House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Paul Keating. M.P.)

General Outline

This Bill will amend the income tax law to:

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allow a resident company to transfer the right to an allowable deduction for a loss incurred in the 1984-85 income year, or a subsequent income year, to another resident company, where there is 100 per cent common ownership;

•

increase, with effect from 22 August 1984, the write-off rate in respect of short-term traveller accommodation buildings and non-residential income-producing buildings from 2 1/2 per cent to 4 per cent per annum;

•

extend by one year the date by which eligible plant must be first used or installed to qualify for the investment allowance;

•

allow, with effect from 22 August 1984, mineral exploration and prospecting expenditure to be deducted from income derived from any source instead of only from income derived from a mining business;

•

increase the basic zone and "overseas forces" rebates by 25 per cent with effect from 1 November 1984;

•

change, with effect from 1 July 1984, the boundaries of the special zone areas in line with 1981 census data where this will advantage taxpayers;

•

extend, with effect from 1 July 1984, eligibility for the dependent spouse rebate to a taxpayer with a de facto spouse on the same basis as the rebate is presently available to a legally married taxpayer and, consequential on that:

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deny the housekeeper rebate for a de facto spouse;

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provide that a taxpayer with a de facto spouse is not entitled to a daughter-housekeeper rebate;

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ensure that a taxpayer cannot obtain more than one dependent spouse rebate; and

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extend entitlement to all concessional (including zone and "overseas forces") rebates of tax to recognise de facto spouses;

•

introduce rebates of tax of $75 per annum for a married (including de facto married) taxpayer and $50 per annum for a single taxpayer, both rebates shading-out above specified income levels, for taxpayers wholly or mainly dependent on social security unemployment, sickness or special benefits;

•

increase the income level at which the existing pensioner rebate begins to shade-out to reflect the effect of the proposed personal income tax rate scale that is to apply from 1 November 1984;

•

provide the method of calculating provisional tax for the 1984-85 income year, and ensure that deductions for subscriptions to shares in licensed management and investment companies in one year are not taken into account in calculating provisional tax for the succeeding year;

•

extend by two years, to 30 June 1986, the scheduled date of termination of the immediate deduction (under section 75C) for expenditure incurred on fencing to help eradicate bovine brucellosis and tuberculosis in live stock;

•

grant income tax deductions for gifts of the value of $2 or more:

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made after 20 March 1984 to the Work Skill Australia Foundation Incorporated;

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made after 21 August 1984 to The Academy of the Social Sciences in Australia Incorporated;

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of property, listed in the Register of the National Estate, made after 21 August 1984 to National Trust bodies;

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of trading stock made after 21 August 1984 to an eligible fund, authority or institution where the value of the gift has been included (under sub-section 36(1)) in the taxpayer's assessable income;

•

alter and clarify, in the provisions authorising special concessions for eligible Australian trading ships, the basis for determining the maximum complement of officers and crew members allowable for an eligible ship; and

•

ensure neutral tax consequences of a substitution on or after 8 August 1984 of existing semi-government and local government securities by securities issued on a matched term basis by a State central borrowing authority (proposal as it applies to semi-government securities announced on 7 August 1984).

Financial Impact

The estimated revenue effects in 1984-85 and in a full year of the major measures outlined above and contained in this Bill are as follows:

NOTES:

(a)

Estimated effect in 1985-86; the amount will reduce year by year to an eventual full year estimate of around $50m.

(b)

Estimated effect in 1985-86; the amount will grow year by year over a number of decades.

(c)

This measure will have no cost in the current financial year, but will cost altogether around $70m - $100m, of which 40% is expected to be met in 1987- 88.

(d)

Estimate is for full year effect in 1986-87; revenue reduction in 1985-86 is estimated at $8m.

(e)

$8m in 1985-86. This is higher than in a full year, given that most eligible taxpayers will get the benefit of the change from 1 July to 1 November 1984 "on assessment" rather than through the PAYE system.

(f)

$0.5m in each of 1985-86 and 1986-87.

(g)

The purpose of this measure is to guard against revenue losses which cannot be reliably estimated.

Main Features

The main features of this Bill are as follows:

Transfer of losses within company groups (Clause 13)

The Bill will allow groups of Australian companies with 100 per cent common ownership to offset losses incurred in 1984-85 and later income years by one resident company within the group against the taxable income of other resident companies in the group. The losses transferable by a company will be calculated on the same basis as losses eligible for carry-forward under the present income tax provisions.

The loss deduction will be transferable only where there is 100 per cent common ownership between the company which incurs the loss and the company to which the right to an allowable deduction for the loss is to be transferred, during the income year in which the loss is incurred, the year in which it is to be allowable as a deduction to the transferee company and in any intervening year.

Under the present income tax law a loss arises, broadly, where there is an excess of allowable deductions (other than carry-forward losses) over all income, including such items as net exempt income and income subject to the inter-company dividend rebate - the section 46 rebate. A loss incurred in a prior year is required to be first offset against any net exempt income derived in a later year before it is deductible from the assessable income of that year. There will be no change in these basic rules. In other words, a loss incurred by a company will be calculated exactly as it is now, and will be deductible in the hands of the transferee company as if it had itself incurred the loss in a prior year.

Where a company with undeducted prior year losses derives assessable income during a year of income, that company is to be required to offset those losses against its own income before any balance may be transferred in that year to another company. Moreover, the amount of loss which may be transferred will be limited to an amount sufficient to extinguish its own taxable income of the year.

It is also proposed that where the current year loss provisions - an anti-avoidance measure - apply for the purpose of determining the loss incurred in a year of income by a company, any loss incurred in that year will not be transferable in that year. Further, a loss incurred in a prior year will only be available for transfer in a year if the loss would otherwise have been deductible from the assessable income of the transferor company of the relevant year (that is, if it had derived sufficient assessable income in that year) following any application of the anti-avoidance prior year loss provisions. The transferee company will also be required to satisfy the normal criteria for deductions under the prior year loss provisions.

Subject to these basic rules, and to the further rule that losses be transferred in the order in which they are incurred, a loss deduction will be transferable to another company in the year in which it is incurred or, where it is a film loss or a loss incurred other than from carrying on a business of primary production, in any of the next seven years. Reflecting the provisions of the existing law, losses incurred in carrying on a business of primary production will be available for transfer in any future year.

Public officers of the respective companies will be required to give written notice to the Commissioner of Taxation specifying details of the loss or losses which are to be transferred.

Finally, a deduction will not be allowable for any payment made by the transferee company to the transferor as consideration for the benefit it obtains from the right to deduct a loss from its assessable income. In the normal course such payments will not be assessable as income in the hands of the transferor company either.

Deductions for capital expenditure on traveller accommodation and certain income-producing buildings (Clauses 17 and 18)

These clauses will increase the rate of write-off available in respect of short-term traveller accommodation and non-residential income-producing buildings. At present, the deduction allowable is 2 1/2 per cent per annum of the construction cost over a period of 40 years.

The proposed amendments will allow an annual deduction of 4 per cent of the construction cost of eligible buildings over a 25 year period and will apply to those buildings (including extensions, etc.) that commenced to be constructed after 21 August 1984.

Investment Allowance (Clause 14)

It is proposed to extend by one year the date by which eligible property ordered or constructed prior to 1 July 1985 is required to be first used, or installed ready for use, to qualify for the investment allowance deduction. In order to so qualify, eligible property that is acquired under a contract entered into before 1 July 1985, or which a taxpayer commences to construct before that date, will be required to be first used, or installed ready for use and held in reserve, before 1 July 1987.

Deductions for expenditure on mineral exploration and prospecting (Clauses 15 and 16)

The Bill will amend the deduction arrangements for expenditure incurred on exploration or prospecting on a mining tenement in Australia for minerals other than gold or petroleum. Under the existing law, such expenditure is only deductible where the taxpayer carries on a mining business, and the amount of the deduction allowable in a year of income cannot exceed the taxpayer's net assessable income from the mining business and associated activities.

The proposed amendments will permit expenditure on exploration or prospecting incurred after 21 August 1984 to be deducted from the taxpayer's net assessable income, regardless of the source of that income. However, deductions will only be allowable if the Commissioner is satisfied that the taxpayer carries on, or proposes to carry on, a business of mining for minerals other than gold or petroleum or that the expenditure was necessarily incurred in carrying on a business of exploration or prospecting in Australia in order to discover minerals.

Zone rebates (Clauses 4, 11 and 12)

The Bill will implement the Budget proposals to increase the basic zone and "overseas forces" rebates by 25 per cent from 1 November 1984, and to change, with effect from 1 July 1984, the special zone area boundaries to adopt, on a no detriment basis, 1981 census data.

The proposed amendments will increase the basic fixed component of the rebate available to eligible taxpayers in Zone A, Zone B and the special areas in Zone A and Zone B. For qualifying taxpayers, the rebate for Zone A will be increased by $54 to $270, for Zone B by $9 to $45 and for the special areas by $188 to $938. The full amount of the increased rebates will be available for the 1985-86 and subsequent years of income. Reflecting the 1 November 1984 commencement date announced in the Budget for these increases, the amounts of the basic rebates for the 1984-85 income year will be $252 for Zone A, $42 for Zone B and $875 for the special areas in Zones A and B.

In line with the increase in the basic component of the Zone A rebate described above, the Bill also provides for a similar increase in the basic component of the comparable rebates available to certain persons serving overseas with a United Nations armed force, and to Defence Force members serving in certain overseas localities.

The Bill will also implement the Budget proposal to extend, with effect from 1 July 1984, eligibility for the special basic zone rebate to taxpayers residing in or near (or spending the qualifying period in or near) urban centres in Zone A or Zone B the population of which, on the basis of 1981 census data, has fallen below 2,500 since 1976. At the same time it will ensure that taxpayers in or near urban centres where populations have increased marginally beyond 2,500 since 1976 are not denied that rebate if they are at present eligible for the rebate based on 1976 census data.

Under existing arrangements, a special basic rebate of $750 (to be increased by this Bill to $875 in 1984-85 and to $938 in subsequent years), in lieu of the ordinary basic rebate (now $216 for Zone A and $36 for Zone B), is available to taxpayers residing or spending the required period at especially isolated places in either zone which are in excess of 250 kilometres by the shortest practicable surface route from the nearest urban centre with a population of 2,500 or more. Under the present law, the population of an urban centre is based on 1976 census data.

