwill roll-over amount of $50 000 in respect of the 1997-98 year of income is apportioned to a particular non depreciable replacement asset and applied in reduction of the following amounts in the following proportions:

Consideration in respect of acquisition $40 000

Incidental costs of acquisition $10 000

At the time of the acquisition of the replacement asset, the consideration in respect of the acquisition of the asset (within the meaning of section 160ZH) was $60 000.

As a result of the apportionment of the net roll-over amount, the consideration in respect of acquisition is $20 000 (i.e. $60 000-$40 000).

During the 1998-99 year of income, the replacement asset changes its nature (in one of the ways described) and because of that, a capital gain equal to $50000 (i.e. the adjustment amount) is taken to accrue to the taxpayer in that year of income.

Under the amendment to subsection 160ZZPX(3), the consideration in respect of acquisition will be increased to $70 000 (i.e. $20 000 + $50 000).

1.129 The amendment to subsection 160ZZPX(3) ensures that a capital gain arising upon a replacement asset changing its status will not be taxed again when the asset is eventually disposed of.

1.130 An amendment similar to the amendment to section 160ZZPX will be made to subsection 160ZZPXA(4) to increase the amount of consideration in respect of acquisition by the adjustment amount where a capital gain is taken to arise in respect of a non depreciable replacement asset. [Item 54 - amended subsection 160ZZPXA(4)]

Roll-over of replacement asset under another Division of Part IIIA

1.131 An amendment similar to that described in paragraph 1.128 above will be made to subsection 160ZZPY(3) to increase the consideration in respect of the acquisition of a replacement asset that is not a depreciable asset if the asset is rolled over to another person under a Division of Part IIIA (apart from section 160X relating to death). The consideration in respect of the acquisition to be increased is the amount of consideration as previously reduced by a net roll-over amount under section 160ZZPU, 160ZZPV or 160ZZPW. [Item 55 - Amended subsection 160ZZPY(3)]

1.132 For example, the consideration in respect of the acquisition of a replacement asset rolled over to another company (the transferee) under section 160ZZO will be increased by the adjustment amount at the time of roll-over. When the asset is eventually disposed of by the transferee, the amount of consideration in respect of acquisition as increased from the time of roll-over will be taken into account in working out the relevant cost base of the asset for the purposes of determining the capital gain or loss on the asset.

1.133 The amendment to subsection 160ZZPY(3) ensures that a capital gain accruing to a taxpayer upon a replacement asset being rolled over to another person under another Division of Part IIIA will not be taxed again when the asset is eventually disposed of by the person.

Application

1.134 The amendments relating to the application of a roll-over amount will apply to assets disposed of after the date of introduction of the Bill into Parliament. [Subitem 58(1)]

Explanatory provision

1.135 Section 160ZZPO contains a comprehensive overview of how roll-over relief will be available on the disposal of certain assets by a taxpayer under Subdivision B of Division 17A. However, the intention of the provision was to provide a brief outline of the operation of the Subdivision.

1.136 New section 160ZZPO will provide a more concise explanation of the operation of Subdivision B. [Item 11]

1.137 The explanation will be amended to reflect the amendments discussed at paragraphs 1.119 to 1.125 above. [Item 35 - Amended section 160ZZPO]

Application

1.138 This amendment will apply to the disposal of active assets after the date of introduction of the Bill into Parliament. [Subitem 58(1)]

Chapter 2 - Amendment of the Sales Tax Assessment Act 1992

Overview

2.1 Schedule 2 of the Bill will insert a new Part into the Sales Tax Assessment Act 1992 (STAA) which will establish a new sales tax regime for suppliers of personal computers and related goods.

Summary of the amendments

Purpose of the amendments

2.2 The purpose of the amendments is to minimise opportunities for sales tax evasion in relation to personal computers and related goods.

Title and commencement of the Act

2.3 When the Bill is enacted it will be called the Taxation Laws Amendment Act (No. 5) 1997. [Clause 1]

2.4 The new regime will be implemented in stages. Two measures will apply from date of introduction of this bill into Parliament:

•

amendments to the credit rules (see para 2.28); and

•

amendments to the untaxed goods provisions (see para 2.22).

2.5 Most of the amendments will come into effect on a date to be prescribed, expected to be approximately three months after Royal Assent. This interval is necessary to allow people time to apply for accreditation and for the applications to be determined. The Australian Taxation Office (ATO) and the Australian Customs Service (ACS) will also need the time to make changes to their computer systems to accommodate the new regime. The industry will also require some time to become familiar with, and adjust to, the new requirements.

2.6 The obligation on retailers to withhold amounts in certain circumstances (Division 4) will only come into effect if a review of the operation of the new regime shows that it is necessary.

Background to the legislation

2.7 For some time now serious sales tax evasion has been occurring in the computer industry in relation to personal computers and related equipment. Despite a strong enforcement effort by Government agencies and action by the industry, evasion remains at a level which is unacceptably high. The Government announced in the 1996 Budget that it would move to close down the evasion. Because of the potential compliance impacts on the industry and end users, the Government asked the ATO to consult with industry and other interested parties to develop a practical solution while minimising compliance costs and inconvenience to the industry and end users. The legislative proposals contained in this Bill have emerged from the consultation process.

2.8 The evasion normally involves acquiring computing equipment tax free by exploiting the current quoting procedures. The goods are usually on sold at artificially reduced prices using invoices which falsely represent that tax has been properly accounted for. No sales tax is actually paid. The invoices are often used by subsequent purchasers to claim refunds and credits even though no tax was ever paid or intended to be paid.

2.9 As explained below, the basis of the new scheme is that the quoting rules for personal computers and related equipment will be tightened in order to regulate access to tax free goods. Broadly, "quoting" is a device which allows goods to be sold free of tax. If a person makes an effective quote, the transaction or dealing is exempt from tax. If a quote is ineffective, the dealing is taxable. A quote may be given by a purchaser to a vendor, or by an importer to the ACS at the time of local entry, if the purchaser or importer intends to use the goods in accordance with one of the quoting grounds set out in sections 82 or 83 of the Sales Tax Assessment Act 1992 (STAA). A number of the other measures are specifically designed to overcome the use of fraudulent invoices and similar practices.

Brief outline of the main features of the new scheme

2.10 The central feature of the new scheme is that access to tax-free personal computers and related goods (referred to as Part 7A goods) will be denied to taxpayers who have not established to the Commissioner's satisfaction that they are likely to fulfil their obligations under the tax law. This is aimed at denying evaders the opportunity of purchasing Part 7A goods tax-free, and so limiting opportunities for evasion.

2.11 People who have established, by satisfying certain criteria, that they are likely to fulfil their taxation obligations will be accredited. Generally, only accredited people will be able to quote effectively on Part 7A goods. The quote will also have to be authorised, a process designed to guard against the fraudulent use of accreditation numbers.

2.12 If a person is accredited, that person will be able to carry on trading in much the same way as he or she has done in the past, and the person's sales tax obligations will remain the same, except for the extra requirement that the quote must be authorised and some extra record-keeping requirements. It is intended that authorisation will be available over the phone, so as not to hinder trade unduly.

2.13 However, accredited people will take on extra obligations when they buy goods from unaccredited people. As a safeguard against attempts to frustrate these measures, there will be a requirement on accredited purchasers who purchase from unaccredited wholesalers to withhold an amount, equivalent to the tax owing on the sale, from the purchase price and remit that amount to the Commissioner. The supplier will be allowed a credit for the amount of tax withheld if the supplier pays the tax owing on the sale.

2.14 In addition, people who deal with Part 7A goods will be required to exercise greater care in accepting quotes for these goods in order to avoid a liability. In particular, if a person accepts a quote without inquiring into the bona fides of the quoter, the person may find that the quote has not operated to exempt the relevant dealing from tax.

2.15 If necessary, the withholding requirement will be extended to retailers who purchase goods from unaccredited wholesalers.

2.16 A few classes of people will be excluded from the requirement for the transaction to be authorised. For instance, registered people who buy less than $6,000 worth of Part 7A goods in a year tax free will not need to be accredited. Similarly always-exempt people will not need to be accredited.

2.17 Some dealers in Part 7A goods have been claiming credits in circumstances where no tax has been, or will be, paid on the goods. To deal with this situation, the Commissioner will have the power to refuse an application for a credit, if he believes that the tax in respect of which the credit is claimed has not been, and will not be, paid. The Commissioner will exercise this power where he believes that the applicant was, or should have been aware, that the tax has not been, and will not be, paid.

2.18 Under the current law, if previously untaxed goods are sold by retail in taxable circumstances, tax is payable in respect of the retail sale. For Part 7A goods, this rule will be extended to cover situations where the Commissioner believes that tax on the goods has not been, and is unlikely to be, paid. This rule will only apply if the Commissioner believes that the retailer is aware or should have been aware, that the tax has not actually been, and will not be, paid.

2.19 While these amendments will have an impact on all parts of the personal computer industry, care has been taken to ensure that this impact is kept to a minimum in respect of those parts of the industry which do not seem to be a compliance risk. Also, care has been taken to minimise changes to the structure of the sales tax law.

2.20 Given the potential that evaders will modify their behaviour in an attempt to circumvent the new arrangements, the ATO will need flexibility to respond to emerging practices. The Bill provides such flexibility through the provisions dealing with the Commissioner's discretions in such areas as accreditation and authorisation.

Explanation of the amendments

Goods affected by the new scheme

2.21 The new scheme will apply in respect of dealings with the following goods, which are referred to as 'Part 7A goods':

•

personal computers;

•

computers known as laptops, notebooks and palmtops;

•

computer monitors;

•

computer keyboards;

•

printers (dot matrix, bubble jet or laser);

•

CD-ROM drives;

•

modems; and

•

computer components (motherboards, central processing units, memory and disk drives). [Item 23 - subsection 91C(1)]

Untaxed goods

2.22 Under the existing law, a retail sale, or a non-lease application to own use (AOU), can be taxable if the relevant goods have not "passed through a taxing point" before the sale or AOU (see section 21 of the STAA). This is intended to prevent goods going into consumption without bearing tax. In the case of Part 7A goods, retailers are using false "tax-inclusive" invoices, as evidence that the goods have passed through a taxing point. This makes it difficult to establish the liability of a retailer for the tax on the retail sale, even though they have enjoyed the benefits of lower (tax-exclusive) prices.

2.23 To overcome this practice, the definition of "passed through a taxing point" will be expanded so that section 21 can be applied to cases where Part 7A goods are sold or applied to own use in circumstances where the Commissioner believes that:

•

tax has not been paid, and is unlikely to be paid, in respect of the earlier taxable dealing;

•

the taxpayer for the earlier dealing did not intend to pay the tax; and

•

the person who acquired the goods (usually a retailer) knew or could reasonably be expected to have known that tax on the goods would not be paid.

2.24 Where those conditions exist, a retail seller of the goods will be liable to tax on the retail sale and, similarly, a person who applies the goods to own use will be liable to tax on the AOU. The taxable value for the goods will be the "notional wholesale selling price". [Item 5]

2.25 This measure is a fall-back provision. In its absence, fraudulent operators could contrive to by-pass the new provisions by selling direct to retailers. In essence, the provision simply provides a means of ensuring that the law operates as intended - ie that goods go into consumption tax paid.

2.26 This provision will only be invoked where the Commissioner has sufficient information to satisfy himself that the three conditions have been met. The application of the provision will depend on the facts of each case. However, in normal circumstances, it is not intended that the provision would be applied where a person who buys Part 7A goods:

•

has taken reasonable steps to satisfy him or herself of the identity of the supplier;

•

has confirmed that the supplier is accredited;

•

is dealing at arm's length and in good faith; and

•

there are no clearly irregular or suspicious aspects of the dealing.

2.27 If on the other hand, for example, the retailer were to buy goods from an unaccredited associate for cash, and the retailer knew that tax would not be paid, then the provision would apply.

Credits

2.28 The credit rules will operate for Part 7A goods in the same way as they do for other goods, but with the exception that the Commissioner will have the power to disallow a credit claim if he believes that:

•

tax has not been paid, and is unlikely to be paid, on the dealing in respect of which the credit is claimed;

•

the taxpayer who was liable to pay the tax on the dealing did not intend to pay it; and

•

the claimant was aware, or could reasonably be expected to have been aware, that the tax would not be paid. [Item 10]

2.29 For these purposes, "tax" will also include a withholding amount (see paragraph 2.103).

2.30 The provision is designed to overcome the exploitation of the current credit provisions by fraudulent operators and those who deal with such operators. It is expected that most claims for credits will not be affected by this provision. It will only be invoked where the Commissioner has sufficient information to satisfy himself that the three conditions have been met. The application of the provision will depend on the facts of each case. However, in normal circumstances, it is not intended that the provision would be applied where a person who buys Part 7A goods:

•

has taken reasonable steps to satisfy him or herself of the identity of the supplier;

•

has confirmed that the supplier is accredited;

•

is dealing at arms length and in good faith; and

•

there are no clearly irregular or suspicious aspects of the dealing.

Consequential amendments

2.31 A number of consequential amendments will be required to various sections of the STAA resulting from the introduction of proposed Part 7A.

Amendments to the provisions concerning exemptions based on quoting

2.32 If a quote is ineffective because it does not comply with the rules contained in Part 7A of the STAA, the quote will not operate to exempt a dealing from sales tax. This applies to both customs dealings and other dealings. [Items 6 and 7]

Small business exemption

2.33 Part 7A goods will not qualify for the small business exemption. At the same time, dealings with Part 7A goods will be not be counted when a taxpayer is working out whether or not the taxpayer qualifies for the exemption for other goods. [Items 8 and 9]

Collection and recovery

2.34 A person who becomes liable to pay tax on dealings with Part 7A goods will be required to remit the tax and a return or remittance advice relating to the Part 7A goods within 21 days after the end of the month in which the dealing occurred or such later time as the Commissioner allows. [Items 11 and 14]

Division 1 - Purpose, overview and interpretation

Purpose

2.35 The purpose of new Part 7A is to establish a new regime which operates to prevent sales tax evasion in relation to personal computers and related goods. [Item 23 - new section 91A]

Overview

2.36 This Part establishes a system of accreditation of parties dealing with personal computers and related goods (Part 7A goods). The Part also establishes a system for authorisation of the dealing. In certain circumstances, sales tax must be withheld by the purchaser of goods in certain transactions. [Item 23 - new section 91B]

Meaning of Part 7A goods

2.37 Goods will be Part 7A goods if, had they been imported, they would have been covered by a description and corresponding tariff classification specified in the following table:

[Item 23 - new subsection 91C(1)]

2.38 This provision will include a power to apply Part 7A to other goods by regulation. This will enable Part 7A to be extended quickly if serious evasion is encountered in relation to other goods or in other industries. [Item 23 - new subsection 91C(2)]

2.39 This provision will enable goods to be excluded from the operation of Part 7A by regulation. This will allow the normal sales tax arrangements to be restored for specified goods. This allows the greatest flexibility to respond to changes in the market. [Item 23 - new subsection 91C(3)]

2.40 Tariff classification is the classification given to certain goods under the Customs Tariff Act 1995. [Item 23 - new subsection 91C(4)]

Relevant person (26/5/98)

2.41 When an applicant applies for accreditation, the applicant will have to provide information about certain associates. This requirement is directed against the situation where relatives or related entities apply for accreditation on behalf of a person who would not satisfy the criteria in his or her own right.