Rebates for dependants (Clauses 19 to 22)

The Bill will implement the Budget proposal to extend, with effect from 1 July 1984, entitlement to the income tax rebate for a dependent spouse to taxpayers living in a de facto relationship. Entitlement to the rebate will be determined on the same basis as if the taxpayer and his or her de facto spouse were legally married, and will be subject to the separate net income test. For these purposes, the Bill proposes that a de facto relationship will be one where a man and a woman live together as husband and wife on a bona fide domestic basis although not legally married to each other.

In its practical effect, this change will not generally alter the overall situation of a taxpayer with a de facto spouse in respect of whom a housekeeper rebate is allowable under the present law, unless that de facto spouse has separate net income which will in future be taken into account for the purpose of determining entitlement to the spouse rebate. It will mean, however, that a taxpayer who is now not entitled to a housekeeper rebate in respect of a de facto spouse - because the taxpayer has no dependent children or student children under 16 years of age - will, again subject to the separate net income test, become entitled to a spouse rebate for his or her de facto spouse.

Recognition of de facto relationships in determining eligibility for concessional rebates is also to be reflected in the zone rebates available to residents of remote areas and taxpayers serving with a United Nations force or an Australian defence force in a designated overseas area.

As a consequence of the recognition of a de facto spouse for the purposes of determining a taxpayer's eligibility for the dependent spouse rebate, the Bill also proposes that a taxpayer who contributes to the maintenance of the parent of his or her de facto spouse is also to be eligible for the dependent parent rebate. In addition, and subject to the threshold of $2000 which applies, a taxpayer with a de facto spouse will be eligible for the general concessional expenditure rebate for medical, dental, optical etc. expenses, funeral expenses, life insurance premiums and education expenses (where the spouse is under 25 and a dependant) paid by the taxpayer in respect of that spouse.

These measures are to operate with effect from 1 July 1984.

Rebate in respect of certain pensions, etc. (Clause 23)

The Bill will give effect to the Budget proposal to increase the income level at which the existing rebate of tax of $250 for taxpayers in receipt of Australian social security or repatriation pensions that are taxable in Australia begins to shade-out. The increase - from $5,429 to $5,533 in 1984-85 and to $5,595 in subsequent years - reflects the effect of the proposed income tax rate scale that is to apply from 1 November 1984. The maximum rebate will continue to shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of the abovementioned new income levels. No rebate will thus be available at taxable incomes in excess of $7,532 in 1984-85 and $7,594 in subsequent years.

A further Budget proposal to which the Bill will give effect is the introduction of rebates of tax for taxpayers in receipt of social security unemployment, sickness or special benefits. For married (including de facto married) taxpayers, the maximum rebate of $75 will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $7,989. For single taxpayers, the maximum rebate of $50 will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $4,783. No rebate will thus be available at taxable incomes in excess of $8,588 for married taxpayers and $5,182 for single taxpayers. The rebates will apply in respect of the 1984-85 and subsequent years of income.

Interpretation - Provisional tax (Clause 24)

At base, provisional tax for one income year is calculated by reference to a taxpayer's taxable income of the preceding income year. The amendments proposed by clause 24 will ensure that the benefit of a deduction allowed to a taxpayer for eligible capital subscriptions to licensed management and investment companies in an assessment in respect of a year of income will not be reflected in the calculation of provisional tax for the following year. In other words, the deduction allowable in one income year will not reduce the amount of provisional tax payable in the next year of income.

Provisional tax for 1984-85 year of income (Clause 25)

Provisional tax for the 1984-85 year of income is to be calculated, basically, by applying 1984-85 rates of tax and medicare levy to 1983-84 taxable incomes as increased by 10 per cent. Generally, to the extent that rebates and credits are allowed in 1983-84 income tax assessments, they will be taken into account in calculating the 1984-85 provisional tax.

Expenditure on fences for disease control (Clause 8)

The Bill will give effect to the Budget announcement that the provisions under which a primary producer may claim an outright deduction for certain expenditure on fences for the purpose of assisting in the control or eradication of bovine brucellosis or tuberculosis are to be extended for a further two years. Under the proposed amendments eligible expenditure incurred by a taxpayer before 1 July 1986 may now qualify for this deduction.

Gifts (Clause 9)

The Bill will extend the provisions of the income tax law which authorise deductions for gifts of the value of $2 or more made to specified funds, authorities or institutions in Australia. The amendments will give effect to proposals announced in the Budget.

The proposed amendments will authorise deductions for gifts made after 20 March 1984 to the Work Skill Australia Foundation Incorporated or made after 21 August 1984 to The Academy of the Social Sciences in Australia Incorporated.

Further amendments will remove, for two categories of gifts that are already deductible, the requirement that gifted property must have been purchased by the donor within the twelve months immediately preceding the making of the gift. These are -

•

certain gifts to National Trust bodies, where the property is listed in the Register of the National Estate kept pursuant to the Australian Heritage Commission Act 1975; and

•

gifts of trading stock to an eligible fund, authority or institution, where the value of the gift is included in the donor's assessable income.

As well, special valuation provisions will apply to these gifts.

The value of property gifted to National Trust bodies will be taken to be its value at the time the gift is made, unless the property was purchased either within the preceding twelve months or for the purpose of gifting to a National Trust body. In these cases, the value of the property will be the lesser of its cost to the donor or its value when the gift is made. The value of trading stock gifted to eligible bodies will be taken to be, in all cases, the amount included in the assessable income of the taxpayer by virtue of sub-section 36(1) of the Principal Act, i.e., the value at the time the gift is made.

Special concessions for Australian trading ships (Clause 7)

Section 57AM of the Principal Act, which authorises special depreciation allowances for eligible Australian ships, will be amended to modify the requirements imposed on the Secretary to the Department of Transport when determining the maximum complement of officers and crew that is allowable for an eligible ship.

The amendments will remove the requirement that the Secretary determine the various designations of officers and crew members in respect of each ship.

The amendments will also remove any unintended suggestion that industrial relations considerations are the dominant or overriding factor to be taken into account by the Secretary when determining the manning level for a ship. Industrial relations considerations, where relevant, are to be but one of the considerations to which the Secretary is to have regard when determining a manning level.

The amendments will apply to manning notices, or variations of manning notices, given on or after 2 July 1984.

Elimination of tax consequences of substitutions of existing semi-government and local government securities (Clause 6)

The amendments proposed by the clause will eliminate the unintended tax consequences which could arise from the substitution of new securities of a State central borrowing authority (CBA) for existing semi-government or local government securities.

Under the present law, the substitution would result in a realisation of the existing securities at their market price on the day of substitution, and an acquisition of the new securities at the same price on that day. Dealers in securities thus would be taxable on any gains and could deduct any losses on the realisation.

It is proposed to treat the new securities received as a consequence of substitution by a CBA as a continuation of the existing securities, and as having been purchased on the same day and at the same cost. The amendments will apply to substitutions occurring after 7 August 1984 - the date on which the decision to legislate in this way was announced - where the CBA securities are issued on a matched term basis, that is, where the new security has the same coupon rate, face value and maturity date as the security it replaces. Minor variations in respect of the interest payment date will not exclude the substitution from the scope of the amendments, provided the interest date for the new security is within 31 days of the date interest was payable on the existing security.

Secrecy Provisions (Clause 3)

The Bill will amend the secrecy provisions of the income tax law to extend the definition of "officer" to include a person who, although not employed by the Commonwealth, performs services for the Commonwealth. This will facilitate certain officer exchange arrangements.

A more detailed explanation of the provisions of the Bill is contained in the notes that follow.

Notes on Clauses

Clause 1: Short title, etc.

By sub-clause (1) of this clause the amending Act is to be cited as the Income Tax Assessment Amendment Act (No. 4) 1984.

Sub-clause (2) facilitates references to the Income Tax Assessment Act 1936 which, in the Bill, is referred to as the "Principal Act".

Clause 2: Commencement

But for this clause, the amending Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent. Subject to the operation of sub-clause (2), the amending Act is, by virtue of sub-clause (1), to come into operation on the date on which it receives the Royal Assent.

By sub-clause (2), the amendment proposed by clause 3, will come into operation on 1 July 1984.

Clause 3: Officers to observe secrecy

Paragraph (a) of clause 3 proposes an amendment of the secrecy provisions of the Principal Act which, generally, prohibit the disclosure by officers, except in specified circumstances, of information about the affairs of other persons that may be acquired in the course of their official duties. Proposed sub-section 16(1A) will ensure that the same rights and obligations under the secrecy provisions also apply to persons (e.g. officers of overseas governments serving in Australia under exchange arrangements) who perform duties for the Commonwealth but who are not employed or appointed by the Commonwealth and are therefore not officers within the meaning of that term in section 16.

Paragraph (b) of this clause proposes a purely technical amendment to paragraph 16(4HJ)(e) of the Principal Act to substitute the word "a" for the word "the" which is inappropriate in the context.

Clause 4: Income of certain persons serving with an armed force under the control of the United Nations

This clause, which is consequential on clause 10, proposes amendments to section 23AB of the Principal Act which authorises a special rebate of tax for residents of Australia serving overseas, other than as members of the Defence Force, with an armed force under the control of the United Nations in circumstances where their salaries, wages and allowances are paid by Australia or by the United Nations on behalf of Australia. A full rebate equal in amount to the rebate allowable under section 79A of the Principal Act to a resident of Zone A is allowable where the total period of UN service during a year is more than half the year of income, while a proportionate rebate is allowed where the period of service is not more than half the year of income. Also reflecting the relationship between the rebate under this section and the rebate under section 79A, the total period of UN service of a taxpayer in a year of income includes any period during the year of income in which the taxpayer was in a zone area and, to avoid double counting, where a taxpayer is entitled to a rebate under this section, a rebate is not allowable under section 79A.

The total rebate under section 23AB is currently made up of a basic amount of $216 and an amount equal to 50 per cent of the total dependants' rebate (if any) to which the taxpayer is entitled under certain concessional rebate provisions of Subdivision A of Division 17 of the Principal Act. To maintain its relativity with the amount of the rebate under section 79A, the basic amount of the rebate under section 23AB is, by sub-clause (1) of this clause, to be increased in line with the increase in the basic amount of the Zone A rebate under section 79A proposed by clause 10 by 25 per cent to $270.

By sub-clause (2), the amendment made by sub-clause (1) is to apply to assessments in respect of income of the 1984-85 and later years of income.

Sub-clause (3) is a transitional provision under which the amount of the basic rebate under section 23AB is to be limited to $252 in the 1984-85 income year. This amount represents the existing basic rebate of $216, as increased by $36, being two-thirds of the proposed full year increase of $54, reflecting the commencement date of 1 November 1984 announced in the Budget Speech.

Clause 5: Sale of securities purchased at a discount

Section 23J of the Principal Act exempts from income tax profits made on the sale or redemption of debt securities acquired at a discount on or before 30 June 1982, subject to certain exceptions. The exemption applies to both securities that bear interest as such and those that do not. Sub-section 23J(3) ensures the continued operation in relation to profits on securities of the specific taxing provisions in sections 26AAA and 26C and in paragraph 26(a) of the Principal Act.

Paragraph 26(a) of the Principal Act was repealed and its terms re-enacted in a new section 25A by the Income Tax Assessment Amendment Act (No. 3) 1984 which received Royal Assent on 25 June 1984.

The measures in section 25A apply to sales of property after 23 August 1983 whether the property was purchased before or after that date. Where the measures do not apply to the sale of property, but to the carrying on or carrying out of any profit-making undertaking or scheme, they apply from 25 June 1984.

By sub-clause (1) it is proposed that the reference to paragraph 26(a) in sub-section 23J(3) be replaced by a reference to section 25A.

Sub-clause (2) specifies that the amendment proposed in sub-clause (1) apply to the sale or redemption of eligible securities after 23 August 1983 and sub-clause (3) specifies that insofar as the amendment relates to the carrying on or carrying out of any profit-making undertaking or scheme it applies on or after 25 June 1984.

Clause 6: Substitution of certain securities

This clause will amend the Principal Act to insert a new section - section 23K - to remove immediate and unintended income tax effects that could otherwise result from the substitution of securities of semi-government and local government bodies by new securities issued by a State central borrowing authority (CBA). The new section will apply to substitutions made on or after 8 August 1984.

The substitution of a security by a CBA may be regarded as a realisation of the original security at its market price on the day of substitution, and an acquisition of the new security at the same price on that day. Dealers in securities would thus be taxable on any gains and could deduct any losses on the realisation. Other investors could also be affected by the substitution, for example, where the investor had purchased the security within 12 months of the date of substitution.

To overcome any income tax effects from transactions which, for all practical purposes, have no real commercial consequence, section 23K will deem a realisation of the original security not to have occurred in specified substitutions.

The specified substitutions are to be those where the substitution is made on a "matched term basis", that is, where the CBA security has the same maturity date, coupon rate and face value as the security it replaces. The section will allow for minor variations in the date interest payments are made, provided the payment date under the new security is within 31 days of the date on which interest was due and payable under the original security.

Where the section operates to determine that a substitution of securities on a matched term basis has occurred there will be no tax consequences as a result of the substitution of the original securities. The substituted securities will be deemed to be a continuation of the original securities, and appropriate tax consequences will arise on their ultimate disposal.

Sub-section (1) of new section 23K contains definitions of terms used in the section:

"central borrowing authority" means one of the authorities or agencies specified in the definition of a public authority of a State that is empowered to issue securities in substitution for other securities. The authorities or agencies specified in the definition are:

•

the New South Wales Treasury Corporation;

•

the Victorian Public Authorities Finance Agency;

•

the Victoria Transport Borrowing Agency;

•

the Queensland Government Development Authority;

•

the Treasurer of Western Australia;

•

the South Australian Government Financing Authority; and

•

the Local Government Finance Authority of South Australia;

"public authority" is defined to include a State Minister, a municipal corporation and any other local government body;

"security" means any instrument that evidences indebtedness, regardless of whether or not the debt is secured.

Sub-section 23K(2) sets out the conditions under which a security will be taken, for the purposes of the section, to have been issued in substitution for another security held by the taxpayer. The two conditions are:

•

the new security must be issued by the CBA to the taxpayer in exchange for the surrender or transfer of, or otherwise in replacement or substitution for, the original security (paragraph (a)); and

•

the new security must be issued on a matched term basis with the terms of the original security, that is, it must have the same maturity date, and must carry the same coupon rate and face value as the original security (paragraph (b)).

By new paragraph 23K(3)(a) where the conditions of sub-section (2) would otherwise be satisfied, but the taxpayer either pays an amount in connection with the issue of the new security (sub-paragraph 23K(3)(b)(i), or receives an amount in relation to the surrender, transfer, replacement or substitution of the original security (sub-paragraph 23K(3)(b)(ii)), then that substitution is not to be one to which the section applies.

Sub-section 23K(4) modifies in a minor respect the conditions set out in paragraph 23K(2)(b) which specify that, for the section to apply, a substitution of a security must be on a matched term basis. The sub-section will ensure that a minor variation in the date on which interest is to be paid on the substituted security from the date on which it was payable on the original security, will not affect the operation of the new section in relation to a substitution of securities on conditions that are otherwise the same in all material respects.

Sub-section (5) is the operative provision of section 23K. It limits the scope of the operation of the section to substitutions by a CBA (as defined in sub-section (1)) on or after 8 August 1984 and sets out the income tax effect of such substitutions.

Paragraph (a) of sub-section (5) specifies that the security issued by a CBA in substitution for an original security is to be regarded as a continuation of the original security. This will ensure that, for income tax purposes, the CBA security will be regarded as having been purchased at the same time, and for the same cost, as the security it replaces. The paragraph will also ensure that any subsequent operation of the Principal Act on the disposal of the CBA security will apply on the same basis as if the security being disposed of was the original security.

Paragraph 23K(5)(b) will effectively deem a realisation of the original security not to have occurred through the substitution. The paragraph removes the unintended tax effects of a substitution of securities by stipulating that any "profits" from the surrender etc., of the original security will not be assessable to an investor, and that any "losses" will not be deductible. This paragraph, together with paragraph (a), will ensure that the income tax law reflects the fact that the investor's financial position is not altered by the substitution of the securities.

Clause 7: Special depreciation on trading ships

This clause proposes amendments of section 57AM of the Principal Act, which authorises special depreciation allowances for eligible Australian trading ships.

Section 57AM sets out, amongst other things, the criteria which must be satisfied in order for a ship to qualify for the special allowances. These criteria include the requirement that a ship must not be manned with a greater complement of officers and crew than that which the Secretary to the Department of Transport has determined - in a manning notice issued under sub-section 57AM(22) - as the safe and efficient manning level for that ship. In determining that level the Secretary is required, by the terms of sub-section (22), to have regard to 'any relevant industrial relations considerations'. Additionally, each manning notice must specify not only the total number of officers and crew members, but also their individual designations (eg. 1 master, 2 engineers, 3 stewards etc).

Paragraph (1)(a) of this clause will amend sub-section 57AM(1) of the Principal Act, which is an interpretative provision that ascribes particular meanings to words and expressions used in section 57AM. The paragraph will insert in that sub-section a definition of 'officer' which is intended to clarify that the term, when used in section 57AM, includes the captain or master of a ship. Although the new definition will not specify all of the various categories of officers, the term is intended to have the meaning that is ordinarily attributed to it by the maritime industry and would include, for example, mates, engineers, radio operators, electricians, doctors and pursers.

Paragraph (1)(b) of this clause will amend paragraph 57AM(4)(h) of the Principal Act to remove the requirement that an eligible ship be manned in accordance with the designated officer and crew positions specified in the manning notice given in respect of that ship. By virtue of an amendment proposed by paragraph (1)(c) of this clause, that requirement will be redundant.

Paragraph (1)(c) of this clause will amend sub-section 57AM(22) which sets out the requirements imposed on the Secretary to the Department of Transport in determining the maximum manning level allowable for eligible ships. Sub-section (22) will be amended to omit -

(a)

the requirement that the manning notice should set out the specified designations of officers and crew members allowable for each ship. As a result of the proposed amendment, the Secretary will be required only to give a single aggregate number of officers and crew members for each ship; and

(b)

the reference to the Secretary being required, when forming an opinion as to the safe and efficient manning level for a ship, to have 'regard to any relevant industrial relations considerations'. This amendment is intended to remove any suggestion that industrial relations considerations are to be the dominant or overriding factor to be taken into account by the Secretary when determining manning levels. Industrial relations considerations, when relevant, are to be but one of the considerations to which the Secretary is to have regard and it will be for the Secretary to decide the weight to be given to each of those considerations.

Paragraph (1)(d) of this clause is complementary to the second of the amendments proposed by paragraph (1)(c) and will omit, from sub-section 57AM(23), another reference to the Secretary to the Department of Transport being required to have 'regard to any relevant industrial relations considerations'. Sub-section (23) authorises the Secretary to vary a manning notice already given and the effect of the proposed amendment will be the same as the effect of the corresponding amendment of sub-section 57AM(22).

Sub-clauses 7(2) and (3) of the amending Bill, which will not amend the Principal Act, are designed to apply the amendments from 2 July 1984, the date on which the changes were announced by the Minister for Transport.

By sub-clause 7(2) the amendments proposed by sub-clause 7(1) will -

(a)

apply to any manning notice, or any notice of a variation of a manning notice, given after the date on which the amending Act receives the Royal Assent; and

(b)

be deemed to have applied to any such notice given after 1 July 1984 and before the date on which the amending Act receives the Royal Assent.

By sub-clause 7(3), the amendments proposed by clause 7 are not to be taken as invalidating any of the manning notices, or variations of manning notices, that have been given on the basis of the provisions presently in the Principal Act. For example, although the Secretary to the Department of Transport is not, by the amendments proposed by this clause, to have been required to specify particular officer and crew designations in a manning notice given after 1 July 1984, the fact that those designations have been included in a manning notice given after that date and before the amending Act comes into operation will not invalidate the notice once that Act comes into operation.

Clause 8: Expenditure on fences for disease control

Under section 75C a taxpayer carrying on a business of primary production in Australia may claim an immediate deduction in respect of expenditure incurred before 1 July 1984 on the construction of stockyard or subdivisional fences where the Secretary to the Department of Primary Industry is satisfied that it is desirable to construct fences on the land for the purpose of assisting in the eradication or control of bovine brucellosis or tuberculosis.

By this clause, the definition of "eligible expenditure" in sub-section 75C(1) will be amended to extend by two years, to 1 July 1986, the date by which expenditure must be incurred by a taxpayer to qualify for deduction under this section.

Clause 9: Gifts, calls on afforestation shares, pensions, etc

This clause will amend section 78 of the Principal Act, which authorises an income tax deduction for gifts of the value of $2 and upwards of money, or of property other than money that was purchased by the taxpayer within the twelve months preceding the making of the gift, to a fund, authority or institution in Australia that is listed in the section.