2.42 The amendments provide for the tracing through to associates, referred to as 'relevant persons', who are relevant to an application for accreditation. The provisions provide for a person to be a 'relevant person' in relation to an application where the 'relevant person' has influence, because of obligation or custom, over the actions of the applicant.

2.43 In more detail, a person will be relevant to an application:

•

if the applicant is accustomed, or obliged, or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the person; or

•

if the applicant is a company, the directors of the company are accustomed, or obliged, or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the person; or

•

if the applicant is a company, the person is a director of the company; or

•

if the applicant is a trust, the person is a trustee of the trust; or

•

if the applicant is a partnership, the person is a partner in the partnership. [Item 23 - new section 91D]

Division 2 - Accreditation

2.44 This Division provides an overview of the accreditation process. [Item 23 - new section 91E]

Who may apply for accreditation

2.45 The persons who may apply for accreditation are:

•

a person who is registered by the Commissioner under section 78 of the STAA [Item 23 - new section 91F] ;

•

any lessor who leases or will lease Part 7A goods:

•

on an eligible short or long term basis as defined in section 5 of STAA; or

•

for export in relation to which section 32 of the STAA would apply [Item 23 - new subsection 91F(2)] .

•

any person who is allowed by the Commissioner to quote for dealing with Part 7A goods under section 84 of STAA [Item 23 - new subsection 91F(3)] ; and

•

any other person who, if agreed by the Commissioner, may apply for accreditation [Item 23 - new subsection 91F(4)] .

2.46 These are generally the types of persons who are able to apply for registration or exemption under the sales tax law to enable them to purchase goods free of sales tax.

Requirements for accreditation

2.47 To be accredited a person must satisfy all the following conditions, unless the Commissioner exempts the person from the requirement to satisfy one or more of the conditions [Item 23- new subsection 91G(1)] :

•

the person must have carried on the business activities in respect of which accreditation has been sought at or from established business premises as advertised to the public [Item 23 - new subsection 91G(2)] ;

•

the person must have a tax file number and have quoted that tax file number for each business account to the relevant financial institution [Item 23 - new subsection 91G(3)] ;

•

for a natural person, the person must conduct all financial transactions of the business through a bank account that is separate from any private or domestic account [Item 23 - new subsection 91G(4)] ;

•

the person and each person who is relevant to the person's application must have a satisfactory compliance record with any law administered by the Commissioner in the previous three years before the application date [Item 23 - new subsection 91G(5)] ;

•

the person must have kept records in English for the previous three years before the application date. The records must include details of purchases and sales of goods, names of suppliers and customers, outstanding sales tax on purchases and sales, and credits claimed from the ATO. The records have to be kept in written or electronic form in Australia [Item 23 - new subsection 91G(6)] ;

•

for a natural person, the person must be an Australian citizen or a holder of a permanent visa in accordance with the migration law. For a company at least one director, for a trust the trustee, and for a partnership at least one partner, must be an Australian citizen or a holder of a permanent visa in accordance with the migration law [Item 23 - new subsection 91G(7)] ;

•

in the previous 3 years before the application date:

•

the person (or person relevant to the application) should not have been convicted in any country of any offence or penalised under a law dealing with:

(a)

taxation;

(b)

customs;

(c)

misdescription of goods;

(d)

trade practices;

(e)

fair trading; or

(f)

the defrauding of a government [Item 23 - new subsection 91G(8)] ;

•

the person (or a person relevant to the application) did not have his or her accreditation application rejected or have the accreditation cancelled in the previous three years [Item 23 - new subsection 91G(9)] ;

•

the person (or a person relevant to the application) in the previous three years was not a person who is relevant to another person's application where the applicant did not satisfy the above eight requirements [Item 23- new subsection 91G(10)] .

Application for accreditation

2.48 An application for accreditation has to be made in a form approved by the Commissioner, in writing, for that purpose and has to contain the specified information required to properly complete the form. [Item 23 - new subsection 91H(1)]

2.49 A Commissioner's approved form of application may require or allow the application to be given on a specified kind of data processing or by electronic transmission in line with specified software requirements. [Item 23 - new subsection 91H(2)]

Granting of accreditation

2.50 The Commissioner must accredit the person who has made an application which satisfies all the necessary tests under new section 91G unless the Commissioner exercises his or her discretion under new section 91K to refuse to accredit a person. [Item 23 - new subsection 91J(1)]

2.51 Once an accreditation is granted, it is valid until the end of any period specified by the Commissioner unless the accreditation is revoked under new section 91L at an earlier time. [Item 23 - new subsection 91J(2)]

Commissioner's discretion to refuse accreditation

2.52 The Commissioner may refuse to accredit a person if:

(a)

the Commissioner has reasonable grounds for believing sales tax will not be or is not likely to be paid relating to transactions involving Part 7A goods dealt with by the person or [Item 23 - new subsection 91K(1)] ;

(b)

the person's application is false and misleading in a substantial manner whether by virtue of omission or what is stated in the application and the Commissioner believes that the refusal would advance the purposes of this part. [Item 23 - new subsection 91K(2)]

Revocation of accreditation

2.53 The Commissioner may by written notice to a person cancel the person's accreditation at a particular time if the Commissioner believes that, if the person made an application at that time:

•

the person would not be a person who may apply for accreditation under new section 91F (e.g. the person would not be a registered person or a person who grants leases); or

•

the person would not satisfy all the requirements for accreditation under new section 91G; or

•

the Commissioner would have exercised the discretion under new section 91K to refuse accreditation.

2.54 Accreditation can also be revoked if the accredited person requests that their accreditation be revoked. [Item 23 - new section 91L]

Review of decisions on accreditation

2.55 A person affected by a decision under new section 91K or a decision to revoke accreditation under new section 91L who is dissatisfied with the decision may object against the decision in the format set out in Part IVC of the Taxation Administration Act 1953. [Item 23 - new section 91M]

Persons to advise Commissioner of certain matters

2.56 A requirement is placed on accredited persons to notify the Commissioner where their circumstances have changed since their application for accreditation. The following are examples of the types of circumstances which would require notification to the Commissioner.

•

If an accredited person becomes aware that if they were to make an application for accreditation at that time:

•

they would not be a person who may apply for accreditation under new section 91F; or

•

they would not satisfy all the requirements for accreditation in new section 91G. [Item 23 - new section 91N]

2.57 If this section applies, the accredited person must inform the Commissioner of that fact and provide the details of circumstances for this section to apply. The notice and details must be given in writing within 7 days of the time when the accredited person becomes aware that they would not satisfy the requirements for accreditation. [Item 23 - new section 91N]

2.58 A person who does not inform the Commissioner of the information outlined above, is punishable, if convicted, by a fine of not more than 50 penalty units. [Item 23 - new section 91N]

Additional information about transactions

2.59 Further to any returns required under section 61 of the STAA, the Commissioner may direct a person to lodge such information as the Commissioner requires:

•

relating to the person's dealings with Part 7A goods; or

•

any other matters which may be relevant to the person's accreditation [Item 23 - new section 91P] .

Commissioner may publicise who is accredited

2.60 The Commissioner may publish or publicise the names of accredited persons and their accreditation and registration numbers.

2.61 The Commissioner may also publish the names, accreditation and registration numbers of persons whose accreditation is cancelled. [Item 23 - new subsection 91Q(1)]

2.62 In addition, the Commissioner may upon request from a person inform the person whether another person is accredited or not accredited and whether or not the person is registered. [Item 23 - new subsection 91Q(2)]

2.63 The successful operation of a number of the new provisions depends on people being able to readily confirm the bona fides of other parties to a transaction. For those purposes information about accreditation and registration will be especially important. The inclusion of these provisions is intended to ensure that there is no technical impediment to the Commissioner providing such information. This ability to publish details prevails regardless of anything covered in this Act or the Taxation Administration Act 1953. [Item 23 - new subsection 91Q(3]

Division 3 - Authorisations

2.64 Division 3 of Part 7A allows the Commissioner to authorise certain quotations in respect of Part 7A goods. It will also provide for the administration of the authorisation system. The authorisation process is necessary to maintain the integrity of the accreditation system. [Item 23 - new section 91R]

2.65 In most cases, a quote in respect of Part 7A goods will not be effective unless the quoter is an accredited person and the quote is authorised by the Commissioner. If a quote is ineffective, the sale on which the quote is made will be taxable. [Item 23 - new paragraph 91S(1)(a)]

Exceptions to the requirement for authorisation

2.66 There will be some quotes which will not have to be authorised:

•

quotes where:

-

the quoter is not registered; and

-

the quote is on the grounds that the goods will be used so as to satisfy an exemption Item in Schedule 1 of the Sales Tax (Exemptions and Classifications) Act 1992 (E&C Act); and

-

the dealing does not relate to a local entry; and

-

the exemption Item is not a prescribed Item. [Item 23 - new paragraph 91S(1)(b)]

•

quotes where:

-

the quoter is registered; and

-

the quoter is not acquiring the goods for the purpose of resale; and

-

the quoter satisfies the 'low purchase value' test (i.e. the purchaser has acquired less than $6,000 worth of tax-free Part 7A goods in the last year, including the current goods, and has a reasonable expectation that he or she will purchase less than $6,000 goods tax-free in the next 12 months); and

-

the quoter has provided a certificate to the seller stating that the quoter satisfies the 'low purchase value' test; [Item 23 - new paragraph 91S(1)(c)] and

•

quotes in prescribed circumstances. [Item 23 - new paragraph 91S(1)(d)]

2.67 A quote will also be effective if the person accepting the quote satisfies the Commissioner that he or she had reasonable ground to be satisfied that one of the above circumstances applied. [Item 23 - new paragraph 91S(1)(e)]

2.68 If experience indicates that certain categories of people are complying with their obligations under the sales tax law in their dealing with Part 7A goods, the Government will be able to exclude those people from the requirement to be accredited in order to make an effective quote. Conversely, if unregistered people claiming exemption under the E&C Act begin to abuse the exclusion from the accreditation process, it will be possible to bring them back into the accreditation system.

2.69 The 'low purchase value test' has been set at the $6,000 limit as it is expected that $6,000 of tax-free goods will enable the registered person, for example a primary producer or a small business operator, to purchase a complete business system without the inconvenience of obtaining accreditation. It is anticipated that $6,000 tax-free would be sufficient for a person to obtain a personal computer, printer, modem etc for use in their business.

2.70 The 'low purchase value test' may be varied by regulation. This is to enable a prompt response to changes in market conditions. For example, if the prices of computer equipment were to increase, or new products came onto the market, the $6,000 limit may not be sufficient to enable a person to acquire the necessary equipment for use in their business. In this case the 'low purchase value test' could be increased to enable registered persons to continue to make an effective quote and obtain those goods tax-free. Conversely, if experience shows that the provision is being exploited, it will be possible to quickly reduce the limit to counter evasion. [Item 23 - new subsection 91S(2)]

2.71 It will be an offence for a person to falsely represent that the person satisfies the 'low purchase value test'. The penalty on conviction will be 50 penalty units. [Item 23 - new subsection 91S(5)]

Method of obtaining authorisation

2.72 The Commissioner will approve in writing the method to be used for obtaining an authorisation. [Item 23 - new subsection 91T(1)]

2.73 It is intended to establish a system whereby authorisations will be given over the telephone or by e:mail. The authorisation process is similar in concept to that used to authorise credit card transactions. For this reason, the Commissioner will have power to approve authorisations which are requested orally or via electronic transmission, and the power to give authorisations in an appropriate form, such as orally or electronically. [Item 23 - new subsection 91T(3) and new section 91V]

2.74 A person will be able to apply for authorisation for a single quote or for a series of quotes. An authorisation covering a series of quotes will be known as a standing authorisation. Although the process will be similar in both circumstances, sufficient flexibility has been provided to enable standing authorisations to cover either all transactions between nominated parties or specified transactions or specified classes of dealings between the parties. [Item 23 - new subsection 91T(2)]

Giving of authorisation by the Commissioner

2.75 The Commissioner will be required to authorise a single quote when requested, unless:

•

the person quoting is not accredited;

•

the quote is otherwise ineffective; or

•

the Commissioner considers that sales tax will not be, or is unlikely to be, paid in relation to the goods. [Item 23 - new subsection 91U(1)]

2.76 The Commissioner will have a discretion to grant a standing authorisation. He will only grant a standing authorisation if he considers that sales tax will be paid in relation to all the goods which are the subject of the quotes covered by the authorisation. Standing authorisations have been provided to minimise inconvenience for the industry and administrative cost for the ATO while providing the Commissioner with the flexibility to ensure that the effectiveness of the system is not compromised. They will only be granted where both parties have a good compliance record and the Commissioner believes there is no risk to the revenue by granting the authorisation. [Item 23 - new subsection 91U(2)]

2.77 The Commissioner will have the power to exclude particular classes of dealing or goods from any authorisation if he believes there is a compliance risk. This will, for example, enable the Commissioner to withhold authorisation if problems arise with a particular type of equipment, such as printers. [Item 23 - new subsection 91U(3)]

2.78 In determining whether sales tax will not be paid or is unlikely to be paid, the Commissioner is not limited to considering dealings to which the person is a party. This is designed as a means to counter attempts by evaders to position themselves downstream from an accredited source and to reduce opportunities for collusion. [Item 23 - new subsection 91U(7)]

2.79 As for single quotes, a standing authorisation will not cover any quotes if the person quoting is not accredited, or if any of the quotes would have been ineffective on other grounds. The Commissioner will be able to revoke a standing authorisation by written notice. [Item 23 - new subsections 91U(4) and (5)]

2.80 A person who is affected by a decision to refuse to authorise a transaction, to refuse to give a standing authorisation or to revoke an authorisation will be able to object against the decision under Part IVC of the Taxation Administration Act 1953 (TAA). [Item 23 - new subsection 91U(6)]

Form of authorisations

2.81 The Commissioner may determine the form of authorisation. The Commissioner may determine that authorisations can be given orally or by way of electronic transmission. This enables the Commissioner to adapt to changes in technology to facilitate the communication of authorisations. It will also increase the options available to the industry and so minimise compliance impacts. [Item 23 - new section 91V]

Division 4 - Withholding requirement

2.82 Division 4 of Part 7A will provide for certain persons to withhold amounts from the purchase price of goods, and remit those amounts to the Commissioner. Division 4 will also provide for the administration of the withholding system. This new requirement is directed at the use of fraudulent invoices and similar practices and at limiting opportunities for collusion. [Item 23 - new section 91W]

2.83 At present, where goods are sold tax inclusive, the seller is liable for payment of the tax, if the sale is a taxable dealing. In practice however, the purchaser effectively bears the tax because the seller includes the tax on the invoice as a component of the total selling price. The seller later remits to the ATO the tax component which he obtained from the purchaser. Under the withholding requirement the purchaser would pay the base selling price to the seller and simply remit the tax directly to the ATO. Where goods are sold at genuine tax inclusive prices the net result should be the same as intended under the existing law.