The proposed amendments will authorise income tax deductions for gifts to the Work Skill Australia Foundation Incorporated and to The Academy of the Social Sciences in Australia Incorporated.

As well, the amendments will remove, for two categories of gifts that are already deductible under section 78, the requirement that the gifted property must have been purchased by the donor within the twelve months preceding the making of the gift. These will be -

•

gifts to National Trust bodies, where the property is listed in the Register of the National Estate; and

•

gifts of trading stock to any fund, authority or institution listed in section 78, where the value of the gift is included in the donor's assessable income.

Paragraph (a) of sub-clause 9(1) will insert new sub-paragraphs (lxxx) and (lxxxi) in paragraph 78(1)(a) of the Principal Act to extend the list of organisations and funds to which the income tax deduction authorised by paragraph 78(1)(a) applies.

Proposed new sub-paragraph 78(1)(lxxx) will authorise deductions for gifts to the Work Skill Australia Foundation Incorporated. By virtue of the operation of sub-clause 9(2), a gift to the Foundation will qualify for deduction where made after 20 March 1984.

New sub-paragraph 78(1)(lxxxi) will extend the operation of paragraph 78(1)(a) to gifts made to The Academy of the Social Sciences in Australia Incorporated. By the operation of sub-clause 9(3), a gift to the Academy will qualify for deduction where made after 21 August 1984.

Paragraph (b) of sub-clause 9(1) will insert new paragraphs (ac) and (ad) in sub-section 78(1) of the Principal Act. These paragraphs will remove, for two categories of gifts that are presently deductible under paragraph 78(1)(a), the requirement that the gifted property must have been purchased by the donor within the twelve months preceding the making of the gift.

New paragraph 78(1)(ac) will authorise deductions for gifts, to National Trust bodies presently listed in sub-paragraph 78(1)(a)(xxvi) of the Principal Act, of property that, at the time when the gift was made, was a 'place' listed in the Register of the National Estate kept pursuant to the Australian Heritage Commission Act 1975. The Register lists those places that -

•

are part of the natural or cultural environment of Australia; and

•

have aesthetic, historic, scientific or social significance or other special value for present and future generations.

The Register may list a site, area, region, building or structure. 'Place' is to be defined to have the same meaning that it has in the Australian Heritage Commission Act (the definition is explained in the notes on the amendment proposed by paragraph (o) of this clause).

To qualify for deduction the property must be gifted to, and accepted by, the National Trust for the purpose of preserving the property for the benefit of the public.

By virtue of the amendments proposed by paragraphs (e) to (k) of this clause, special provisions will apply to value, for deduction purposes, property that is gifted to National Trust bodies (these provisions are explained in the notes on those paragraphs).

New paragraph 78(1)(ad) will authorise deductions for gifts of trading stock to a fund, authority or institution presently listed in section 78, where the value of the gift of the trading stock is included in the assessable income of the donor by virtue of the operation of sub-section 36(1) of the Principal Act. Sub-section 36(1) includes in the assessable income of a taxpayer the value of trading stock that is disposed of otherwise than in the ordinary course of the taxpayer's business. But for this amendment, taxpayers who gift trading stock that they have not purchased within the preceding twelve months would have the value of the trading stock included in their assessable income but would not be eligible for a deduction for the gift under section 78.

Paragraph (c) of sub-clause (1) proposes an amendment of sub-section 78(1A) of the Principal Act to ensure that, where a deduction is allowable under proposed new paragraph 78(1)(ac) or (ad) in respect of a particular gift, a deduction is not allowable under sub-paragraph 78(1)(a) for that gift.

Paragraph (d) of sub-clause (1) proposes the insertion of a new sub-section - sub-section 78(2A) - which is a special valuation provision to apply for the purpose of the proposed new paragraph 78(1)(ad) (gifts of certain trading stock). Sub-section (2A) will provide that the value of the gifted trading stock will be taken to be the value of that property that is, by virtue of sub-section 36(1), included in the taxpayer's assessable income. As explained in the notes on new paragraph 78(1)(ad), where a taxpayer disposes of trading stock by way of gift otherwise than in the ordinary course of carrying on a business, sub-section 36(1) operates to bring to account, as assessable income of the taxpayer, the market value of that property.

The purpose of the amendment proposed by paragraph (d) is to apply the income tax law neutrally as between those donors who gift trading stock to an authorised fund and those donors who sell the trading stock and gift the proceeds to an authorised fund.

Amendments proposed by paragraphs (e), (f), (g), (h), (j) and (k) of sub-clause (1) will apply special valuation provisions, presently in section 78 of the Principal Act, to gifts of property in respect of which deductions are proposed to be authorised by new paragraph 78(1)(ac) (gifts to National Trust bodies of property listed in the Register of the National Estate). The broad effect of these provisions - which are presently applicable to gifts of works of art to collections maintained by the Australiana Fund, Artbank, a public library, museum or art gallery - will be that:

•

the value of property, for deduction purposes, will generally be its value at the time the gift is made;

•

property purchased either within the twelve months preceding the making of the gift, or for the purpose of gifting it to a National Trust body, will be valued at the lesser of its cost to the donor or its value at the time the gift was made;

•

the taxpayer will be required to submit to the Commissioner at least two valuations in writing by valuers approved by the Secretary to the Department of Home Affairs and Environment;

•

the Commissioner will be authorised to reduce the value of the gift where the donee does not receive immediate and unfettered control or custody of or title to the gifted property.

Paragraph (m) of sub-clause (1) proposes the insertion of a new sub-section in the Principal Act - sub-section 78(6J) - which is consequential upon the proposal to allow deductions for certain gifts of trading stock under new paragraph 78(1)(ad). Sub-section (6J) will provide that no deduction is to be allowable under paragraph 78(1)(ad) where the taxpayer makes, at any time, an election under either sub-section 36(3) or section 36AAA of the Principal Act in respect of the disposal of that trading stock. Where a taxpayer is forced to dispose of livestock as a consequence of, amongst other things, loss or destruction of pastures or fodder by reason of fire, drought or flood the taxpayer may -

•

make an election under sub-section 36(3) to spread, for tax purposes, the profit arising from that disposal in equal instalments over five years commencing in the year of disposal; or

•

make an election under section 36AAA to have the profit on the forced disposal applied to reduce the cost, for tax purposes, of replacement stock acquired during that year or any of the five succeeding years.

New sub-section 78(6J) will ensure that a taxpayer is not able to gain the immediate benefit of the deduction available for gifted trading stock whilst spreading the corresponding assessable income over a number of years.

Paragraphs (n) and (o) of sub-clause (1) will amend sub-section 78(12) of the Principal Act, which is an interpretative provision, to include a definition of 'place'. The amendments are consequential upon the insertion of new sub-paragraph 78(1)(ac) which will authorise deductions for gifts to National Trust bodies of property that is a 'place' listed in the Register of the National Estate kept pursuant to the Australian Heritage Commission Act 1975. 'Place' will be defined to have the same meaning that it has in that Act, namely, that it will include a site, area, region, building or structure. As well, it may include equipment, furniture, fittings and articles associated or connected with a building or other structure that is listed in the Register.

By sub-clause 9(2), the deduction being authorised by sub-clause (1) for gifts to the Work Skill Australia Foundation Incorporated (proposed sub-paragraph 78(1)(a)(lxxx)) will be available for gifts made after 20 March 1984.

By sub-clause 9(3), the deductions being authorised by sub-clause (1) for gifts to The Academy of the Social Sciences in Australia Incorporated (proposed sub-paragraph 78(1)(a)(lxxxi)), gifts to National Trust bodies (proposed paragraph 78(1)(ac)) and gifts of trading stock to eligible funds, authorities or institutions (proposed paragraph 78(1)(ad)) will be available for gifts made after 21 August 1984.

Clause 10: Certain gifts not to be allowable deductions

This clause proposes amendments of section 78A of the Principal Act which are consequential upon the amendments proposed by clause 9. Section 78A is an anti-avoidance measure designed to deny deductions otherwise allowable under section 78 of the Principal Act where, by virtue of any scheme or arrangement -

•

the ostensible value of the gift to the donee is less than the actual value of the property that is the subject of the gift;

•

the donor or any associate of the donor obtains any benefit, advantage, right or privilege other than the benefit of a tax saving; or

•

the donee is to acquire any other property from the donor or an associate of the donor.

The broad effect of paragraphs (a), (b) and (c) of this sub-clause will be to apply section 78A to all gifts of property that are deductible under section 78, including gifts in respect of which deductions are proposed by virtue of clause 9 of this Bill. These paragraphs will also apply section 78A to gifts of eligible property to Artbank (paragraph 78(1)(ab) of the Principal Act) that have been deductible under section 78 since 1 July 1979 but which are not presently covered by section 78A.

Sub-clause 10(2) will apply section 78A, with one exception (which is explained in the notes on sub-clause 10(3)), to all gifts of property that are made after 21 August 1984, being the commencement date for those extensions of the gift provisions in section 78 of the Principal Act to which section 78A would not, but for the amendment proposed by sub-clause (1), apply.

By sub-clause 10(3), the amendments proposed by sub-clause 10(1) - to the extent to which they apply to gifts of property to Artbank - will apply to gifts made after 13 September 1984 (the date on which the Bill was introduced in the House of Representatives).

Clause 11: Rebates for residents of isolated areas

In recognition of the disadvantages to which they are subject because of uncongenial climatic conditions, isolation and high cost of living, taxpayers who reside or are present for a specified period in isolated areas are entitled, under section 79A of the Principal Act, to a rebate of income tax calculated in accordance with that section. This rebate consists of a basic rebate and a dependant component, both of which are determined according to whether a taxpayer resides or is present in Zone A or Zone B for a specified period of time. At present the ordinary basic rebate is $216 for Zone A and $36 for Zone B.

It is further provided in the existing law that taxpayers who reside or are present for a specified period in particularly isolated areas in either Zone A or Zone B are entitled to a higher basic rebate. Under these provisions of section 79A, a special basic rebate of $750, in lieu of the ordinary basic rebate of $216 for Zone A and $36 for Zone B, is currently available to taxpayers residing or spending the required period in either zone at especially isolated places which are in excess of 250 kilometres by the shortest practicable surface route from the nearest urban centre with a population of 2,500 or more. In establishing the location of these special areas, the population of an urban centre is at present based on the results of the Census of Population and Housing taken by the Australian Statistician on 30 June 1976.

By clause 11 it is proposed to amend section 79A to increase by 25 per cent the amounts of the basic component of the rebates for Zone A, Zone B and the special areas within the two zones. As announced in the Budget Speech, the increases are to be effective from 1 November 1984 and this clause therefore contains transitional provisions that will apply for the 1984-85 income year.

A further amendment to be effected by this clause is the proposed substitution of 1981 census data for 1976 census data in order to delineate the special areas which are subject to the higher basic rebate. However, 1981 census data will only be used where this will not disadvantage a taxpayer. If the population of an urban centre exceeded 2,500 at the time of the 1976 Census but fell below that figure at the 1981 Census, taxpayers who meet the usual qualifying conditions of residence or presence in the designated special area will become eligible for the special area tax rebate. However, taxpayers who, under the existing law, are entitled to the higher special area rebate on the basis of 1976 census data will retain their entitlement even though the population of an urban centre used in the determination of that eligibility exceeded 2,500 at the 1981 Census. This change will apply from 1 July 1984.

Under paragraph (a) of sub-clause 11(1), the basic fixed component of the rebate available to qualifying taxpayers in the special areas located in Zone A and Zone B will be increased by 25 per cent from $750 to $938.

Paragraph (b) of sub-clause 11(1) will increase the basic component of the rebate available to qualifying taxpayers in Zone A by 25 per cent from $216 to $270. Paragraph (c) will increase the basic component of the rebate available to qualifying taxpayers in Zone B from $36 to $45.

By paragraph (d) an amended definition of the special areas within Zone A and Zone B is to be inserted in paragraph 79(3D)(a) of the Principal Act. Under paragraph 79(3D)(a), a special area is constituted by points within Zone A or Zone B that, at 1 November 1981, were in excess of 250 kilometres by the shortest practicable surface route from the centre point of the nearest urban centre (whether or not within a zone) with a population of 2,500 or more. Under the existing law 1976 census data is used to identify such centres.

Under new sub-paragraph 79(3D)(a)(i), which will re-enact the terms of paragraph 79(3D)(a), the special area will continue to be delineated by the points within a zone that were not situated at a distance of 250 kilometres or less by the shortest practicable surface route from the centre point of the nearest urban centre (wherever situated) with a census population of not less than 2,500. Although 1981 census data will, from 1 July 1984, be used to identify such centres (see later notes on paragraphs (e) and (f) of this sub-clause), by reason of proposed new sub-Paragraph 79(3D)(a)(ii), taxpayers who were entitled to claim the special rebate on the basis of the law as it stood before enactment of the amendments effected by this Bill will retain that eligibility.

For the purpose of identifying urban centres with a population of 2,500 or more, definitions of "census population" and "urban centre" are provided in sub-section 79A(4) of the Principal Act. Under paragraphs (e) and (f) these definitions will be amended so that, in determining future eligibility for the special area rebate, the population of an urban centre will be based on the results of the Census of Population and Housing taken by the Australian Statistician on 30 June 1981. The results of that Census have been published by the Australian Bureau of Statistics in documents entitled "Persons and Dwellings in Local Government Areas and Urban Centres".

By sub-clause (2), the increased rebates and the use of 1981 census data to delineate the special zone areas in which taxpayers are entitled to the special zone rebate (but subject to continued eligibility for taxpayers who presently qualify on the basis of 1976 census data) will apply to assessments in respect of income of the 1984-85 and subsequent income years.

Sub-clause (3) is a transitional provision under which a limitation is placed on the amounts of the basic rebates in the 1984-85 income year. By reason of paragraph (a), the basic rebate available to eligible taxpayers in the special areas in Zone A or Zone B in 1984-85 will be $875 (an amount which represents the existing basic rebate of $750 increased by $125 or two-thirds of the full year's increase of $188). By paragraph (b) the basic rebate available to eligible taxpayers in Zone A in 1984-85 will be $252 (the existing basic rebate of $216 increased by $36 i.e. two-thirds of the full year's increase of $54). Under paragraph (c), the basic rebate available to eligible taxpayers in zone B in 1984-85 will be $42 (the existing basic rebate of $36 increased by $6 or two-thirds of the full year's increase of $9). These limitations on the rebates for the 1984-85 income year reflect the commencement date of 1 November 1984 announced in the Budget Speech.

Clause 12: Rebates for members of Defence Force serving overseas

By this clause, which is also consequential on clause 11, it is proposed to amend section 79B of the Principal Act which provides a rebate of tax for members of the Defence Force serving at certain overseas localities in recognition of the uncongenial nature of service in, and the isolation of, the particular localities. A full rebate is allowable where the total period of service at the overseas localities is more than half the year of income, while a proportionate rebate is allowed where the period of service is not more than half the year of income. For this purpose, the total periods of overseas service of the taxpayer in the year of income include any period in the year of income during which the taxpayer served as a Defence Force member in a zone area. Since its inception, the rebate authorised by section 79B has been comparable with that available to residents of Zone A under section 79A. Reflecting that, the total rebate is currently made up of a basic amount of $216 and an amount equal to 50 per cent of the total dependants rebate (if any) to which the taxpayer is entitled under certain concessional rebate provisions of Subdivision A of Division 17 of the Principal Act.

In line with the proposed increase in the basic amount of the Zone A rebate under section 79A, sub-clause (1) of this clause will increase the basic component of the rebate under section 79B by 25 per cent (or $54) to $270.

By sub-clause (2), the increased rebate will apply to assessments in respect of income of the 1984-85 and subsequent years of income.

Sub-clause (3) is a transitional provision under which the amount of the basic rebate will be limited to $252 in the 1984-85 income year. This amount represents the existing basic rebate of $216 increased by $36 or two-thirds of the full year's increase of $54, reflecting the commencement date of 1 November 1984 announced in the Budget Speech.

Clause 13: Transfer of loss within company group

Introductory Note

Clause 13 proposes to insert a new section - section 80G - in the Principal Act which will allow the right to a deduction for a loss or losses incurred by a resident company for the purposes of the Principal Act to be transferred to another resident company, where there is 100 per cent common ownership between the companies. This new measure will apply to losses incurred in the 1984-85 and subsequent income years.

The allowable deduction for a loss incurred by a taxpayer is determined under section 80, 80AAA (film loss) or 80AA (loss from engaging in primary production) of the Principal Act. Generally speaking, a loss is deemed to be incurred by a taxpayer in a year of income where the allowable deductions for that year exceed the sum of any assessable and exempt income derived in that year (including income from dividends, that is effectively exempt from tax because of the section 46 rebate).

Under section 80, a taxpayer who incurs a loss in a year of income may, subject to certain stipulations, carry that loss forward as an allowable deduction against income of the seven succeeding years of income.

A loss incurred in engaging in primary production may, by virtue of section 80AA, be carried forward indefinitely. In calculating a loss from engaging in primary production, only primary production income and related allowable deductions are taken into account. Sub-section 80(2A) of the Principal Act operates to exclude from the determination of any deductions allowable under section 80, so much of any loss incurred in a year of income as is attributable to primary production activities or a film loss.

A film loss has the same seven year carry-forward limitation as a section 80 loss, and is only available as a deduction from film income to which section 26AG of the Principal Act applies. Such a loss is determined under section 80AAA, by deducting from the sum of the film deductions allowable to the taxpayer under sections 124ZAF and 124ZAFA, and deductions for any revenue expenses that are deductible against film income under section 124ZAO, the sum of any assessable film income and exempt film income. Broadly, the amount of any film loss that will be available for carry forward is limited by reference to the amount of the taxpayer's overall loss (section 80) for the particular year of income that remains after deducting the amount of any primary production loss incurred in that year.

The deduction for a loss incurred under section 80, 80AAA or 80AA will be transferable where there is 100 per cent common ownership of the company which incurs the loss and of the company to which the right to an allowable deduction in respect of the loss is to be transferred. For these purposes there will be no change in the basic rules outlined above. In other words, a loss incurred by a company will be calculated in precisely the same manner as it is now, and will be deductible in the hands of the transferee company as if the transferee had itself incurred the loss in an earlier year.

The common ownership test for the relevant companies must be satisfied at all times during the year of income in which the loss was incurred and during the year of income in which the deduction is to be allowable, as well as in any intervening years. Its effect will be to permit the transfer of losses between a resident holding company and its wholly-owned resident subsidiaries and between wholly-owned subsidiaries that are resident companies. The fact that one or more companies in a group (including a holding company) is or are non-residents, will not affect the right to transfer losses between members of a group that are resident companies.

In addition to these fundamental conditions, the Bill proposes a number of further rules to facilitate the transfer of losses within company groups. The first is that, where a company that has incurred a loss in a prior year derives assessable income in a year of income, the company will not be entitled to transfer any of the benefit of the loss deduction to another company until it first applies the loss against its own assessable income and any exempt income, in accordance with the terms of the existing law. Any balance of the loss deduction then remaining may be transferred. Once a loss deduction is transferred to another company, the loss will be treated as not having been incurred by the transferor.

A further condition will be that a deduction for a loss will only be transferable to a company in a year of income if the transferee company would, but for the operation of new section 80G, have a taxable income in that year, that is, if the assessable income of the company exceeds all other allowable deductions. Any loss so transferred will first be offset against any net exempt income of the transferee company and then against assessable income.

Where Subdivision B of Division 2A of Part III of the Principal Act (the "current-year" loss provisions) applies to a company in a year of income, any loss incurred by the company in that year will not be transferable to another company in that year. Such a loss will, however, be carried forward and would be available for transfer in future years. Moreover, a loss incurred in a prior year will only be available for transfer in a year of income if the loss would have been deductible by the transferor company in the relevant year had that company derived sufficient assessable income in that year. Determination of that matter will require a notional application of the anti-avoidance prior year loss provisions contained in sections 80A, 80B, 80DA, 80E and 80F of the Principal Act. Finally, the loss will only be deductible by the transferee company if that company also satisfies the normal criteria for deduction of losses under the prior year loss provisions.

Subject to the foregoing rules, and to the rule that losses are to be transferred in the order in which they are incurred, a loss deduction will be transferable to another company in the year in which it is incurred or, unless it is a loss incurred in carrying on a business of primary production, in any of the next seven years. Under existing law, losses incurred in carrying on a business of primary production may be carried forward without limit as to time. Such losses will be available for transfer on the same basis.