2.84 An accredited person who makes a payment for Part 7A goods to an unaccredited person will be required to deduct an amount (referred to as a withholding amount) from the payment, if the dealing is taxable and the goods are purchased for the purpose of resale. If the person fails to deduct the withholding amount, the person will be guilty of an offence punishable on conviction by a maximum fine of 20 penalty units. [Item 23 - new subsections 91X(1) and (3)]

2.85 The requirement to withhold will not relieve the vendor of the goods for liability for tax on the sale.

2.86 The withholding requirement will not apply to a person who took reasonable steps to ascertain that the vendor was accredited and reasonably believed that the vendor was accredited.

Withholding amount

2.87 The withholding amount will be calculated as follows:

•

if the purchase only involves Part 7A goods and an invoice was given in relation to the purchase -

[Schedule 4 rate x Taxable value of Part 7A goods] - any amount previously withheld in respect of those goods


•

if the purchase involved Part 7A goods and other goods or services (e.g. tax advantaged computer software) -

[Schedule 4 rate x Taxable value of Part 7A goods] - any amount previously withheld in respect of those goods


"Notional wholesale selling price" is defined in Table 1 of Schedule 1 to the STAA. The Schedule 4 rate is currently 22%. [Item 23 - new section 91Y]

Reporting and remitting amounts

2.88 If a person is required during a month to deduct amounts under the withholding provisions, the person must send all amounts so deducted to the Commissioner within 21 days of the end of the month (or such longer time as the Commissioner allows). [Item 23 - new subsection 91Z(1)]

2.89 A person other than a government body who does not remit the amounts deducted to the Commissioner within the time required is guilty of an offence punishable on conviction by imprisonment for 12 months. Also, the court will be able to order the person to pay the Commissioner, as a penalty, an amount equal to the amount which should have been remitted. Normally the time required will be 21 days; however, as noted above, the Commissioner will be able to extend the time beyond 21 days, giving the person a further period in which to pay the amounts without committing an offence. The power to extend the time period will only by used to benefit a person - the Commissioner has no power to reduce the period. [Item 23 - new subsection 91Z(4)]

2.90 Further, the person who has been required to deduct and remit will be required to complete and send a withholding advice form to the Commissioner within 21 days after the end of the month (or such longer time as the Commissioner allows). The person will be required to keep a copy of the form in Australia for a period of 5 years after the end of the financial year in which the relevant payments were made. The purchaser will also be required to provide the seller with a copy of the form. A person who does not comply with these requirements will be guilty of an offence punishable on conviction by a fine not exceeding 20 penalty units. [Item 23 - new subsections 91Z(2), (3) and (5)]

Refund of deductions in certain cases

2.91 If a withholding amount is deducted by mistake from a payment to a vendor, the vendor will be able to apply for a refund of the whole or part of the amount. The Commissioner will be required to refund the amount if, having regard to the nature of the mistake, the purpose of the Division and any other matter as he thinks fit, the Commissioner concludes that it would be fair and reasonable to refund the amount to the applicant. The vendor cannot claim a credit for the amount refunded. [Item 23 - new section 91ZA]

Failure to deduct from certain payments

2.92 If a person, other than a government body, refuses or fails to deduct a withholding amount as required, the person will be liable to pay a penalty to the Commissioner equal to the sum of:

•

the amount which should have been deducted; and

•

16% per annum of the above amount, worked out from the time when the person would have been required to remit the amount to the Commissioner if it had been withheld. [Item 23 - new subsection 91ZB(1)]

2.93 If a government body other than the Commonwealth does not deduct a withholding amount when required to do so, the body will be required to pay the Commissioner a penalty equal to 16% per annum of the amount which should have been withheld, calculated from the time when the government body should have paid the amount to the Commissioner, until the day on which the whole of the amount is paid. [Item 23 - new subsection 91ZB(2)]

2.94 A government body is defined as the Commonwealth, a State, a Territory or an authority of the Commonwealth or a State or Territory. [Item 23 - new subsection 91ZD(1)]

Failure to pay amounts deducted to the Commissioner

2.95 Where a withholding amount remains unpaid at the end of the period during which it should have been paid, by a person other than the Commonwealth, the withholding amount will continue to be payable by the person to the Commissioner, and the person is liable to pay a penalty. [Item 23 - new subsection 91ZC(1)]

2.96 If the person is not a government body, the penalty will be equal to the sum of 20% of the withholding amount, plus an amount calculated at the rate of 16% per annum, on the portion of the withholding amount and the portion of 20% penalty which remains outstanding. [Item 23 - new subsection 91ZC(2)]

2.97 If the person is a government body, the amount of penalty will be 16% of the portion of the withholding amount which remains unpaid, worked out from the end of the period in which it should have been paid. [Item 23 - new subsection 91ZC(3)]

Retailers' withholding

2.98 The legislation will make provision for retailers of Part 7A goods to be required to deduct a withholding amount (calculated as above), if they make a payment in respect of the purchase of Part 7A goods, and the goods are purchased from an unaccredited person for a price which includes tax. However, this measure will not come into effect until a date to be prescribed. It will be activated if changing patterns of tax evasion make it necessary. [Item 23 - new subsection 91X(2)]

2.99 A person will be a retailer of Part 7A goods if wholesale and indirect marketing sales of Part 7A goods constitute half or less of the total value of his or her sales of Part 7A goods in the last 12 months, and the person has a reasonable expectation that this position will continue for the next 12 months. The value will be measured by the price for which the goods are sold. A person is not a retailer in respect of Part 7A goods if the person manufactured the goods. [Item 23 - new subsections 91ZD(2) and (3)]

2.100 If the requirement for retailer withholding comes into effect, retailers will be subject to the same obligations and penalties as wholesalers.

Division 5 - General provisions about offences

2.101 It will be an offence for a person to falsely represent that the person is accredited or falsely represent that the quote is authorised. The amount of the penalty is 20 penalty units. [Item 23 - new section 91ZE]

2.102 Offences against this Part are governed by Chapter 2 of the Criminal Code. [Item 23 - new section 91ZF]

Credit for amount withheld

2.103 As noted above, even if a person withholds an amount from a payment for Part 7A goods, the vendor of the goods will remain liable for sales tax in respect of the sale. To avoid double taxation, the vendor will be entitled to a credit for the amount withheld by the purchaser. The credit will arise either when the vendor pays the tax, or the Commissioner receives the withholding advice form, whichever is the later. [Item 24]

Application

2.104 The Bill provides for the following application dates:

•

Amendments made by Items 5 and 10 relating to credits and untaxed goods apply from day following the date of introduction.

•

Divisions 3 and 4 of Part 7A, the authorisation and withholding provisions, apply to dealings on or after a date to be specified. [Item 25]

Transitional - record keeping

2.105 A transitional provision is inserted to clarify that the requirement for keeping records in English for 3 years under subsection 91G(6) is limited to records kept after the commencement of this Part. This is to ensure that people do not have to go back and translate into English records that were kept before the commencement of this Part. [Item 26]

Regulation impact statement

Specification of policy objective

2.106 The policy objective of this measure is to combat Wholesale Sales Tax (WST) fraud in the computer industry. The measure will involve amendments to the Sales Tax Assessment Act 1992.

2.107 It has become apparent that there have been some wholesalers and retailers of personal computers and related equipment who fail to pay sales tax as and when they should, or who claim sales tax refunds in circumstances where they are not entitled to those refunds.

2.108 The central feature of the new scheme is that access to tax-free personal computers and related goods (prescribed goods) will be denied to taxpayers who have not established, to the Commissioner's satisfaction, that they are likely to fulfil their obligations under the tax law.

Identification of implementation options

Option 1

2.109 This option provides that access to tax free goods will be limited to people accredited by the ATO.

2.110 Where a person attempts to purchase equipment tax free the seller will be able to seek authorisation from the ATO as to whether the purchaser can actually purchase the goods tax free.

2.111 Where an accredited person or a retailer purchases goods from a unaccredited person on a tax-paid basis, the accredited purchaser must withhold the tax shown on the invoice and remit that amount to the ATO.

2.112 Generally, persons who wish to acquire Part 7A goods tax-free will need to apply to the ATO for accreditation. The authorisation process will be similar to that used by people selling goods via the use of a credit card. The sellers will be required to seek authorisation from the ATO before selling goods on a tax-free basis. In some circumstances purchasers of goods purported to be tax-inclusive from a unaccredited seller will be required to withhold the amount of tax and remit that amount to the ATO.

Option 2

2.113 This option is to essentially deny access to tax-free goods; sales tax would be paid at each point of the distribution chain. Exempt end users would be required to purchase goods tax-inclusive and then apply to the ATO for a refund of tax paid.

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

Impact group identification

2.114 The following groups will be impacted by the proposed amendments:

Assessment of costs

Option 1

2.115 The affected groups, other than Government agencies, will incur costs to comply with the system in the following ways:

Initial costs

•

Familiarising themselves with the new requirements under the legislation. This may require the cost of seeking professional advice.

•

Seeking accreditation from the Commissioner.

Recurrent costs

•

Seeking authorisations from the Commissioner. These costs will be minimised by the use of new technology such as Integrated Voice Recognition technology. These costs may be further reduced through the use of standing authorisations.

•

Where certain purchases are made from unaccredited sellers the purchaser may be required to withhold and remit the sales tax. The withholding requirements for retailers will only be introduced if a review of the system indicates that such withholding is required.

•

Purchases by unaccredited persons will, generally, need to be tax paid.

Government agencies

2.116 The Government has allocated $2.5 million for the implementation of this proposal. The funding will be used by the ATO for the following purposes:

•

the establishment of a unit to process applications for accreditation;

•

the establishment of a hotline to handle enquiries regarding accreditation and authorisations;

•

introduce new technologies such as Integrated Voice Recognition technologies to enable authorisations to be provided over the telephone. It is anticipated that the authorisation process will be similar to that used for credit card authorisation where the purchase is above the seller's limit;

•

conduct an education campaign to inform members of the industry as to how the new system will operate; and

•

the Australian Customs Service will also need to do some minor upgrading of its computer system to facilitate the operation of the new system for imports.

2.117 Any shortfall in the funding will be met from existing funding to the ATO.

Option 2

Initial costs

•

Familiarising themselves with the new requirements under the legislation. This may require the cost of seeking professional advice.

2.118 The effectiveness of this approach is dependant on the extent to which access to tax free goods could be restricted. To be effective this approach would require a major enforcement effort at the Customs barrier.

2.119 This proposal met with strong criticism from the industry due to the extra compliance cost burden that it would impose on both dealers in the goods and exempt users.

2.120 This proposal would have a significant impact on legitimate dealers who were not involved in the fraud.

2.121 A number of smaller operators were also very concerned that the proposal would increase the underlying industry cost structures. They believed that larger operators would be better placed to absorb the costs to the detriment of smaller businesses.

Recurrent costs

2.122 Estimates prepared by the industry suggested that the compliance costs of this proposal could be in the order of $25 million for businesses involved in the supply and distribution with flow on costs for downstream resellers such as small wholesalers and retailers.

2.123 One State Government estimated that it would require refunds on purchases in the order of $24 million per year with consequential Public Debt Interest costs.

2.124 Tertiary institutions estimated the costs to those institutions to be in the order of $5 million per annum.

2.125 Although these figures may be overstated the Government accepts that the compliance costs associated with this option would be of significant magnitude to make it unacceptably inequitable. The costs of processing claims for refunds and credits would be very significant for the ATO.

Assessment of benefits

Option 1

2.126 This option will counter the revenue erosion due to fraudulent activity. The estimated revenue loss from fraudulent activity is $80 million per annum.

2.127 This option will restore fair competition within the computer industry by removing the competitive advantage that some operators have enjoyed through their fraudulent activities.

Option 2

2.128 This option would also go some way to counter the fraudulent activity in the computer industry.

Consultation

2.129 A consultative document "Sales Tax on Computer Equipment" was released in September 1996.

2.130 In relation to the consultative documents the following represents some of the issues raised in the consultation process.

2.131 Generally speaking, those who regarded themselves as suffering from the current situation tended to support the proposal in the consultative document - some were very enthusiastic.

2.132 Typically supporters tended to be smaller businesses (often retailers). On the other hand those who considered themselves to be unaffected by the fraud tended to oppose the proposal. Objectors tended to be larger firms operating at the level of import, manufacture or distribution. A number of the supporters were also somewhat reluctant in the sense that they believed that the proposal would impact adversely on their operations but believed such impacts to be an unavoidable cost of dealing with the problem.

2.133 Strong objections were expressed by firms who claim that neither they nor their products are involved in any illegal activities. The major criticism arose from increased compliance costs in the form of financial and administrative costs. It is accepted that some costs of the proposal would have been significant.

2.134 Strong objections were also raised by firms who use computer components to manufacture goods which would not be regarded as computer equipment, eg fire alarms, security systems, life support equipment, EFTPOS devices, production control systems etc. Unless some exclusions were made such firms would be drawn into the changed system.

2.135 Exempt end users while generally supporting the objective of removing the fraud form the industry were very concerned about the cost and inconvenience of buying goods tax inclusive and then obtaining refunds. The cost of systems changes to enable differential treatment of prescribed goods (compared to other goods) was also nominated as a major cost factor.

2.136 Another view was that the ATO had not done enough in the enforcement area and that it was attempting to pass this responsibility to the industry. A number of submissions, particularly from sales tax practitioners, suggested that the law should be strengthened to deal with non-compliance by strengthening the enforcement provisions through increased powers and penalties, eg seizure of goods.

2.137 Strengthening registration and cancellation powers was another common suggestion. This was often combined with a notion of a 'white list' of taxpayers and end users who should be able to apply for exclusion on the basis of an established compliance record and a demonstrated low revenue risk. Another common related suggestion is the introduction of an on-line authorisation system whereby taxpayers could establish the bona fides of buyers or sellers.

Conclusion

2.138 After careful consideration of the options the Government accepts option 1 as the most appropriate. The Government recognises that this option may attract some criticism and may result in increased compliance costs. However, it is considered to be the most effective option to combat the fraudulent activities of some members of the industry whilst at the same time protect the legitimate business interests of the majority of the computer industry participants. The Government considers option 1 to be the most appropriate response to this threat to the industry and the revenue.

2.139 The Treasury and the ATO will monitor this 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 small business associations and other taxpayer consultative forums.

Chapter 3 - Land transport facilities

Overview

3.1 Part 1 of Schedule 3 of the Bill will insert new Division 396 into the Income Tax Assessment Act 1997 to provide for a tax rebate at the general company tax rate on interest derived by lenders to approved public road and rail infrastructure projects. To the extent that a lender's interest is rebatable, the borrower will be denied a deduction on the interest.

3.2 Part A of this chapter summarises new Division 396.

Part B sets out the background to these provisions.

Part C explains the provisions of the new Division.

Part D explains transitional rules by which the new interest rebate provisions may apply to certain eligible projects under the previous Infrastructure Borrowings Tax Concession.

Part E is a Regulation Impact Statement.

A. Summary of the amendments

3.3 New Division 396 will provide for a tax rebate - called a tax offset - to be allowed to resident lenders to an approved land transport infrastructure project in the first 5 years of borrowings by the project borrower. The offset is calculated by applying the general company tax rate to the interest that a lender includes in assessable income. The amount of the tax offset may be subject to an upper limit set by the Minister for Transport and Regional Development (the Minister) in approving the particular infrastructure project. Where the lender's interest is subject to a tax offset, the project borrower is denied a deduction in respect of a comparable amount of interest.

3.4 The broad scheme of Division 396 is as follows:

•

a tax offset calculated at the general company tax rate is allowable to a resident lender to an approved land transport project on the interest derived from the borrowing. The tax offset may be subject to an annual upper limit set by the Minister;

•

deductions for a comparable amount of interest incurred by the borrower will be denied;

•

to be approved, a project must be a publicly accessible road or rail infrastructure facility or a related facility in Australia. Broadly, that means a road or rail system open for use by the public at a charge;

•

a project borrower is required to make written application to the Commissioner of Taxation so that the project can be approved and the borrower approved in relation to the project;

•

the Minister will consider applications and decide whether to approve the borrower and the project, having regard to specified criteria including the commercial viability of the project, its economic or social benefits or costs etc, and advice from the Commissioner concerning aspects of the taxation law which may be relevant to the project, e.g. whether certain anti-avoidance provisions may apply;

•

if a project is approved, it will be necessary for the project borrower and all of the lenders who are eligible for a tax offset on their interest to enter into an agreement with the Minister which specifies the conditions under which the offset will be allowed. A tax offset is not available to a lender unless the lender enters into an agreement;

•

the agreement will specify details of the project, the lenders and the borrower, the income years covered, any maximum amount of tax offset determined by the Minister, and any other conditions set by the Minister;

•

the agreement will also require the project borrower to apply the borrowed moneys by constructing the project facilities, or constructing or acquiring related facilities, and to control the use of the project facilities for income producing purposes for the income years covered by the agreement;

•

provision is made to enable one lender to be replaced by another under the agreement. The new lender becomes eligible for a tax offset on interest derived for the balance of the period covered by the agreement.

B. Background to the legislation

3.5 The previous Infrastructure Borrowings Tax Concession which was introduced in 1992 to facilitate private sector investment in certain publicly accessible infrastructure projects was closed with effect from 14 February 1997. The provisions relating to the concession are contained in Division 16L of the Income Tax Assessment Act 1936 and Chapter 3 of the Development Allowance Authority Act 1992. The tax concession was, broadly, by way of exemption of the lender's interest on borrowings - or, as an option, a tax rebate of 36% of the interest - and non-deduction for the borrower's interest. In addition, any profit or loss on the disposal of an infrastructure borrowings instrument was non-assessable or non-deductible. Eligible infrastructure facilities included land transport, seaport, electricity generation, air transport, gas pipeline, water supply and sewerage or waste water facilities.

3.6 The replacement Land Transport Infrastructure Rebate contained in this Bill is a more restricted concession. Only road and rail infrastructure facilities may be approved infrastructure projects. (As a transitional measure, however, projects in respect of which an application had been made under the previous concession, extensions of projects certified under the previous concession, or projects certified after the cessation of the previous concession, may be approved.)

3.7 The concession is in the form of a tax offset on the taxable interest of a resident lender to an approved infrastructure project. The offset is calculated by applying the general company tax rate to the lender's assessable interest, but may be subject to an upper limit set by the Minister. Where the lender's interest is subject to a tax offset, the project borrower is denied a deduction in respect of a comparable amount of interest.

3.8 Offsets are allowable only in the first 5 income years after the first borrowing for the infrastructure project.

C. Explanation of the amendments

Tax offset for interest derived on land transport facilities borrowings

3.9 New section 396-15 authorises a tax rebate (called tax offset) to a lender who has entered into a land transport facilities borrowings agreement with the Minister. ( Section 396-80 describes such an agreement and section 396-85 the conditions it contains.) The allowable tax offset is the amount worked out by applying the general company tax rate (which is currently 36%) to the assessable interest derived by the lender in that year from a borrowing covered by the agreement. However, the amount must not exceed the maximum tax offset for the lender for the income year - as determined by the Minister and specified in the agreement.

3.10 For example, if a lender derived interest of $100,000 in a particular year, the allowable offset would be .36 x $100,000, i.e. $36,000, unless a lesser amount was specified by the Minister as the maximum offset for the lender for that year.

Maximum amount of tax offsets

3.11 The maximum revenue cost of tax offsets is governed by new section 396-20 which authorises the Treasurer to determine the maximum net cost to revenue for an income year of tax offsets being approved, having regard to any reduction to borrowers' interest deductions.

Deduction reduced for interest incurred on land transport facilities borrowings

3.12 New section 396-25 reduces the deduction for interest incurred in a year of income by an infrastructure project borrower if the lender is entitled to a tax offset under section 396-15. The deduction that would be allowable is reduced according to the formula:

1/ General company tax rate x Tax offset entitlement


That is, the borrower is denied a deduction on the equivalent amount of interest on which the lender's tax offset is calculated.

3.13 For the purpose of applying the formula, the lender must advise the borrower of the amount of offset to which it is entitled. It will be a condition of entering the agreement with the Minister (see section 396-85) that the lender undertakes to provide such information to the borrower.

3.14 If in any income year the amount of the reduction exceeds the borrower's deduction entitlements in respect of the interest, the deduction is reduced to nil and the excess must be carried forward and added to the reduction amount calculated for the subsequent year.

Land transport facilities interest

3.15 New sections 396-30 to 396-40 explain when interest will be eligible for a tax offset. Such eligible interest is called "LTF interest". Under section 396-30, LTF interest for a lender is defined broadly as being interest or in the nature of interest under a borrowing which is included in the lender's assessable income.

3.16 The converse applies for a borrower, i.e. the conditions are the same except that the interest would be deductible to the borrower.

3.17 Paragraphs 396-30(1)(b) and (2)(b) cover cases where the assessable or deductible amount is not, strictly speaking, interest but is assessable or deductible under the accrual rules contained in Division 16E of Part III of the Income Tax Assessment Act 1936 which deals with deferred income securities.

3.18 Section 396-35 explains when LTF interest is covered by a land transport facilities borrowings agreement to which section 396-80 applies. The lender must be a lender under the agreement and the interest must arise under a borrowing that is covered by the agreement when the lender derives the interest. The borrower must be a borrower under the agreement and the interest must arise under a borrowing that is covered by the agreement when the borrower incurs the interest.

3.19 Interest will cease to be covered by the agreement if the borrower or lender breaches the agreement and the Minister determines that the breach is a material breach and does not allow the breach by agreeing to vary the agreement under section 396-40.

Projects, borrowers and lenders

3.20 New sections 396-45 to 396-55 specify the infrastructure projects that can be approved by the Minister, and who can be approved as a project borrower or lender.

3.21 A project must be a land transport facility, that is a road or railway line in Australia that is for the transport of the public or their goods for a charge to them. Related facilities such as plant and equipment, buildings, stations and maintenance facilities which are reasonably necessary for the central facility to be able to operate also form part of the central facility for the purpose of the tax offset concession.

3.22 Roads and roadworks such as bridges or tunnels are not a related facility to a railway. Similarly, railways and railway works are not a related facility to a road.

3.23 Under section 396-50, an entity can be approved as a project borrower only if it is

•

an incorporated body;

•

a corporate limited partnership;

•

a public trading trust; or

•

a corporate unit trust,

and intends to retain its status as such an entity throughout the period covered by the land transport facilities agreement.

3.24 It is not permissible for a borrower to make the borrowing in partnership with another entity, nor to be a government body or government owned. Government bodies and government owned bodies may be borrowers, however, if they operate on a commercial basis under criteria published by the Treasurer in the Commonwealth Gazette. For that purpose, criteria are published in Gazette No S73 of 2 March 1995 under the authority of subsection 93I(4) of the Development Allowance Authority Act 1992.

3.25 Any person or entity that is an Australian resident may be approved as a lender to a project. To obtain a tax offset on interest income, the lender must be a resident for the whole of the relevant income year.

Application, approval and agreement process

3.26 New sections 396-60 to 396-90 contain rules relating to the process for making application for approval as a borrower to a land transport infrastructure project, approval by the Minister, and the entering into of a land transport facilities borrowings agreement.

3.27 An entity that seeks approval as a borrower must make written application to the Commissioner of Taxation in a form approved for that purpose, including all information required for proper completion. The Commissioner or the Minister may seek additional information if necessary in order to determine the application.

3.28 The person who approves the borrower and the project is the Minister. The Minister will make a decision in writing and will specify

•

the borrower;

•

the project;

•

the income years covered; and

•

if applicable, a maximum amount of tax offsets that lenders may obtain for each income year.

3.29 As mentioned, the approval must not apply to an income year that starts more than 5 years after the first borrowing is made for the project. The Minister is not authorised to approve a project if, having regard to the estimated revenue cost of allowing tax offsets to the project lenders etc., any maximum net revenue cost determined by the Treasurer in accordance with section 396-20 (the revenue cap) would be exceeded in any income year.

3.30 In deciding whether to approve a project, the Minister must weigh up the various criteria that are specified in new section 396-75:

•

commercial viability;

•

benefits to the borrower of lenders' tax offsets;

•

estimated revenue foregone;

•

economic or social benefits or costs;

•

application of government planning rules;

•

the degree of public consultation; and

•

any other relevant matter

The Minister must also take into account any advice of the Commissioner relating to the application of the taxation law to the project e.g. the likely application of general or specific anti-avoidance rules, or whether lenders qualify as residents.

3.31 Some specific anti-avoidance rules are section 51AD and Division 16D of the Income Tax Assessment Act 1936. They prevent taxable financiers from obtaining tax benefits related to costs associated with property that is controlled, or the use of which is controlled, by tax exempt bodies. In the absence of section 51AD and Division 16D, financing arrangements could be structured so as to allow the tax exempt controller of the property to transfer these benefits to taxable financiers in return for cheaper finance.

3.32 The tax offset measure is intended to encourage genuine private investment in publicly accessible infrastructure, not to facilitate public sector involvement in the construction and financing of infrastructure projects. Section 51AD and Division 16D ensure that the tax benefits provided through the tax offset will only be available where the property is controlled by, and the benefits and burdens of control belong to, private investors.

3.33 If the Minister approves a project and a borrower, it is necessary to enter into a land transport facilities borrowings agreement with the borrower and each of the lenders that will be entitled to a tax offset on interest derived. The agreement will specify those matters specified in the Minister's written notice of approval, as well as each of the lenders and the borrowings that are covered by the agreement. The agreement may contain additional conditions.

3.34 New section 396-85 sets out certain conditions relating to the borrower's use of the approved infrastructure facilities, and the application of the borrowings, that must be included in the agreement. The two principal conditions are that:

-

the borrower will own the facilities and use them principally for gaining or producing assessable income, and will effectively control their use until the end of the last income year covered by the agreement. (A borrower will be taken to own a facility if it holds a lease or other right over land on which the facility is situated and the lease or other right has been granted by a government or exempt government agency e.g. a Crown lease);

-

the borrowings will be used only by spending them on the construction of the approved infrastructure facilities or the construction or acquisition of approved related facilities.

3.35 The agreement will also oblige the borrower and lenders to undertake to do all the things specified in the agreement, to keep proper records and to inform the Commissioner of any breach of the agreement. The borrower will be required to agree not to do anything that would trigger the application of section 51AD or Division 16D of the Income Tax Assessment Act 1936 to any part of the approved infrastructure facilities. Lenders will be obliged to inform the borrower of the amount of their tax offset entitlement as soon as practicable every year.

3.36 An agreement may be varied or revoked by the parties. In addition, the parties may enter into a new agreement for the purpose of replacing one lender with another.

Miscellaneous

3.37 The amendments being made by new section 396-95 will enable information to be passed, without breaching existing taxation secrecy rules, from the Commissioner of Taxation to the Minister or to other persons e.g. officers of the Minister's department, for the purpose of administering the land transport infrastructure tax offset scheme. Persons who receive such information, however, are bound by the secrecy rules not to divulge or make copies of it except for the specific purpose of that administration. The Minister will be authorised to publicly announce an approved project without breaching secrecy rules.

3.38 Under new section 396-105, the Minister may delegate his powers under Division 396 to the Secretary or other senior officers of his Department, but not the power to approve projects and borrowers stipulated in section 396-70.

3.39 The Minister's decisions under the Division are not reviewable by the Administrative Appeals Tribunal, except a decision under section 396-40 as to whether a breach of a land transport facilities agreement is a material breach.

Other Amendments

3.40 Part 2 of Schedule 3 contains various amendments to the 1997 Act consequential on the insertion of new Division 396. Section 13-1 - which lists the various offset provisions - is amended to include a reference to the land transport facilities borrowings offset rules being inserted by the Division. Section 995 -1(1) - containing the dictionary definitions - is amended to include definitions of "borrowing", "corporate limited partnership", "corporate unit trust", "general company tax rate", "land transport facility", "land transport facilities borrowings agreement", "LTF interest", "public trading trust" and "related facility".

D. Transitional provisions

3.41 Part 3 of Schedule 3 contains provisions which enable certain public infrastructure facilities which are not necessarily road or rail facilities to be treated as eligible facilities in respect of which lenders to the project borrower may become entitled to a tax offset under Division 396.

3.42 The first category is a facility (or a related facility) which qualified as an infrastructure facility under the previous Infrastructure Borrowings Tax Concession where either:

•

an application had been made on or before 14 February 1997 to the Development Allowance Authority for a borrowings certificate under Part 3 of the Development Allowance Authority Act 1992 in respect of the borrowings for the facility; or

•

facility is an extension of one for which a borrowings certificate under Part 3 is in force.

3.43 Borrowers may apply for such facilities to be approved by the Minister under section 396-70 subject to the same terms and conditions as apply to road and rail transport infrastructure.

3.44 The second category is a facility (or a related facility) which qualifies as an infrastructure facility under the previous Infrastructure Borrowings Tax Concession where:

•

an application had been made on or before 14 February 1997 under Part 3 of the Development Allowance Authority Act 1992 in respect of borrowings for the facility; and

•

ertificate was issued in respect of the borrowings but was rendered ineffective by the Taxation Laws Amendment (Infrastructure Borrowings) Act 1997, which terminated the previous Infrastructure Borrowings Tax Concession; and

•

the Minister makes a written determination to approve the project and the borrower in the same manner as if the facilities were land transport facilities, i.e. by specifying all of the matters that would be set out in a written approval under section 396-70.

3.45 If the Minister makes such a determination, the Minister and the borrower and the project lenders will be able to enter into a land transport facilities borrowings agreement in accordance with section 396-80 so as to entitle lenders to a tax offset in respect of their assessable interest.