As part of the formal mechanism for transfer, the public officers of the respective companies will be required to give written notice to the Commissioner of Taxation specifying details of the loss or losses which are to be transferred.

A deduction will not be allowable for any payment made by the transferee company to the transferor as consideration for the value of the benefit of the right to deduct the loss from assessable income. Nor in the ordinary course would any such payment be assessable as income in the hands of the transferor company.

A more detailed explanation of section 80G is given in the notes that follow.

Section 80G

Sub-section (1) of new section 80G specifies two tests, either of which must be satisfied if, in relation to a year of income, a loss is to be transferable between two companies. These tests are that, throughout the year of income, one of the companies was a subsidiary of the other company (Paragraph (a)) or each of the companies was a subsidiary of the same parent (Paragraph (b)). The relevant test must be satisfied during the whole of the year of income or, if either or both of the companies was not or were not in existence for part of the year it must be satisfied during that part of the year in which both companies were in existence. For these purposes, by virtue of sub-section (5), a company is to be treated as coming into existence during a year if it was incorporated during the year. The provisions will not extend to an existing company that is acquired or disposed of by the company group concerned during the year.

Where a company has adopted a substituted accounting period for income tax purposes, the "common ownership" test must be met throughout the whole of the period covering that accounting period and, if it is not identical, the comparable year of income of the related company.

Sub-section 80G(2) specifies the circumstances in which a company is to be taken to be a subsidiary of another company (termed the "holding company") for the purposes of section 80G during the whole or a part of a year of income (the "relevant period") as required to satisfy sub-section (1). Under sub-paragraph (2)(a)(i) this relationship is established if all the shares in the subsidiary company were beneficially owned by the holding company at all times during the relevant period. Sub-paragraph (a)(ii) establishes the relationship if all the shares in the subsidiary company were beneficially owned during the relevant period by a company that is, or by two or more companies each of which is, a subsidiary of the holding company. By sub-paragraph (a)(iii) the necessary relationship will also exist if all the shares in the subsidiary company were owned during the relevant period by the holding company and by a company that is, or two or more companies each of which is, a subsidiary of the holding company.

Paragraph (2)(b) imposes the further requirement that during the relevant period there was no agreement, arrangement or understanding in force by virtue of which any person was in a position, or would become in a position after the relevant period, to affect rights of the holding company, or of another subsidiary of the holding company in relation to the particular subsidiary company. This is a safeguard against the possibility of any collateral arrangement being used to circumvent the intended operation of the provisions.

Sub-section 80G(3) extends the operation of sub-sections (1) and (2) by establishing a qualifying group relationship between companies which are part of a wholly-owned chain of subsidiaries of a holding company. Thus, in a corporate structure under which all of the shares in a subsidiary are owned by one or more wholly-owned companies that are interposed between a holding company and the end subsidiary company, a qualifying group relationship will be found between each of those companies.

Sub-section 80G(4) qualifies sub-section (2). It specifies for the purposes of paragraph (2)(b) the circumstances in which a person is to be regarded as being in a position at a particular time to affect the rights of one company in relation to another company. A person will be in that position if he or she has at the particular time a right, power, or option to acquire any of the rights of the first company in its subsidiary or to prevent that company from exercising rights in the subsidiary for its own benefit.

The practical effect of sub-section 80G(5), when taken together with sub-section (1), is that a company which was not a group company for the whole of the year of income will only be regarded as such if it was a company that was incorporated during the year and was, in practical effect, wholly owned for the remainder of the year by another group company. Where either an existing group company is disposed of, in whole or in part, during a year, or a company which was not previously a group company is wholly acquired during a year, neither of those companies can be a group company for loss transfer purposes in relation to that particular year of income. However, where a company is acquired during a year of income, that company would be a group company for these purposes in subsequent years if the specified 100 per cent common ownership rule continues to be met.

Sub-section 80G(6) is the operative provision of section 80G. It sets out the basis on which a resident company that has incurred a loss for the purposes of section 80, 80AAA or 80AA of the Principal Act in the year of income that commenced on 1 July 1984 or in a subsequent year may transfer the loss (or a part of the loss) to another resident company with which it has the necessary group relationship. The deduction for a loss so transferred will be deemed, for the purposes of the application of the Principal Act, to be a loss incurred by the transferee company for the purpose of section 80, 80AAA or 80AA, as the case requires. In this way, all of the existing provisions of the law relating to the allowance of deductions for losses will apply to that company.

Paragraph (6)(a) requires a resident company (the "loss company") to have incurred a loss for the purposes of section 80 of the Principal Act in the year of income that commenced on 1 July 1984 or in a subsequent year of income (the "loss year"). This paragraph effectively establishes that the losses to which the new provisions apply are those calculated in accordance with the present law, that is, losses allowable as a deduction under section 80, 80AAA or 80AA, depending on the particular circumstances.

Paragraph (b) specifies characteristics of the company (the "income company") to which the loss incurred by a loss company may be transferred where the companies are group companies in relation to each other. The income company must be a resident company that has, or but for the operation of section 80G would have, a taxable income in the relevant year of income being the year that commenced on 1 July 1984 or a subsequent year (the "income year"). The term "taxable income" is defined in sub-section 6(1) of the Principal Act and means, broadly, the amount remaining after deducting from assessable income all allowable deductions.

Paragraph (c) will require the loss company and the income company to furnish to the Commissioner of Taxation, in relation to a loss that is to be transferred, a notice specifying -

•

that the right to an allowable deduction in respect of all or a specified part of a loss under either sub-section 80(2), 80AAA(7) or 80AA(4) that has not been allowed as a deduction is to be transferred to the income company (sub-paragraph (i)); and

•

the year of income in which the loss was incurred by the loss company (sub-paragraph (ii)).

The notice to be given to the Commissioner for this purpose is to be in writing, signed by the public officers of both companies, and furnished on or before the date of lodgment of the relevant return of income of the income company, or within such further time as the Commissioner allows.

The operation of paragraph (c) is subject to the provisions of sub-sections (7) and (8) which effectively limit, respectively, the amount of ordinary losses and primary production losses and the amount of film losses which may be transferred; of sub-section (11) which establishes the order in which losses (other than film losses) are to be transferred; and of sub-section (13) which permits a loss company that has given a transfer notice under paragraph (6)(c) for part of a loss to give a further notice for any balance of the loss. The operation of these sub-sections is explained in more detail later in these notes.

Paragraph (6)(d) deals with the case where a loss company transfers the right to an allowable deduction in respect of a loss to an income company in the year in which the loss is incurred.

Sub-paragraph (d)(i) requires the loss company and the income company to be group companies in relation to the loss year.

Sub-paragraph (d)(ii) establishes that the right to a deduction of an income company in the same year as the loss is incurred by the loss company exists if the loss is one which, had it been incurred by the loss company in the preceding year and the loss company had assessable income in the current year to absorb all or part of the loss, the loss would have been deductible to the loss company. The operation of this sub-paragraph is subject to sub-sections (9) and (14). Briefly, sub-section (9) will deny the right to transfer a loss in the loss year where the anti-avoidance current year loss provisions apply to the loss company in that year. On the other hand, sub-section (14) will ensure that any application of the prior year loss provisions does not stand in the way of the transfer of a right to an allowable deduction in respect of a loss in the year in which it was incurred because of the hypothesis set up by sub-paragraph (d)(ii).

Paragraph (e) is comparable to paragraph (d) but addresses the situation where a loss company proposes to transfer the right to an allowable deduction in respect of a loss to an income company in a year subsequent to the year in which the loss was incurred by the loss company.

Sub-paragraph (e)(i) requires the loss company to be a group company in relation to the income company for the loss year and the income year, and for any intervening year.

Sub-paragraph (e)(ii) stipulates the same basic test as that in sub-paragraph (d)(ii), namely, that the loss company, if it had derived sufficient assessable income in the income year, would have been entitled to a deduction in that year for the prior year loss sought to be transferred by it to the income company. The loss company will be required to satisfy the tests of the prior year loss rules set out in sections 80A, 80B, 80DA, 80E and 80F of the Principal Act (the "continuing ownership test" and the "same business test") to determine whether it is nominally entitled to deduct the loss in the income year, and so be able to transfer the loss to the income company.

Paragraph (f) operates in conjunction with paragraph (d) and specifies that a loss transferred in the year of income in which it is incurred will be deemed to be a loss incurred by the income company in the year of income immediately preceding the loss year. This will have the effect that section 80, 80AAA or 80AA, as the case requires, will operate to determine the allowance of a deduction for the loss to the income company.

In similar fashion, paragraph (g) in conjunction with paragraph (e) deems a loss transferred in a year of income subsequent to that in which it was incurred to be a loss incurred by the income company in the year of income in which it was incurred by the loss company. In this way, the seven year limitation attaching to losses other than primary production losses will be maintained. By virtue of the application of the general loss provisions the income company to which a prior year loss is transferred will also have to satisfy the prior year loss provisions in the year in which it seeks the deduction before it can obtain a deduction for the loss.

As noted briefly earlier, sub-section 80G(7) will specify, in relation to ordinary and primary production losses, how much of a loss may be transferred to an income company for deduction by that company in a year of income. Generally the limit will be an amount equal to the taxable income of the income company for that year. Where the income company also has any net exempt income, the limit will be the sum of that net exempt income and the taxable income. To this end, a notice given under paragraph (6)(c) will be of no effect to the extent the above limits are exceeded. Paragraphs (6)(f) and (g) will correspondingly operate to deem the income company to have incurred a deductible loss within the limits established in sub-section (7).

Sub-section 80G(8) operates in an identical way in relation to film losses as sub-section (7) applies to other losses. Reflecting the basis on which carry forward film losses are deductible under present law, this sub-section will limit the amount of film losses which may be transferred to an income company for deduction in a year of income to the sum of any net assessable film income and net exempt film income derived by the income company in that year.

Sub-section 80G(9) is relevant to the determination, for the purposes of paragraph (6)(d), of the amount of any loss available for transfer in a year of income in which it is incurred. Where the provisions of Subdivision B of Division 2A of Part III of the Principal Act (the current year loss provisions) apply to the loss company in determining its loss for a year under section 80, that loss will not be available for transfer to another company in that year. The loss will, however, be available for transfer in any subsequent year in which all other relevant conditions are met.

Sub-section 80G(10) will require a company that has carry-forward losses incurred in earlier years to absorb those losses as deductions against any assessable income and any net exempt income of a year of income, before it may transfer the loss or part of it to another company in that year.

Under the existing law, deductions for prior year losses are made first from a taxpayer's net exempt income (if any) and then from assessable income of a year before certain other allowable deductions are deducted from the assessable income. These other deductions are, subject to some exceptions, those allowable under the provisions specified in Paragraphs (a) and (b) of sub-section (10) and which are contained in Division 10 (General Mining), Division 10AA (Prospecting and Mining for Petroleum) and Division 16C (Income Equalisation Deposits) of Part III of the Principal Act. This prevents any possibility that the taxpayer could lose the benefit of a deduction for the particular expenditure specified by reason of the general seven year limitation on the deduction of losses under section 80.

Sub-section (10) will thus ensure that the amount available for loss transfer by a company will be so much of any of its prior year losses as are not offset against its exempt and assessable income of a particular year and which, in accordance with the existing law, the company would be able to carry-forward for deduction in a succeeding income year.

Under the existing loss provisions in the Principal Act, losses are allowable as a deduction to a taxpayer in the order in which they are incurred. Sub-section 80G(11) will ensure that, with the exception of film losses, losses incurred by a loss company which are able to be transferred to another company under sub-section (6) may be transferred only in the order in which they were incurred.

The exclusion from sub-section (11) of film losses recognises the special way in which such losses are dealt with under provisions of the present law - that is, they may only be set off against certain film income and may not be carried forward beyond seven years. These features will also apply to film losses that are transferred from one company to another.

Sub-section 80G(12) is to the effect that where the right to an allowable deduction in respect of a loss or a part of a loss is transferred to an income company under sub-section (6), the loss or part of the loss so transferred is deemed not to have been incurred by the loss company. The purpose of this sub-section is to prevent a double deduction in respect of any loss which is transferred.

Where a loss company has given to the Commissioner a notice or notices in accordance with paragraph (6)(c) in relation to a part of a loss incurred by the loss company, sub-section 80G(13) will preclude the company from giving a valid further notice in relation to that loss to the extent to which it purports to transfer to an income company the right to an allowable deduction for an amount in excess of the balance of the loss available.

The general prior year loss provisions are, as discussed earlier, called into play in determining whether a loss incurred by a loss company in a year of income is available for transfer to an income company in a subsequent year, and whether the income company is entitled to a deduction for that loss in that subsequent year. Against that background, sub-section 80G(14) will ensure that the prior year loss provisions are not brought into account inappropriately because of the mechanism for loss transfer established by sub-paragraph (6)(d)(ii) where a loss is to be transferred in the year in which it is incurred. Accordingly, in such a case, sub-section 80G(14) will effectively exclude the application of relevant prior year loss provisions to both the loss company (paragraph (a)) and the income company (Paragraph (b)).

Sub-section 80G(15) sets out the circumstances in which the Commissioner will, at any time, be able to amend an assessment of an income company to withdraw, in whole or in part, a deduction claimed previously by the income company under section 80G in respect of a loss transferred to that company. Those circumstances are that -

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although procedures had been followed for the right to an allowable deduction in respect of the loss or part of the loss to be transferred to the income company under sub-section 80G(6) - paragraph (a);

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the loss or part of the loss had not, in fact, been incurred by the loss company and, for that reason, a deduction was not available to be transferred to the income company - paragraph (b).

But for the operation of this sub-section, the general rules authorising the amendment of income tax assessments in particular circumstances, as laid down in section 170 of the Principal Act, would apply.

Sub-section 80G(16) is a technical measure which takes into account the circumstances where an income company has been allowed a deduction in respect of an amount specified in a notice to the Commissioner under paragraph (6)(c) and, as a result of an amendment of the income company's assessment or for some other reason, the income company is later found not to be able to absorb the benefit of a deduction for the whole of the amount specified in that notice. This could occur for example, because the company's taxable income has been subsequently reduced.

By virtue of this sub-section, section 80G will apply as if the amount in respect of which the income company is actually entitled to a deduction had been specified on the original notice. In effect, this will mean that the loss company will retain the right to deduction for so much of the loss as was not transferable to the income company. The loss would then be available for transfer to other companies in the group in that year, or to those companies or the income company in later years as the case may be. The end result will be consistent with the operation of sub-section (7) which proposes to limit the amount of the deduction for a loss or losses transferred to an income company in an income year to an amount equal to the sum of that company's net exempt income (if any) and its taxable income in that year.

It may be that, in company group situations to which proposed section 80G is to apply, a payment might be made by the income company to the loss company in consideration for the loss company transferring its right to an allowable deduction to the income company. Sub-section 80G(17) will ensure that where such a payment is received by the loss company, so much of the payment as in the opinion of the Commissioner is made in consideration of the transfer of the right to an allowable deduction shall not be regarded as income of the loss company for the purposes of the Principal Act.

Sub-section 80G(18) addresses the position of the income company in such circumstances and will operate to ensure that a deduction is not allowable to an income company in respect of any payment that the company makes to a loss company as consideration for the benefit of the right to an allowable deduction for a loss.

By sub-section 80G(19) the term 'net exempt income' used in proposed section 80G is to have the same meaning as in section 80 - the general loss provisions.

Clause 14: Deduction in respect of new plant installed on or after 1 January 1976

This clause proposes an amendment to section 82AB of the Principal Act to extend by one year the present date by which eligible property must be first used or installed ready for use to qualify for the investment allowance.

That section authorises a deduction equal to 18 per cent of capital expenditure incurred in the acquisition or construction of eligible property or an eligible Australian ship that is acquired under a contract entered into before 1 July 1985, or which the taxpayer commences to construct before that date, if it is first used or installed ready for use and held in reserve before 1 July 1986.

The effect of the amendments to paragraphs 82AB(1)(d) and 82AB(1A)(d) proposed by clause 14 will be to extend that latter date by one year to 1 July 1987.

Clause 15: Exploration and prospecting expenditure

Clause 15 proposes several amendments to section 122J of the Principal Act, under which deductions are allowable in respect of expenditure incurred on exploration or prospecting on a mining tenement in Australia for minerals obtainable by prescribed mining operations. "Prescribed mining operations" is defined in sub-section 122(1) of the Principal Act to mean mining operations on a mining property located in Australia for the extraction of minerals, other than petroleum, from their natural site, being operations carried on for the purpose of gaining or producing assessable income.

At present, mineral exploration or prospecting expenditure is only deductible from a taxpayer's net assessable income from a mining business and any associated activities. The amendments proposed by clause 15 will permit such expenditure, where it is incurred after 21 August 1984, to be deducted from the taxpayer's net assessable income derived from any source.

Paragraph (a) of clause 15 proposes the omission of the present sub-section 122J(2) and the substitution of a new sub-section (2).

The present sub-section (2) limits the availability of deductions for exploration or prospecting expenditure to a taxpayer who carries on a mining business during the relevant year of income. It also provides that the deduction allowable in any one year cannot exceed the amount of assessable income derived from carrying on the mining business and from associated activities less all other allowable deductions relating to that income.

The new sub-section 122J(2) proposed retains the same limitations in respect of mineral exploration or prospecting expenditure incurred on or before 21 August 1984. Expenditure incurred after that date will be deductible in accordance with the provisions of the proposed new sub-section 122J(4B).

Paragraph (b) of clause 15 provides for the omission of existing sub-section 122J(4) and the substitution of a new sub-section (4).

Existing sub-section 122J(4) applies, broadly, where exploration or prospecting expenditure incurred after 30 June 1974 exceeds the amount of the deduction allowable for the year in which the expenditure is incurred. This may occur either because the taxpayer did not carry on a mining business during the year of income or because such a business was carried on but the assessable income derived from that business and any associated activities in the year of income was insufficient to fully recoup the relevant exploration or prospecting expenditure. Sub-section 122J(4) deems this excess expenditure to be incurred in the next subsequent year in which the taxpayer carries on prescribed mining operations. This process is repeated until the excess expenditure is fully recouped.

Proposed new sub-section 122J(4) will operate in the same manner as the present sub-section except that it will only apply to expenditure incurred after the year of income that ended on 30 June 1974 and on or before 21 August 1984. Exploration or prospecting expenditure incurred after the latter date will be deductible in accordance with the new sub-sections (4B), (4C) and (4D) proposed by paragraph (c) of clause 15.

Proposed new sub-section 122J(4B) establishes the maximum annual limit of the deduction allowable in respect of expenditure incurred after 21 August 1984. It provides that the amount of the deduction allowable under section 122J in relation to post-21 August 1984 expenditure is not to exceed so much of the assessable income of the year of income as remains after deducting all allowable deductions other than those in respect of exploration or prospecting expenditure incurred after 21 August 1984. This means that all other allowable deductions, including deductions allowable for exploration or prospecting expenditure incurred on or before 21 August 1984, are to be deducted from the taxpayer's assessable income before any deduction can be allowed in respect of expenditure incurred after that date.

As with the present and proposed new sub-section (2) of section 122J, the limitation to be imposed by new sub-section (4B) effectively overrides the seven year limitation on carrying forward losses imposed by section 80 of the Principal Act.

Proposed new sub-section 122J(4C) applies where the exploration or prospecting expenditure incurred after 21 August 1984 exceeds the deduction allowable in respect of the relevant year of income. In such a case, sub-section (4C) deems the excess to be incurred in the first subsequent year of income in which the taxpayer derives assessable income. If there is still an excess in that subsequent year, the process is repeated in each following year until the taxpayer has received deductions for the full amount of the expenditure.

Proposed new sub-section 122J(4D) provides that a deduction is not allowable in accordance with section 122J in respect of expenditure incurred after 21 August 1984 unless the Commissioner of Taxation is satisfied that during the year of income -

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the taxpayer carried on or proposed to carry on prescribed mining operations; or

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the taxpayer carried on a business of, or a business that included, exploration or prospecting on any mining tenements in Australia for minerals obtainable by prescribed mining operations and the expenditure was necessarily incurred in carrying on that business.

Paragraph (c) of clause 15 also proposes the insertion in section 122J of a new sub-section (4E). This new sub-section will be along similar lines to existing sub-sections (3A) and (4A) except that it will relate to exploration or prospecting expenditure incurred after 21 August 1984. As with sub-sections (3A) and (4A), sub-section (4E) is designed to complement paragraph 23(pa) of the Principal Act. That paragraph exempts from tax income derived by a bona fide prospector from the sale, transfer or assignment of a right to mine for gold or a prescribed metal or mineral in Australia.