3.46 To facilitate the administration of the transitional rules contained in Part 3, the Development Allowance Authority will be required to advise the Commissioner of particulars relating to infrastructure facilities that may be approved under those rules.

E. Regulation impact statement

Policy Objective

3.47 To continue to encourage the provision of private sector investment in new public road and rail infrastructure through the Infrastructure Borrowings Tax Rebate scheme while also capping the potential cost to revenue of the tax concession. The Infrastructure Borrowings Tax Rebate replaces the Infrastructure Borrowings Tax Concession which was introduced in 1992 and was closed off to applications with effect from 14 February 1997.

Implementation options

Background

3.48 Certain aspects of the Infrastructure Borrowings Tax Rebate scheme are fixed.

3.49 Under the scheme, infrastructure providers forgo tax deductibility on interest paid on the infrastructure borrowings to resident infrastructure financiers. In return those financiers are given a tax rebate:

•

on the amount of the interest on the borrowings in the year that interest is assessable as income of the financier;

•

at a rate equal to the company tax rate;

•

for a maximum of 5 years from the time of first borrowing for a project; and

•

that is not tradeable or capable of being carried forward.

3.50 The cost to revenue of the rebate will be limited to $37.5 million for 1997-98 and $75 million per annum thereafter. The Australian Taxation Office (ATO), which will jointly administer the program, will call for applications for the rebate biannually. The closing date for the first round of applications is intended to be 31 December 1997.

3.51 As a transitional measure, the programme will also be open to infrastructure borrowers who:

•

had applied by 14 February 1997 to the Development Allowance Authority for an Infrastructure Borrowings Certificate under the previous infrastructure borrowings tax concession; or

•

had existing Infrastructure Borrowings Certificates from the Development Allowance Authority and propose to extend the certified project; or

•

had applied by 14 February 1997 to the Development Allowance Authority for an Infrastructure Borrowings Certificate under the previous infrastructure borrowings tax concession and had received such a certificate, but the certificate was cancelled by operation of the Taxation Laws Amendment (Infrastructure Borrowings) Act 1997.

3.52 Applications seeking approval of a proposed infrastructure project as one to which tax rebatable loans can be made will be assessed against published selection criteria (such as commercial viability, transfer of tax benefits, cost to the revenue, economic and social benefits, and consistency with government policies). The decision in respect of each project and each lender will be made by the Minister for Transport and Regional Development (the Minister). The decisions of the Minister will not be subject to merits review.

3.53 Given the above restrictions there are two feasible implementation options.

Option 1

3.54 This option would have as little as possible contained in legislation. It would rely on the executive powers of Government being applied by the Minister to determine which projects have approval and the extent to which a financier could claim a rebate in any particular year.

3.55 The legislative scheme would simply require the Commissioner of Taxation to quantify the allowable rebate, or the deduction to be disallowed, in an assessment for a particular year, based on a decision of the Minister and/or on an agreement made between the Commonwealth and the relevant parties.

3.56 The only other legislation required would be machinery provisions to determine appeal rights and, because agencies other than the ATO will participate in assessment processes, provide relief from the secrecy provisions of the income tax laws.

3.57 Guidelines would have to be issued to assist applicants prepare their applications for the rebate. Applicants would be required to satisfy the criteria contained in the Budget announcement.

Option 2

3.58 This option is the same as Option 1 except that the selection criteria on which the Minister would base decisions are set out in legislation. Applicants would be required to provide the same information under either option, and the selection processes would be the same.

3.59 The selection criteria would be more fully described in guidelines.

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

Impact group identification

3.60 Under either option, the scheme will affect developers of new road and rail public infrastructure and resident taxpayers who finance that development. Under transitional arrangements, however, the class of infrastructure development which may benefit under the scheme will be wider than road and rail.

3.61 The scheme will also affect various government agencies such as the ATO, the Department of Transport and Regional Development (DoTRD), the Treasury, the Department of Industry, Science and Tourism, the Department of Prime Minister and Cabinet, and the Department of Finance which will be asked to take part in the initial assessment of applications.

Identification of the costs and benefits

Costs under either Option

3.62 Under either option, there will be a cost for the developer and/or financier in providing sufficient information to support the application for the rebate. Under the taxation system as a whole this cost is considered to be small as few taxpayers will be affected. Once a rebate is granted, there will be a further cost for the developer and financier in negotiating an agreed contract with the Government. These costs are unquantifiable. Option 2 may be less costly overall because of the greater certainty for applicants in having selection criteria expressed in legislation.

3.63 There will be costs to the ATO and DoTRD in producing the forms and guidelines necessary for applications to be lodged. There are other significant government costs in administering the scheme taking into account the number of agencies involved in the process, the quantitative and qualitative assessments needed to be carried out before decisions are made (e.g., basic eligibility, anti-avoidance checks, revenue analysis, and compliance with selection criteria). These costs are estimated to be in the vicinity of $2m per annum.

Benefits of Option 1

3.64 Because there would be no legislative selection criteria on which to base his decisions, the Minister would have maximum flexibility in deciding which projects would receive the benefit of the tax rebate.

3.65 The absence of legislatively based criteria means that fewer legislative drafting resources would be required.

Benefits of Option 2

3.66 By expressing in legislation the criteria by which the Minister will make decisions, Option 2 is a more open and accountable process, and more likely to be an acceptable process to infrastructure project developers and financiers.

Consultation

3.67 Consultation in the form of discussions and seminars on administrative and legislative issues will be carried out with relevant industry and professional bodies and individuals in the early implementation stages of the rebate scheme.

3.68 The Treasury and the ATO will monitor this 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 and through other taxpayer forums.

Conclusion and preferred option

3.69 Given that the costs of Option 1 and 2 do not differ greatly, the benefits arising from the more open and accountable approach of Option 2 makes it the preferred option.

Chapter 4 - Removing exemption for CRAFT scheme payments

Overview

4.1 Item 1 of Schedule 4 to the Bill will remove the income tax exemption of the rebate for employers under the Commonwealth rebate for apprentice full-time training (CRAFT) scheme.

Summary of the amendments

Purpose of the amendments

4.2 The amendment will remove the anomaly in the historical development of apprenticeships and traineeships, where the incentives payable to employers of apprentices are tax exempt while incentives payable for trainees are not exempt.

Date of effect

4.3 The amendment will apply to any incentive payments to employers for apprentices whose most recent employment commenced on or after 1 January 1998. [Item 1]

Background to the legislation

4.4 Paragraph 23(jc) of the Income Tax Assessment Act 1936 (the 1936 Act) [see section 51-10 of the Income Tax Assessment Act 1997 (the 1997 Act) for the 1997-98 and subsequent income years] was introduced in 1977 to provide Commonwealth assistance to employers of apprentices for wage costs incurred by them in respect of apprentices released to attend technical colleges for compulsory full-time basic trade training or to undertake full-time off-the-job training. The paragraph exempts employers from paying tax on the CRAFT rebate that they receive from the Government.

4.5 The Government has decided to replace the tax exemption of the payments made under the CRAFT scheme, with a budget outlay paid as a completion payment and an increased recommencement payment to 'for profit' employers of Australian qualification framework (AQF) level 3 and level 4 new apprentices.

4.6 The change is in line with other reforms to the entry level training system. The change also addresses issues raised in the Government's review of the impact of restrictions on entry level training incentives. Details of the outlays under this proposal are contained in Part 1 of the 1997-98 Budget Paper under the Employment, Education, Training and Youth Affairs portfolio.

4.7 The Government announced in Treasurer's press release No. 54 on 13 May 1997 that it would amend paragraph 23(jc) of the 1936 Act to remove the income tax exemption to employers entitled to payments under the CRAFT scheme.

Explanation of the amendments

4.8 The proposed amendment will remove the tax exemption of the CRAFT rebate to employers under item 2.2 of section 51-10 of the 1997 Act for apprentices who commence or recommence with their employers on or after 1 January 1998. [Item 1]

4.9 Incentives payable to employers for apprentices whose most recent employment commenced under the CRAFT scheme before 1 January 1998 will retain their tax exempt status. [Item 1]

4.10 The proposed amendment will apply for the 1997-98 income year and later income years. [Item 2]

Regulation impact statement

Specification of policy objective

4.11 The Government has decided to remove the tax exemption of payments made under the CRAFT scheme. In its place, additional payments will be made to 'for profit' employers of AQF level 3 and level 4 new apprentices.

Identification of implementation options

4.12 The removal of the tax exemption can only be achieved by an amendment to the tax law.

Assessment of impacts (costs and benefits) of the measure

Impact group identification

4.13 There are around 43,000 employers who will be affected by this change.

Assessment of costs

4.14 The compliance costs to taxpayers of this change are minimal and involve:

•

learning about the change in the tax law;

•

establishing the tax status of payments; and

•

including the amount received from CRAFT in their income tax returns.

4.15 The administrative costs to ATO of this change are minimal and relate mainly to:

•

advising clients on the tax status of the payments; and

•

changing the income tax return form instructions.

Assessment of benefits

Financial impact

4.16 This measure will result in notional gains to the revenue arising directly from the conversion of the tax expenditure to outlays. They include the gain to revenue arising from removing the tax exemption of payments and from the additional payments designed to compensate recipients for the tax they will pay on the payments.

4.17 There is no gain to revenue in 1997-98. The gain to revenue in 1998-99 is $35 million, in 1999-2000 is $45 million, in 2000-2001 is $55 million and in 2001-2002 is $50 million.

Other benefits

4.18 Conversion of the exemption to outlay will simplify the entry level training arrangement and improve the overall transparency of benefits to the public while clarifying the costs to Government.

4.19 The conversion will facilitate more precise targeting of Commonwealth financial assistance of entry level training, and allowing more precise measurement, and therefore accountability, in respect of the assistance.

4.20 The simplification and clarity achieved by the conversion may contribute to delivering entry level training in a contestable market.

4.21 The conversion allows the tax treatment of employers with apprentices and trainees to be consistent and more equitable.

Consultation

4.22 As the tax measure formed part of the 1997-98 Budget, public consultation was not possible. In any case, public consultation was not necessary as employers will obtain equivalent net after tax payments as were available under the CRAFT scheme.

Conclusion

4.23 The benefits of increased transparency of public benefits, more precise targeting of Commonwealth financial assistance together with the notional gains to the revenue outweigh the costs of this measure.

Chapter 5 - Tax Law Improvement Project - drafting and technical corrections

Overview

5.1 The amendments in Schedules 5, 6, 7, 8, 9 and 11 of the Bill make drafting and technical corrections to the income tax laws rewritten by the Tax Law Improvement Project (TLIP).

5.2 These measures make miscellaneous amendments to the:

•

Income Tax Assessment Act 1997;

•

Income Tax Assessment Act 1936;

•

Income Tax (Transitional Provisions) Act 1997;

•

Income Tax (Consequential Amendments) Act 1997;

•

Financial Corporations (Transfer of Assets and Liabilities) Act 1993.

Summary of the amendments

Purpose of the amendments

5.3 Schedules 5, 6, 7, 8 and 9 will amend technical errors that have arisen from the rewrite of the income tax laws. The amendments make corrections to the Income Tax Assessment Act 1997 (referred to as the ITAA 1997 throughout this chapter) so that it restates the effect of the Income Tax Assessment Act 1936 (referred to as the ITAA 1936 throughout this chapter) or gives the Government policy changes that were incorporated in the ITAA 1997 their full intended operation. Schedule 11 will make amendments to further improve the readability of the rewritten income tax laws.

Date of effect

5.4 Generally, the amendments discussed in this chapter will apply to assessments for the 1997-98 and later income years. However, some items do have a different date of effect and these are specifically identified below.

Background

5.5 The Parliament has enacted the first two instalments of the TLIP's rewrite of the ITAA 1936. The first instalment comprises three Acts:

•

the Income Tax Assesment Act 1997;

•

the Income Tax (Transitional Provisions) Act 1997; and

•

the Income Tax (Consequential Amendments) Act 1997.

Those Acts received Royal Assent on 18 April 1997 and have effect for the 1997-98 income year.

5.6 The ITAA 1997 contains a rewrite of the core provisions of the income tax law including the general income and deduction provisions and of the deductions for capital works, carry forward losses and mining and quarrying.

5.7 The second instalment is the Tax Law Improvement Act 1997 (TLIA 1997) which received Royal Assent on 8 July 1997. That Act amends the ITAA 1997 by inserting the rewritten assessable income, exempt income and trading stock provisions as well as some allowable deduction provisions including gifts, entertainment, depreciation and primary production. Those provisions also have effect for the 1997-98 income year.

Explanation of the amendments

Schedule 5 - Technical amendments of the Income Tax Assessment Act 1997

Items 1, 2, 11, 12, 17, 18, 19, 34, 35, 40 and 41

Provisions being amended: Various sections which allow deductions for losses or outgoings.

Amendment will: Insert signposts to Subdivision 20-A (Insurance, indemnity or recoupment for deductible expenses) for cases where a recoupment is received for the various losses or outgoings.

Item 3

Provision being amended: Subsection 9-5(1) lists entities that work out their income tax by reference to something other than taxable income.

Amendment will: Add a new item to the list to refer to Australian resident individuals who derive foreign source income exempt under section 23AF or section 23AG of the ITAA 1936.

Reason for amendment: These individuals are liable to pay income tax on their assessable income reduced by some, not all, of their otherwise allowable deductions.

Item 4

Provision being amended: Section 12-5 lists rules about specific kinds of deductions.

Amendments will: Insert a new item, balancing adjustment, which contains cross-references to entries in the list.

Items 5 to 7

Provisions being amended: Sections 20-10 and 20-15, which are guide material to Subdivision 20-A which deals with the recoupment of deductible expenses.

Amendment will: Take account of the new sections 20-60 and 20-65 to be inserted into Subdivision 20-A by item 10 (discussed below). These sections will deal with the case where the person incurring an expense receives a recoupment, but another person is entitled to some or all of the deductions.

Items 8 and 9

Provision being amended: Subsection 20-45(3) which explains how to deal with a recoupment where a balancing charge has been included in assessable income in respect of a deduction allowable over 2 or more years.

Amendment will: Substitute references to subsection 20-40(2) for incorrect references to subsection 20-40(3).

Item 10

Provision being amended: Subdivision 20-A, which includes in assessable income certain amounts received as recoupment for a deductible expense.

Amendment will: Insert new sections 20-60 and 20-65 to ensure that appropriate adjustments flow through when the person who incurred the relevant expense has that expenditure recouped but another person was entitled to deductions for the expense.

Reason for amendment: Under the ITAA 1936, some deductions can be transferred to another person so that the transferee claims deductions by reference to the expenditure incurred by the transferor. The deduction for expenditure on establishing a grapevine is an example. Further, some of these transferable deductions contain a recoupment provision which applies to disallow the deductions claimed by the transferor and transferee if the transferor's expenditure is recouped.

Subdivision 20-A of the ITAA 1997 consolidates all the various deduction recoupment rules of the ITAA 1936. However, as enacted it does not apply to a transferee.

The amendment has two effects. Firstly, it will restate the effect of the ITAA 1936 by ensuring that the recoupment provisions apply to the transferee if the transferor's expenditure is recouped.

Secondly, new sections 20-60 and 20-65 adopt the new standard approach in the ITAA 1997 of assessing recouped deductible expenses.

When the new sections apply, the recoupment will be assessed:

•

firstly to the transferor, but only to the extent that deductions have been allowed to the transferor; and

•

then to the transferee.

Example: On 1 July 1997, Don incurs $10,000 of expenditure on establishing a grapevine. Don owns the grapevine and uses it in a primary production business until he sells it to Sally on 1 July 1999. Sally also uses the vine in a primary production business. During the 1999-2000 income year, Don receives $6,000 as recoupment of the expenditure on the grapevine.

On these facts, Don is entitled to a $2,500 deduction in the 1997-98 and 1998-99 income years under section 387-305 of the ITAA 1997. Sally is entitled to a $2,500 deduction in the 1999-2000 and 2000-2001 income years.

The new section 20-65 would apply in these circumstances because Don's recoupment is an assessable recoupment under subsection 20-20(3) (see item 1.15 in subsection 20-30(1) of the ITAA 1997). Section 20-65's effect is:

•

subsections 20-65(2) and (3): The notional entity's (Don and Sally together) assessable amount is $6,000.

•

subsection 20-65(5): The recoupment reverses $6,000 of deductions (paragraph (a)) - $2,500 from the 1997-98 income year, $2,500 from the 1998-99 income year and $1,000 from the 1999-2000 income year (paragraph (b)).

•

subsection 20-65(4): As Don has all of his deductions reversed, he has $5,000 included in his assessable income in the 1999-2000 income year. Sally has $1,000 of her deductions reversed, and will therefore have this amount included in assessable income in the 1999-2000 income year.

Item 13

Provisions being amended: The example to subsection 25-5(5). Subsection 25-5(5) provides that certain property used in managing an entity's tax affairs is taken to be used to produce assessable income.

Amendment will: Omit a reference to section 54 of the ITAA 1936 and substitute a reference to Division 42 of the ITAA 1997 which contains the rewritten depreciation deduction previously in section 54.

Item 14

Provisions being amended: Subsection 25-10(1), which allows a deduction for expenditure on repairs to premises and plant, machinery, tools or articles used to produce assessable income.

Amendment will: Substitute the reference to plant, machinery, tools or articles with a reference to *plant.

Reason for amendment: The subsection 995-1(1) definition of *plant in the ITAA 1997 has been extended to include machinery, tools and articles.

Items 15 and 16

Provision being amended: Subsection 25-35(5) which lists special rules which affect deductions for bad debts.

Amendments will: Insert a new item in the table in subsection 25-35(5) to refer readers to the operation of Subdivision 20-A (Insurance, indemnity or recoupment for deductible expenses) when a recoupment is received for a bad debt.

Items 20, 21 and 33

Provisions being amended:

•

Section 28-15, which contains a graphic illustrating methods of calculating car expense deductions;

•

Section 40-30, which contains a table providing information about capital allowances; and

•

Section 330-10, which contains a diagram indicating how the income tax law treats mining and quarrying.

Amendments will: Adjust for changes in pagination by substituting the words below or in this section for the words on the next page.

Item 22

Provision being amended: The note to subsection 41-25(1). Subsection 41-25(1) states that there is no need to do a balancing adjustment for a capital allowance when a roll-over event occurs. The note indicates how a balancing adjustment will be applied if roll-over relief is not available for a later roll-over event. Amendment will: Substitute a new note, more accurately expressed to refer to a disposal instead of to a roll-over event. The substituted note will now refer generally to a disposal instead of to a roll-over event.

Item 23

Provision being amended: The example to section 42-65 illustrates how to work out the cost on which a depreciation deduction is based.

Amendment will: Omit the reference to the market value of the car and substitute references to the cost of the car had the parties been dealing at arm's length.

Reason for amendment: The reference to market value is inappropriate because the example is based on Common rule 2 of the capital allowance common rules as modified by section 42-75. Together those sections reduce the cost of the car to what would have been incurred had the parties been dealing at arm's length.

Items 24 and 25

Provision being amended: Sections 42-65 and 42-205 which contain depreciation cost and termination value tables.

Amendments will: Insert a new subsection (2) into each provision so that references to quasi-ownership rights in the tables are read as quasi-ownership rights granted by exempt Australian and foreign government agencies.

Reason for amendments: The tables as enacted could apply to any lease of land, easement etc. The amendment will restate the effect of the ITAA 1936 by ensuring that only leases, easements etc. granted by exempt government agencies are covered.

Item 26

Provision being amended: Paragraph 42-310(1)(b), which is part of the definition of quasi-owner of plant.

Amendment will: Confine the notion of a quasi-owner of plant to an entity who:

•

acquired or constructed plant and attached it to land held under a quasi-ownership right granted by an exempt Australian government agency or an exempt foreign government agency; or

•

subsequently acquired the right.

Reason for amendment: The provision as enacted does not reproduce the effect of its equivalents in the ITAA 1936. Under the ITAA 1936, the quasi-owner of plant must both acquire or construct the plant and attach the plant to land held under the relevant quasi-ownership right. The ITAA 1997 only restates the latter requirement. The amendment will reinstate the effect of the ITAA 1936 by adding the requirement that the quasi-owner acquire or construct the plant.

Item 27

Provision being amended: Section 43-250, which allows a deduction on the destruction of capital works.

Amendment will: Ensure that the amount of the balancing deduction is reduced to take account of any period during which the capital works were:

•

not used at all to produce assessable income;

•

used concurrently for income producing and other purposes.

Reason for amendment: The amendment will uphold the effect of the ITAA 1936.

Item 8

Provision being amended: Subsection 70-30(4), which treats an asset converted into trading stock as having a cost' equal to its market value if it was acquired for no consideration.

Amendment will: Correct an unintended change to the effect of the ITAA 1936 that can arise if the asset was inherited.

Reason for amendment: If someone disposes of an asset worth more than its indexed cost base, the excess is normally taxable as a capital gain. But, if the asset is disposed of to a beneficiary on the owner's death, the beneficiary is treated instead as acquiring it for the deceased's inflation adjusted (i.e. indexed) cost base. Effectively, the accrued capital gain is rolled-over' so that gain would normally be taxed to the beneficiary when he or she disposes of the asset.

However, if the beneficiary converts it to trading stock at cost, subsection 70-30(4) says that its cost is the market value it had at inheritance. No taxable capital gain can be made in these circumstances and the difference between the market value and the asset's indexed cost base (i.e., the accrued capital gain') would escape tax.

The amendment will ensure that inherited assets that are later put into trading stock have a cost' equal to the asset's indexed cost base in the deceased's hands. If the taxpayer ultimately sells the asset for more than its indexed cost base, the difference will be assessable income. If the final sale proceeds are less than the indexed cost base, the difference will be deductible.

Item 29

Provision being amended: The notes to section 70-90. That section includes the market value of an item of trading stock in assessable income if that item is disposed of outside the ordinary course of business.

Amendment will: Add a new note 5 to refer readers to section 70-10 of the Income Tax (Transitional Provisions) Act 1997.

Reason for amendment: The amendment draws to a reader's attention the fact that the Income Tax (Transitional Provisions) Act 1997 gives the section a wider operation than appears on its face. That operation is explained in more detail at item 2, Schedule 8 below.

Items 30 and 31

Provision being amended: Subsection 175-5(2), which sets out the circumstances in which the Commissioner is denied the ability to reverse the effect of tax avoidance schemes using tax losses and current year deductions of companies.

Amendment will: Correct the formatting of the subsection.

Item 32

Provision being amended: Subsection 175-5(2). Subdivision 175A is an anti-avoidance provision which sets out the circumstances in which the Commissioner may deny a company a deduction for a tax loss. Subsection 175-5(2) sets out circumstances in which the Commissioner cannot apply the anti-avoidance provision. It provides that the deduction for a tax loss is not denied when the company satisfies the same business test even if the company has failed the continuity of beneficial ownership test for the income year.

Amendment will: Amend paragraph 175-5(2)(a) to ensure the conditions of the continuity of beneficial ownership test refer to both the loss year and the income year.

Reason for amendment: To ensure that the ITAA 1997 accurately reflects the ITAA 1936 by more precisely describing the circumstance of failing the continuity of beneficial ownership test. As enacted, it is arguable that the rewritten provision can be read more narrowly than the equivalent provision in the ITAA 1936.

Items 36 and 37

Provision being amended: Subsection 330-110(1) which tells you when you can deduct allowable capital expenditure.

Amendment will: Substitute references to paragraph 330-85(h) for incorrect references to paragraph 330-85(1)(h).

Items 38 and 39

Provision being amended: Section 330-175, which deals with mining and prospecting cash bidding payments. It determines both:

•

the entitlement to an eligible cash bidding amount; and

•

how much that amount is.

Amendments will: Replace paragraphs (b) and (c) of existing section 330-175 with a new paragraph (b) which will:

•

correct an error in paragraph (b) as enacted; and

•

restate the combined effect of paragraphs (b) and (c).

Reasons for amendments: Paragraph 330-175(b) provides that, if a person is to be entitled to an eligible cash bidding amount, that person has to be the original owner of the exploration or prospecting authority to which the cash bidding payment relates. This was not the position under the ITAA 1936 where the entitlement to an eligible cash bidding amount was not restricted to the original owner. This amendment brings section 330-175 into line with the ITAA 1936.

Item 42

Provision being amended: Note 3 to subsection 330-547(1). Section 330-547 modifies Common rule 1 about roll-over relief for the purposes of mining and quarrying provisions.

Amendment will: Make it clear that roll-over relief does not depend on an election.

Item 43

Provision being amended: Section 995-1 definition of listed public company which is relevant to concessional tracing rules used to determine when companies are entitled to claim prior and current year losses in Division 166.

Amendment will: Substitute a new definition to restate the effect of the ITAA 1936 by ensuring that the company is listed on an approved stock exchange and the ownership of its shares is widely held.

Item 44

Application: : The amendments made by Schedule 5 apply to assessments for the 1997-98 and later income years.

Schedule 6 - Technical amendments of the Income Tax Assessment Act 1936

Item 1

Provision being amended: Subsection 36(1), which includes in assessable income the market value of an item of trading stock disposed of outside the ordinary course of business.

Amendment will: Add a note to alert readers to section 70-10 of the Income Tax (Transitional Provisions) Act 1997 which allows a deduction in the income year in which subsection 36(1) includes an amount in assessable income on the disposal of some items of trading stock.

Item 2

Provision being amended: Section 51, the general deduction provision of the ITAA 1936, which includes subsection (2) dealing with deductions for expenditure incurred in the purchase of trading stock.

Amendment will: Insert a new subsection 51(1B) which will ensure that subsection 51(2) does not apply for the 1997-98 and later income years, i.e. the years in which the ITAA 1997, as amended by TLIA 1997, operates.

Item 3

Provision being amended: Section 93, which allows partners to make separate elections for the value of their partnership's live stock.

Amendment will: Insert a new subsection 93(1A) which will ensure that section 93 does not apply for the 1997-98 and later income years. It will also provide a cross-reference to the transitional provisions that apply for the 1997-98 income year.

Reason for amendment: Under the ITAA 1936, a partnership generally makes a single election (rather than a separate one by each partner) about how to value its trading stock at the end of each income year. However, section 93 of that Act allows each partner to make a separate election if the trading stock is live stock. This would have created significant tax planning opportunities except that, unlike other trading stock it was a once only' election and taxpayers had to use the same valuation method for their live stock in all future years. They also had to value every animal according to the same method. So, in practice, partners have almost always made the same election.

The rewrite of the trading stock rules streamlines and simplifies the law by bringing the rules for valuing live stock into line with those for other trading stock. Thus, the rewrite allows owners of live stock to vary their valuation method from year to year and animal to animal in the same way as they can with other trading stock. However, a consequential amendment to require live stock to be valued by partnerships rather than by the individual partners was omitted. This could open up unintended tax planning opportunities for partners.

This amendment will limit section 93 to the 1996-97 and prior income years. Transitional provisions (discussed below at items 3 and 4 of Schedule 7) will apply in the 1997-98 income year to ensure that any (rare) partnerships where the partners have made different elections will not be disadvantaged.

Item 4

Provision being amended: Section 124AF, which allows a deduction for unrecouped previous capital expenditure incurred in prospecting and mining for petroleum.

Amendment will: Insert a new subsection 124AF(1A) which will ensure that section 124AF does not apply for the 1997-98 and later income years.

Reason for amendment: This consequential amendment is, at a practical level, unnecessary because there are no deductions still allowable under that section. However, because no consequential amendment was made to section 124AF, it remains technically operative.

Item 5

Provision being amended: Subsection 160ZK(3A), which specifies rules for determining the reduced cost base of an asset where a deduction has been allowed to a partnership.

Amendment will: Add a reference to Division 43 of the ITAA 1997 to the current reference to Divisions 10C and 10D of Part III of the ITAA 1936 to ensure that subsection (3A) refers to the relevant provisions of both the ITAA 1936 and the ITAA 1997.

Items 6 to 16

Provision being amended: Sections 177C, 262A, 390, 577 and 579. Each section refers to selections, elections or notices of one kind or another available under the ITAA 1936.

Amendment will: Add additional references to choices that can be made under the ITAA 1997.

Reason for amendment: The rewrite of the depreciation provisions contained in Division 42 of the ITAA 1997 allows owners and quasi-owners of plant to make various choices such as about the effective life of plant, calculation method, rate of deduction, balancing adjustment relief and pooling. These choices replace elections, nominations and notices under the ITAA 1936.

Item 17

Application: : The amendments made by Schedule 6 (except items 2, 3 and 4) apply to assessments for the 1997-98 and later income years.

Schedule 7 - Technical amendments of the Income Tax (Transitional Provisions) Act 1997

Item 1

Provision being amended: Division 43 of the Income Tax (Transitional Provisions) Act 1997 which contains the transitional measures needed for Division 43 of the ITAA 1997 (Deductions for capital works).

Amendment will: Insert a new transitional provision (new section 43-110) that ensures that subsection 43-75(3) of the ITAA 1997 does not apply to hotel buildings or apartment buildings begun before 1 July 1997.

Reason for amendment: Subsection 43-75(3) is intended to legislate an administrative concession for buildings covered by Division 10D of Part III of the ITAA 1936. However, subsection 43-75(3) applies to all capital works, including those formerly covered by Division 10C. This amendment ensures that subsection 43-75(3) will not apply to hotel buildings and apartment buildings (i.e. the buildings formerly covered by Division 10C) begun before the commencement of the ITAA 1997. This ensures that the legislative concession is not extended retrospectively to buildings that were not within the administrative concession.

Item 2

Provision being amended: Section 70-10 of the Income Tax (Transitional Provisions) Act 1997, which explains how to treat an item that used to be trading stock under the ITAA 1936 definition of trading stock but is not under the ITAA 1997 definition.

Amendment will:

•

1. Ensure that late balancing taxpayers do not escape tax on disposals of items that used to be trading stock.

•

2. Allow taxpayers to deduct, in the year in which they finally dispose of the item, the value at which it was brought to account at the end of 1996-97.

Reason for amendment: The intended effect of the section 70-10 transitional provision is to ensure that the change of definition of trading stock in the ITAA 1997 does not result in an asset that a taxpayer has ceased to use as trading stock escaping tax that the ITAA 1936 would have levied. It seeks to achieve this outcome by assessing the item's market value when it is finally disposed of in the same way that subsection 36(1) of the ITAA 1936 did before 1 July 1997. The policy is to include an amount in assessable income to balance the deduction already allowed to the taxpayer for the acquisition of the stock. The section 70-10 transitional provision fails to achieve its objective and needs to be amended in two respects.

The first proposed amendment ensures that the effect of the ITAA 1936 is maintained for taxpayers with income years ending other than on 30 June. The current transitional provision did not achieve this if, eg. a taxpayer acquired an item as trading stock after 30 June 1997, put the item to another use before the end of the 1996-97 income year and still held the item at the end of that income year. The proposed amendment will overcome the problem by including an amount in assessable income when the taxpayer finally disposes of the item.

The second proposed amendment will ensure that if this transitional provision applies, it will tax only the profit on disposal, rather than the whole of the item's market value. This was the result under the ITAA 1936 because an item which stopped being used as trading stock would have been brought to account at the end of each income year it was on hand. However, under the transitional provision, as enacted, the full market value would have been taxed because the item would have stopped being trading stock under the ITAA 1997 at the start of the 1997-98 income year.

Items 3 and 4

Provision being amended: Division 70, which contains the transitional provisions for the rewritten trading stock provisions in Division 70 of the ITAA 1997.

Amendment will: Insert new section 70-35 and new subsection 70-55(3) which will provide transitional rules for partners and partnerships which are affected by the amendments to section 93 discussed above at item 3, Schedule 7.

Reason for amendment: The opening value of trading stock for an income year is determined by the closing value of that trading stock in the prior income year. These new transitional provisions are needed to provide a mechanism for converting from a system where partners individually valued live stock to a system where the partnership values the live stock. This prevents any disadvantage under the ITAA 1997 to partners who have chosen different valuation methods at the end of the 1996-97 income year.

Item 5

Provision being amended: Section 330-20, which provides for the reduction of unrecouped expenditure where:

•

an amount derived from the sale of rights to mine an area is exempt under section 330-60 of the ITAA 1997; and

•

in relation to that area, there are amounts of expenditure under subsection 122J(3) of the ITAA 1936 that have become allowable capital expenditure under the ITAA 1997 (the excess amount).

Unrecouped expenditure determines how much mining or quarrying expenditure is deductible under Subdivision 330-C of the ITAA 1997.

Amendment will: Replace the word exceeds with the words does not exceed to ensure that unrecouped expenditure is reduced by the excess amount. But if the excess amount exceeds the exempt income, there is a limit on the extent of the reduction to the unrecouped expenditure. That limit is the amount of the exempt income.

Reason for amendment: Section 330-20 of the Transitional Provisions Act incorrectly reduces unrecouped expenditure by so much of the excess amount as exceeds the amount of exempt income instead of the amount that does not exceed the amount of exempt income.

Item 6

Application: : The amendments made by Schedule 7 apply to assessments for the 1997-98 and later income years.

Schedule 8 - Technical amendments of the Income Tax (Consequential Amendments) Act 1997

Item 1

Provision being amended: Item 98 of Schedule 1, which amends paragraph 82KZM(c) of the ITAA 1936.

Amendment will: Insert a reference to paragraph 82KZM(1)(c) instead of the incorrect reference to paragraph 82KZM(c).

Item 2

Provision being amended: Item 99 of Schedule 1, which amends section 82KZM of the ITAA 1936.

Amendment will: Insert a more accurate reference to subsection 82KZM(1) instead of the reference to section 82KZM.

Item 3

Provision being amended: Item 1 of Schedule 3, which amends paragraph 3(e) of Schedule 1 to the Administrative Decisions (Judicial Review) Act 1977.

Amendment will: Insert a reference to paragraph (e) of Schedule 1 instead of the reference to paragraph 3(e).

Item 4

Provision being amended: Item 88 of Schedule 3, which amends paragraph 52(1)(ba)(ii) of the Fringe Benefits Tax Assessment Act 1986.

Amendment will: Omit the item.

Reason for amendment: Subparagraph 52(1)(ba)(ii) was amended by both items 86 and 88. The amendment made by item 88 was unnecessary.

Schedule 9 - Technical amendments of other Acts

Item 1

Provision being amended: Section 22 of the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 which specifies how the deduction for bad debts allowed under section 63 of the ITAA 1936 applies to certain financial corporations.

Amendment will:

•

Insert a reference to section 25-35 of the ITAA 1997 which is the rewrite of section 63 of the ITAA 1936. This ensures the provision applies to debts that are written off in the 1997-98 and later income years.

•

Extend the provision to take account of a change made by the ITAA 1997, which allows a deduction for a bad debt that has been bought by the transferring corporation in the ordinary course of its business of lending money.

Item 2

Application: : The amendment made by Schedule 9 applies to assessments for the 1997-98 and later income years.

Schedule 11 - Amendments to improve further the readability of the Income Tax Assessment Act 1997

Items 1 to 8, 14 and 18 to 25

Provision being amended: Sections 36-10, 36-20, 70-30, 165-75, 165-90, 166-10, 166-30 and, 166-145.

Amendments will:

•

Insert asterisks to identify that particular terms are defined.

•

Remove asterisks which incorrectly identify something as a defined term or which have already been identified in the provision as defined terms.

Items 9 to 13, 15 to 17, 26, 27 and 28

Provision being amended: Various subsections of sections 165-80, 165-85 and 165-90 and section 995-1. Sections 165-80 and 165-85 explain how to calculate a company's share of a partnership's notional loss or notional net income for an income year in which the company has failed the continuity of ownership and same business test of the carry forward loss provisions. Section 165-90 provides that certain full year deductions of a partnership in which a company is a partner are taken to be full year deductions of the company. Section 995-1 is the dictionary of defined terms for the ITAA 1997.

Amendments will:

•

Ensure that subsections 165-80(2) and 165-85(2) make clear that the terms notional loss and notional net income are being defined by those subsections.

•

Ensure that subsections 165-80(3), 165-80(4), 165-85(3), 165-90(3), 165-90(4) and 165-90(5) show that the term company's share is defined.

•

Insert in the dictionary definitions of notional loss for a partnership and notional net income for a partnership.

•

Insert in the dictionary a definition of company's share of a partnership's notional loss or notional net income and of a partnership's full year deductions.

Items 29 to 52

Provision being amended: Various guide sections.

Amendment will: Remove asterisks from defined terms that appear in the guides included in the ITAA 1997.

Reason for amendment: Subsection 2-15(2) provides that defined terms are not identified with an asterisk when used in non-operative material.

Items 53 to 59

Provision being amended: Various sections which are not operative provisions.

Amendment will: Remove asterisks from defined terms that appear in the non-operative material included in the ITAA 1997.

Reason for amendment: Subsection 2-15(2) indicates that defined terms are not identified with an asterisk when used in non-operative material.

Items 60 to 120

Provision being amended: Various sections.

Amendment will: Insert a link note to indicate when guides end.

Reason for amendment: To make clear where guides end and operative provisions start.

Items 121 and 122

Provision being amended: Subsection 950-150(1), which defines the term guide and subsection 995-1(1), which contains a series of defined terms including the term link note.

Amendment will: Substitute new definitions of guide and link note to further assist readers in delineating between guides and operatives rules.

Item 123

Application: : The amendments made by Schedule 11 apply to assessments for the 1997-98 and later income years.

Chapter 6 - Tax Law Improvement Project - update amendments

Overview

6.1 The amendments in Schedule 10 of the Bill make miscellaneous amendments to the:

•

Income Tax Assessment Act 1997;

•

Income Tax Assessment Act 1936;

•

Airports (Transitional) Act 1996;

•

Civil Aviation Legislation Amendment Act 1995; and

•

Federal Airports Corporation Act 1986.

6.2 They are necessary to ensure that:

•

the rewrite of the income tax law reflects more recent legislation; and

•

conversely, recent legislation reflects the rewrite of relevant parts of the income tax law.

Summary of the amendments

Purpose of the amendments

6.3 The amendments in Schedule 10 will ensure both that the rewrite of the income tax laws reflects recent legislation and that recent legislation reflects the tax law improvement rewrites.

Date of effect

6.4 Generally, Schedule 10 will apply to assessments for the 1997-98 and later income years. However, some items do have a different date of effect and these are specifically identified below.

Background to the legislation

6.5 The Parliament has enacted the first two instalments of the rewrite of the Income Tax Assessment Act 1936 (referred to as the ITAA 1936 throughout this chapter). The first instalment comprises three Acts:

•

the Income Tax Assesment Act 1997;

•

the Income Tax (Transitional Provisions) Act 1997; and

•

the Income Tax (Consequential Amendments) Act 1997.

They received Royal Assent on 18 April 1997 and have effect for the 1997-98 income year.

6.6 The Income Tax Assesment Act 1997 (referred to as the ITAA 1997 throughout this chapter) contains a rewrite of the core provisions of the income tax law including the general income and deduction provisions and of the deductions for capital works, carry forward losses and mining and quarrying.

6.7 The second instalment is the Tax Law Improvement Act 1997 which received Royal Assent on 8 July 1997. That Act amends the ITAA 1997 by inserting the rewritten assessable income, exempt income and trading stock provisions as well as some allowable deduction provisions including gifts, entertainment, depreciation and primary production. Those provisions also take effect for the 1997-98 income year.

Explanation of the amendments

Part 1 - Amendment of the Income Tax Assessment Act 1997

Items 1 to 5

Provision being amended: Section 10-5, which lists rules that expressly include amounts in assessable income.

Amendments will:

•

Insert a cross-reference to tax exempt entities under the listings for balancing adjustment and trading stock [items 1 and 5] ;

•

insert a reference, under the listing shares, to a profit on disposal of shares in a small-medium enterprise - sections 128TG to 128TL of the ITAA 1936 [item 2] ;

•

insert a new listing, small-medium enterprises (SMEs), with a cross-reference to shares [item 3] ;

•

insert a new listing, tax exempt entities, with a reference to the treatment of income and gains when those entities become taxable - Schedule 2D of the ITAA 1936 [item 4] .

Reasons for amendments:

•

Items 1, 4 and 5 are necessary because Taxation Laws Amendment Act (No 3) 1996 inserted new Schedule 2D into the ITAA 1936. It deals with transitional issues that arise when a tax exempt entity becomes taxable.

•

Items 2 and 3 are necessary because Taxation Laws Amendment Act (No 3) 1996 inserted new Division 11B of Part III into the ITAA 1936. It changes the tax treatment of some equity investments in small and medium enterprises.

Item 6

Provision being amended: Section 11-5, which lists entities that are exempt from tax regardless of the nature of their income.

Amendment will: Insert a note before the list, referring readers to Schedule 2D of the ITAA 1936 which deals with tax exempt entities that cease to be exempt.

Reason for amendment: Taxation Laws Amendment Act (No 3) 1996 inserted new Schedule 2D into the ITAA 1936. It deals with transitional issues that arise when a tax exempt entity becomes taxable.

Items 7 to 9

Provision being amended: Section 12-5, which lists rules about specific kinds of deductions.

Amendments will:

•

Insert a reference, under the listing shares, to a loss on disposal of shares in a small-medium enterprise - sections 128TG to 128TL of the ITAA 1936 [item 7] .

•

Insert a new listing, small-medium enterprises (SMEs), with a cross-reference to shares [item 8] .

•

Insert a new listing, tax exempt entities, with a reference to the treatment of losses and outgoing when those entities become taxable - Schedule 2D of the ITAA 1936 [item 9] .

Reasons for amendments:

•

Items 7 and 8 are necessary because Taxation Laws Amendment Act (No 3) 1996 inserted new Division 11B of Part III into the ITAA 1936. It changes the tax treatment of some equity investments in small and medium enterprises.

•

Item 9 is necessary because Taxation Laws Amendment Act (No 3) 1996 inserted new Schedule 2D into the ITAA 1936. It deals with transitional issues that arise when a tax exempt entity becomes taxable.

Items 10 and 11

Provision being amended: Section 13-1, which lists all the rules that allow a tax offset.

Amendments will:

•

Insert references, under the listing low income earner, to:

-

aged persons generally - section 160AAAA of the ITAA 1936; and

-

aged beneficiaries of a trust estate, where the trustee is liable to be assessed on the beneficiary's share of net income of that trust estate - section 160AAAB of the ITAA 1936 [item 10] .

•

Insert a cross-reference to low income earner under the listing trustee [item 11] .

Reason for amendments: These amendments are necessary because Taxation Laws Amendment Act (No 3) 1996 inserted sections 160AAAA and 160AAAB into the ITAA 1936. They allow aged low income earners a tax offset.

Item 12

Provision being amended: Item 9 of the table in section 42-65. The table is used to determine the depreciable cost of plant. Item 9 provides rules for plant for which deductions were previously claimed under the research and development provisions.

Amendments will: Add a reference to subsection 73B(21A) of the ITAA 1936 to cover pilot plant for which deductions were previously claimed under the research and development provisions.

Reason for amendments: Taxation Laws Amendment Act (No.3) 1996 inserted subsection 73B(21A) to allow a depreciation deduction to be claimed for pilot plant that was previously used exclusively for research and development activities. That subsection contains rules as to the cost on which the depreciation deduction is based. Item 9 of the table in section 42-65 therefore needs to refer readers of depreciation provisions to those rules.

Items 13 and 14

Provision being amended: Sections 42-65 and 42-205, which contain the depreciation cost and termination value tables.

Amendments will: Insert new items into the cost and termination value tables to set out rules for determinations made by the Minister for Finance under the Airports (Transitional) Act 1996.

Reason for amendments: The Airports (Transitional) Act 1996 puts in place a framework to give effect to the Government's decision to lease Federal airports to private companies. The Act gives the Minister for Finance power to determine:

•

the depreciable cost of assets acquired by a private company in taking a lease of a Federal airport; and

•

the consideration receivable by the Federal Airports Corporation for the transfer of assets as part of the scheme to lease the airports to private companies.

The cost and termination value tables of sections 42-65 and 42-205 have been designed as complete codes. Therefore, the tables will be amended to reflect the Minister's power to make determinations under the Airports (Transitional) Act 1996. Two entries will be inserted in each table. The first covers the situation where the Minister's determination covers only one item of plant. The cost or termination value determined by the Minister will apply. The second covers the situation where the Minister's determination covers more than one item of plant. The cost or termination value for a particular item of plant covered by the determination will be so much of the Minister's determination as is reasonably attributable to the plant.

Items 15, 16 and 18

Provision being amended:

•

Sections 166-265 and 166-270 which broadly provide that a listed public company does not have to trace through any complying superannuation fund, complying approved deposit fund or special company that is interposed between it and the persons who are the ultimate beneficial owners of its shares.

•

Section 995-1, which contains a Dictionary of all definitions used in the ITAA 1997.

Amendments will:

•

Expand the concession granted in respect of complying superannuation funds to 'foreign superannuation funds' within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936. [Items 15 and 16]

•

Insert the definition of foreign superannuation fund in section 995-1. [Item 18]

Reason for amendments:

•

Complying superannuation funds are funds that satisfy strict supervisory arrangements aimed at ensuring that the funds are maintained solely for superannuation purposes rather than for non-superannuation purposes.

•

Foreign superannuation funds do not fall within the actual definition of 'complying superannuation fund'. As these funds are generally subject to strict supervisory arrangements similar to those applying to complying superannuation funds, the concessional tracing rules in Subdivision 166-G can be extended to 'foreign superannuation funds'.

Item 17

Provision being amended: Section 960-220, which defines the meaning of trading when there is trading in shares in a company or in units in a trust.

Amendment will: Make it clear that trading only occurs where an issue, redemption, transfer, or another dealing in shares or units changes the proportions in which shareholders or unitholders hold ownership rights in the company or trust.

Reason for amendment: Under Division 166, a listed public company is required to test for changes in the beneficial ownership of shares whenever there is abnormal trading in those shares. This is because abnormal trading can be indicative of a change in the majority ownership of the company. The concept of abnormal trading relies on the meaning of trading. Beneficial ownership does not change where there is no change in the proportion in which shareholders hold shares. Therefore, trading should only be relevant where there is a change in the proportion in which shareholders hold shares.

Item 19

Application: : The amendments made by Part 1 of Schedule 10 apply to assessments for the 1997-98 and later income years.

Part 2 - Amendment of the Income Tax Assessment Act 1936

Items 20, 21 and 22

Provision being amended: Subsection 73B(4J), which provides that the effective life of pilot plant for the purposes of the research and development deduction is the same as its effective life under the depreciation provisions.

Amendment will: Replace the reference to effective life within the meaning of section 54A of the ITAA 1936 with a reference to effective life within the meaning of Subdivision 42-C of the ITAA 1997.

Reasons for amendments: Taxation Laws Amendment Act (No.3) 1996 inserted various new provisions into section 73B to allow deductions for certain pilot plant based on the effective life of the pilot plant. The amendment is necessary because the provision by which the effective life of the pilot plant is determined have been rewritten.

Items 23 to 30

Provision being amended: Sections 128TG, 128TH and 128TI, which form part of Division 11B of the ITAA 1936, dealing with certain equity investments in small-medium enterprises.

Amendments will: Insert references to sections 6-5 and 8-1 of the ITAA 1997 instead of references to sections 25 and 51 of the ITAA 1936.

Reason for amendments: Items 23 to 30 are necessary because Taxation Laws Amendment Act (No 3) 1996 inserted new Division 11B of Part III (which includes sections 128TG, 128TH and 128TI) into the ITAA 1936. It changes the tax treatment of some equity investments in small and medium enterprises. Those sections contain references to sections 25 and 51 of the ITAA 1936 which have been rewritten as sections 6-5 and 8-1 of the ITAA 1997.

Item 31

Provision being amended: Section 128TI, which outlines the consequences of Division 11B applying to the disposal of an investment in a small-medium enterprise.

Amendment will: Clarify that the reference to Part IIIA in the note is a reference to provisions in the ITAA 1936 by inserting the words of this Act'.

Reason for amendment: The amendments described in items 23 to 30 above insert references to provisions of the ITAA 1997 into sections 128TG to 128TI. As a result, the note to section 128TI will refer to sections of both the ITAA 1997 and the ITAA 1936. The words of this Act' are being added to the reference to Part IIIA' in the note to avoid confusion.

Item 32

Provision being amended: Subsection 245-230(4) of Schedule 2C, which includes, among other things, a definition of deductible revenue losses.

Amendment will:

•

Substitute a new definition of deductible revenue losses. The new definition will exclude a tax loss transferred to the company by another company, where the year in which the loss was incurred is the same year as the loss was transferred.

•

Insert a note at the end of the new definition.

Reasons for amendment: The amendment is necessary because Taxation Laws Amendment Act (No.1) 1997 inserted a definition of deductible revenue losses as subsection 245-230(4). That definition refers to paragraph 80G(6)(f) of the ITAA 1936 which has been rewritten in Subdivision 170-A of the ITAA 1997. This amendment will ensure that the definition contains appropriate references to the ITAA 1997. Further, the note, which is also being inserted by this amendment, explains that Subdivision 170-A provides for the transfer of tax losses within wholly-owned company groups.

Items 33, 34, 35, 36, 37, 41, 42, 43, and 49

Provision being amended: Various sections of Schedule 2D, which is about the income tax treatment of a tax exempt entity that becomes taxable.

Amendments will: Ensure that Schedule 2D contains appropriate references to those provisions of the ITAA 1936 which have been rewritten in the ITAA 1997. Different mechanisms are to be used. In some cases, the ITAA 1997 references will be additional to ITAA 1936. In other cases, the ITAA 1936 references will be substituted.

Reason for amendments: The amendments are necessary because Taxation Laws Amendment Act (No.3) 1996 inserted new Schedule 2D into the ITAA 1936. Schedule 2D refers to provisions of the ITAA 1936 (such as sections 25 and 51 and Division 10 of Part III, amongst others) which have been rewritten in the ITAA 1997. These amendments will ensure that the Schedule contains appropriate references to the ITAA 1997.

Items 38, 39 and 40

Provision being amended: Section 57-30, which deals with the liabilities of a tax exempt entity that becomes taxable. It deems those liabilities to have ceased and to be re-assumed at the time when the entity becomes taxable. Subsection (3) provides particular rules for foreign currency exchange liabilities covered by Division 3B of Part III.

Amendments will:

•

Omit a reference in 57-30(3) to Division 3B of Part III and substitute a reference to a provision listed in subsection (4) [item 38] .

•

Insert a new subsection (4) [item 40] .

•

Make an amendment consequential upon item 40 to subsection (3) [item 39] .

Reasons for amendments: One aspect of Division 3B of Part III has been rewritten in Subdivision 20-A. The amendment will provide a reference to the relevant provision of the ITAA 1997 as well as Division 3B of Part III.

Items 44 and 45

Provision being amended: Section 57-75 of Schedule 2D, which deals with how to apply the tax loss provisions to a tax exempt entity that has become taxable.

Amendments will:

•

Substitute references to the loss provisions of the ITAA 1997 for references to the loss provisions of the ITAA 1936. [Item 44]

•

Substitute, at the start of paragraph (b), the words the transition taxpayer's deductions are taken into account only so far as they are in respect of... for the words allowable deductions are only taken into account as non-loss deductions of the transition taxpayer to the extent that they are in respect of... [item 45] .

Reasons for amendments: The amendments are necessary because Taxation Laws Amendment Act (No.3) 1996 inserted new Schedule 2D into the ITAA 1936. Section 57-75 refers to sections 79E, 79F, 80, 80AAA and 80AA of the ITAA 1936 which have been rewritten in the ITAA 1997. The change in wording in paragraph (b) reflects the language that is used in the ITAA 1997. In particular, the terms allowable deduction' and non-loss deductions' will not be used in the new law.

Item 46

Provision being amended: Section 57-87 of Schedule 2D, which lists modified deduction rules for the purposes of Subdivision 57-J of that Schedule. Subdivision 57-J sets out how certain deductions operate where a tax exempt entity becomes taxable.

Amendment will: Substitute a new section 57-85 for the existing provision. The new section will change the definition of modified deduction rules to substitute references to the ITAA 1997 where the provisions of the ITAA 1936 to which it now refers have been rewritten. It also introduces the new concept of corresponding deduction provision for those provisions of the ITAA 1936 that have been rewritten.

Reason for amendment: The amendment is necessary because Taxation Laws Amendment Act (No.3) 1996 inserted new Schedule 2D (including section 57-85) into the ITAA 1936. Section 57-85 defines modified deduction rules by reference to provisions of the ITAA 1936 which have been rewritten in the ITAA 1997.

The two separate concepts are needed because it will be necessary for the entities affected by Schedule 2D to apply the provisions of both the ITAA 1936 and the ITAA 1997 to work out the deductions they are entitled to claim.

Items 47 and 48

Provision being amended: Sections 57-90 and 57-100 of Schedule 2D which set out how certain deductions operate where a tax exempt entity becomes taxable.

Amendments will: Make amendments consequential upon item 46 to insert references to the corresponding deduction provision where a modified deduction rule is referred to in these sections.

Reason for amendments: The concept of a corresponding deduction provision was introduced to Subdivision 57-J by the amendment in item 46. Where there is a reference to a modified deduction rule applying before the 1997-98 income year, a corresponding deduction provision (where applicable) would have applied. In these cases, both the modified deduction rule and the corresponding deduction provision need to be referred to.

Items 50 and 51

Provision being amended: Section 57-110 of Schedule 2D, which contains rules on how to apply balancing adjustment provisions to tax exempt entities that become taxable.

Amendments will:

•

Substitute a new subsection 57-110(2) to replace both subsections 57-110(2) and (3) [item 51] . The new subsection (2) will change the definition of balancing adjustment provision to substitute references to the ITAA 1997 where the provisions of the ITAA 1936 to which it now refers have been rewritten. The new subsection (2) also incorporates the definition of deduction rule that is currently stated at subsection (3) and inserts references to the ITAA 1997 where the provisions of the ITAA 1936 to which it now refers have been rewritten.

•

Substitute a reference to subsection (2) for a reference to subsection (3) in the definition of actual deductions at subsection 57-110(1) [item 50] .

Reasons for amendments:

•

Item 51: Subsection (2) of the existing law is a table listing all of the relevant balancing adjustment provisions and subsection (3) lists the deduction rules to which those balancing adjustment provisions relate. The new table in subsection (2) will consolidate subsections (2) and (3) by adding a column for the deduction rules that are currently listed in subsection (3). In addition, the new table:

-

refers to balancing adjustment provisions that have been rewritten in the ITAA 1997 instead of the ITAA 1936 balancing adjustment provisions; and

-

includes references to rewritten deduction rules in addition to their ITAA 1936 counterparts. Dual references are required here because the deductions to which the balancing adjustment relates can be allowed or allowable in an earlier income year than 1997-98.

•

Item 50: This amendment is consequential on the amendment made by item 51. Under the item 51 amendment, subsection 57-110(3) is consolidated within the new subsection 57-110(2) table.

Items 52 to 56

Provision being amended: Section 57-115, which contains rules as to how to apply the trading stock rules of Subdivision B of Division 2 of Part III of the ITAA 1936.

Amendments will:

•

Substitute references to sections 28 and 29 of the ITAA 1936 with references to their corresponding rewritten provisions - sections 70-35 and 70-40 of the ITAA 1997.

•

Make minor consequential changes to the terminology used to reflect the differences in language between the ITAA 1936 and ITAA 1997.

Reasons for amendments: The amendments are necessary because Taxation Laws Amendment Act (No.3) 1996 inserted new Schedule 2D into the ITAA 1936. Schedule 2D refers to provisions of the ITAA 1936 (including sections 28 and 29) which have been rewritten in the ITAA 1997. These amendments will ensure that the Schedule contains appropriate references to the ITAA 1997.

Item 57

Application: : The amendments made by Part 2 of Schedule 9, other than items 52 to 56 apply to assessments for the 1997-98 and later income years. Items 52 to 56 only apply to an income year that is the transition year for a particular entity, that is, the year in which the entity becomes taxable. Those items amend section 57-115 which applies in a transition year.

Part 3 - Amendments of the Airports (Transitional) Act 1996

Items 58 to 63

Provision being amended: Part 8 of the Airports (Transitional) Act 1996. The Act puts in place a framework to give effect to the government's decision to lease Federal airports to private companies. The amendments relate to the special tax rules dealing with the depreciation of airport assets.

Amendments will:

•

Insert new sections 49A, 50A and 51A to mirror existing provisions dealing with the different ways plant (including fixtures) can be acquired and held as a result of a new airport lease.

•

Insert new section 52A to mirror an existing provision allowing the Minister for Finance to make a determination as to the consideration received by the Federal Airports Corporation as a result of a new airport lease.

•

Include a reference to the ITAA 1997 in section 55 which allows regulations to be made to the taxation laws in relation to new airport leases.

•

Insert new section 48A which contains definitions which are relevant to new sections 49A, 50A, 51A and 52A.

Reason for amendments: The special depreciation rules in sections 49, 50 and 51 of the Airports (Transitional) Act ensure, amongst other things, that:

•

new airport lessees are entitled to depreciate any fixtures that their previous owner, the Federal Airports Corporation, was entitled to depreciate;

•

the Minister for Finance can determine the depreciable cost for those fixtures and any other property that the new airport lessee acquires from the Commonwealth or the Federal Airports Corporation; and

•

existing airport tenants that currently depreciate fixtures as Crown lessees can continue to do so after the issuing of new airport leases.

The amendments will ensure that these special rules continue to apply to new airport leases that are issued after the commencement of the rewritten depreciation provisions contained in Division 42 of the ITAA 1997.

The provisions which state that assets acquired by the new airport lessee from the Commonwealth are instead taken to have been acquired from the FAC for the purposes of section 60 of the ITAA 1936 will not be repeated in the amendments because they are not necessary.

The new section 52A will allow the Minister for Finance to determine the consideration received by the FAC for the purposes of the ITAA 1997. A provision has also been inserted to ensure that any determination made by the Minister before the commencement of this amendment will also have effect for the ITAA 1997.

The amendment to section 55 will allow regulations to be made to the ITAA 1997 in relation to matters arising out of issuing new airport leases.

Item 64

Application: : The amendments made by Part 3 of Schedule 10 apply to assessments for the 1997-98 and later income years.

Part 4 - Amendment of the Civil Aviation Legislation Amendment Act 1997

Item 65

Provision being amended: Subsection 19(1) which treats Airservices Australia as the owner of any eligible building (as defined) for the purposes of applying the depreciation and building write-off provisions of the ITAA 1936.

Amendment will: Substitute references to section 54, or Division 10D of Part III of the ITAA 1936 with references to Divisions 42 and 43 of the ITAA 1997.

Reason for amendment: To ensure that Airservices Australia continues to be entitled to claim the depreciation and capital works deductions under the ITAA 1997.

Item 66

Application: : The amendments made by Part 4 of Schedule 10 apply to assessments for the 1997-98 and later income years.

Part 5 - Amendment of the Federal Airports Corporation Act 1986

Item 67

Provision being amended: Subsections 57E(1) and (2) which ensure that the Federal Airports Corporation is taken to be the owner of:

•

land which is vested in the Corporation; and

•

buildings and any other fixtures on land which is leased by the Corporation

for the purposes of the ITAA 1936.

Amendment will: Insert references to the ITAA 1997 after the references to the ITAA 1936.

Reason for amendment: To ensure the Federal Airports Corporation continues to be entitled to claim the depreciation and capital works deductions under the ITAA 1997.

Item 68

Application: : The amendments made by Part 5 of Schedule 10 apply to assessments for the 1997-98 and later income years.