The new sub-section (4E) will only apply where, after 21 August 1984, a taxpayer derives an amount of income from the sale, transfer or assignment of rights to mine on a mining tenement that is or has been exempt from income tax by virtue of paragraph 23(pa) and where, in relation to that mining tenement, excess amounts of expenditure referred to in sub-section (4C) - i.e. relevant expenditure incurred after 21 August 1984 - have not been deemed, and are not required to be deemed, to have been incurred in the year of income in which the taxpayer derived the exempt income or in a prior year of income. These conditions, which are set out in paragraphs (a) and (b) of the new sub-section, will occur where the taxpayer has derived insufficient assessable income, from all sources, to fully recoup the exploration or prospecting expenditure.

Where the conditions of paragraphs (a) and (b) are satisfied, new sub-section (4E) will reduce the taxpayer's entitlement to deductions in future years in respect of the excess amounts of expenditure referred to in paragraph (b). The amount of the reduction will equal the amount of the income exempt from income tax by virtue of paragraph 23(pa) less the reductions (if any) of residual previous capital expenditure under sub-section 122C(3A), of exploration or prospecting expenditure under sub-section 122J(3A) and of exploration or prospecting expenditure under sub-section 122J(4A). Effecting the reduction in this manner enables a taxpayer to deduct any remaining excess exploration or prospecting expenditure relating to the disposed mining tenement on the most advantageous basis in future years.

Paragraph (d) of clause 15 proposes amending sub-section 122J(5) to include references to new sub-section 122J(4C) in consequence of the proposed insertion of that new sub-section. This will ensure, consistent with the principles underlying existing sub-section 122J(5), that a vendor of a mining or prospecting right or mining or prospecting information who transfers an entitlement to deductions for unrecouped expenditure in accordance with section 122B will not be eligible for a deduction in respect of the amount so transferred that represents undeducted exploration or prospecting expenditure incurred after 21 August 1984. Sub-section 122J(5) will also preclude a subsequent purchaser from becoming entitled to a deduction for such expenditure.

Clause 16: Deductions not allowable under other provisions

Clause 16 proposes the amendment of sub-section 122N(3) of the Principal Act. That section prevents the allowance of more than one deduction in respect of capital expenditure which has been or may become deductible under Division 10. It stipulates that such expenditure is not to be deductible or taken into account in determining a deduction under any other provision of the Principal Act.

Sub-section 122N(3) ensures that amounts of eligible capital expenditure which, by virtue of the operation of sub-sections 122D(3), 122DB(3), 122DD(3), 122DF(3), 122DG(6) and 122J(2), are not allowable as deductions in the year of income but are carried forward for deduction under Division 10 in subsequent years are not to be deductible under any other provision of the income tax law.

The amendment proposed will make it clear that the same principle is to apply to amounts of mineral exploration or prospecting expenditure incurred after 21 August 1984 that are carried forward, by the application of the proposed new sub-section 122J(4B), for deduction in future years.

Clause 17: Deductions in respect of capital expenditure

Clause 17 will amend section 124ZC of the Principal Act, which establishes the primary entitlement to deductions under Division 10C of Part III of the Act. Division 10C provides deductions to an owner or eligible lessee in respect of capital expenditure on the construction of a hotel, motel or guest house containing at least 10 bedrooms to be used wholly or principally for the provision of short-term traveller accommodation where construction of the building commenced after 21 August 1979. Also eligible for deduction under the Division is the construction cost of a building to the extent that it contains not less than 10 apartments, units or flats for use wholly or principally in providing short-term accommodation for travellers. Capital expenditure on building extensions, alterations or improvements qualifies on a similar basis to capital expenditure on original buildings.

The maximum deduction presently allowable under the Division is 2 1/2% per annum of the cost of the construction of the building, extension, alteration or improvement over a period of 40 years. The amendments proposed by clause 17 will increase the annual deduction allowable to 4% of the cost, with the deduction being available for a period of 25 years, where the construction of the building, extension, alteration or improvement commenced after 21 August 1984.

Paragraph (a) of clause 17 will omit existing paragraph 124ZC(1)(c) and substitute a new paragraph 124ZC(1)(c). Under the new paragraph a taxpayer who, during the whole of a year of income, was the sole owner of a hotel, motel or guest house will be entitled to an annual deduction equal to 4% of the amount of qualifying expenditure where construction of the building, or an extension, alteration or improvement to that building, commenced after 21 August 1984. A taxpayer who is one of a number of owners will be entitled to a proportion of the full 4% deduction under the sub-section.

Paragraph (b) of clause 17 proposes the omission of existing paragraph 124ZC(2)(c) and the substitution of a new paragraph 124ZC(2)(c). By the new paragraph, a taxpayer who, during part of a year of income, owned a hotel, motel or guest house will be entitled to a proportion of the full annual deduction of 4% of qualifying expenditure where the relevant construction commenced after 21 August 1984. A taxpayer who, for part of a year of income, is one of two or more owners of a hotel, motel or guest house will similarly be entitled to a proportion of the 4% deduction.

Paragraphs (c) and (d) of clause 17 replace existing paragraphs 124ZC(3)(c) and 124ZC(4)(c) respectively with new paragraphs 124ZC(3)(c) and 124ZC(4)(c). These new paragraphs are in similar terms to new paragraphs 124ZC(1)(c) and 124ZC(2)(c) discussed above but confer corresponding deduction entitlements in respect of qualifying apartment expenditure.

By paragraph (e) of clause 17 a new sub-section 124ZC(5) is substituted for the existing sub-section. Sub-section (5) operates to ensure that deductions cease to be available in respect of an amount of qualifying expenditure after the expiration of a 40 year period commencing on the day on which the building, extension, alteration or improvement to which the qualifying expenditure relates was first used after completion of the relevant construction. The effect of substituting the new sub-section (5) will be to reduce the period over which deductions are available to 25 years for a building or an extension, alteration or improvement, as the case may be, that commenced to be constructed after 21 August 1984.

Clause 18: Deductions in respect of qualifying expenditure

By this clause it is proposed to amend section 124ZH of the Principal Act, under which the primary entitlement to deductions under Division 10D of Part III of the Act is established. Under Division 10D, deductions are available in respect of capital expenditure on the construction of non-residential buildings or the construction of extensions, alterations or improvements to such buildings used for the purpose of producing assessable income where construction commenced after 19 July 1982.

The purpose of the amendments proposed by clause 18 is to increase the maximum annual deduction allowable under the Division to 4% of the cost of construction of a building or an extension, alteration or improvement to a building that commenced to be constructed after 21 August 1984. The present write-off rate of 2 1/2% per annum, available over a period of 40 years, will continue to apply to those buildings, etc., the construction of which commenced on or before that date.

By paragraph (a) of the clause, existing paragraph 124ZH(1)(c) is to be omitted and a new paragraph 124ZH(1)(c) substituted to provide that a taxpayer who, during the whole of a year of income, owned a non-residential building, will be entitled to a deduction of an amount equal to 4% of the amount of qualifying expenditure where that building or an extension, alteration or improvement to that building, commenced to be constructed after 21 August 1984. Similarly, an appropriate proportion of the new 4% deduction will be allowed under the sub-section to a taxpayer who, during an entire year of income, was one of a number of owners of a non-residential building where construction work commenced after 21 August 1984.

Paragraph (b) of clause 18 substitutes a new paragraph 124ZH(2)(c), which will permit a taxpayer who, during part of a year of income, owns a non-residential building to also obtain the benefit of the increased deduction rate. A taxpayer who is the sole owner of such a building will be entitled to a proportion of the full annual deduction of 4% of qualifying expenditure where construction of the building or an extension, alteration or improvement to the building commenced after 21 August 1984. A taxpayer who is one of two or more owners for part of an income year may likewise obtain a proportionate deduction.

By paragraph (c) of clause 18 existing sub-section 124ZH(3) is to be replaced with a new sub-section 124ZH(3). Under the new sub-section, deductions will not be available in respect of an amount of qualifying expenditure after a period of 40 years where construction of the relevant building, extension, alteration or improvement commenced on or before 21 August 1984. Where construction commenced after that date, the time limit for the availability of deductions will be 25 years.

Clauses 19-22: Concessional rebates

Introductory Note

Provision is made in Subdivision A of Division 17 of Part III of the Principal Act for a system of concessional rebates. The sections contained in that Subdivision (sections 159H to 159Y) specify the income tax rebates available, the circumstances in which the rebates are allowable and the tests to be applied in determining a taxpayer's entitlement to those rebates. Under the present law, section 159H limits the rebate of tax allowable under the Subdivision to individual taxpayers who are residents of Australia and trustees where an assessment is made under section 98 of the Principal Act in respect of a resident individual beneficiary of a trust estate.

The existing law restricts the eligibility for spouse-related concessional rebates to taxpayers who are legally married. A taxpayer who wholly maintains a legal spouse is entitled to the dependent spouse rebate and other spouse-related rebates, if applicable. A taxpayer with a dependent de facto partner is denied those rebates. However, a taxpayer who maintains a de facto spouse may receive, under the existing law, a housekeeper rebate where the de facto spouse is wholly engaged in keeping house for the taxpayer and in caring for certain dependants of the taxpayer.

These clauses will amend the concessional rebate provisions of the present law to generally treat legally and de facto married taxpayers alike.

Clause 19: Application

Clause 19 proposes the insertion in section 159H of a new sub-section - sub-section (3) - to recognise de facto relationships for the purpose of determining a taxpayer's entitlement to a tax rebate for a dependent spouse. This new sub-section will also affect a taxpayer's entitlement to other rebates which are at present determined by reference to the taxpayer's marital status.

Proposed new sub-section 159H(3) will ensure that, in determining a taxpayer's entitlement to rebates under Subdivision A, all references to the taxpayer's spouse in the Subdivision shall be taken to include a reference not only to his or her legal spouse, but also to his or her de facto spouse. It is proposed by this amendment that, where a man and a woman live together as husband and wife on a bona fide domestic basis although they are not legally married to each other, the Subdivision applies as if they were legally married to each other. A de facto couple will, in appropriate circumstances, be taken as having lived together as husband and wife in a bona fide domestic basis notwithstanding that they may on occasions be temporarily apart, for example, where one partner is absent in connection with his or her employment, or is hospitalised for an extended period.

The proposed amendment will have the effect of allowing a taxpayer in a bona fide de facto relationship to be eligible for the dependent spouse rebate on the same basis as the rebate that is presently available to a legally married taxpayer.

As a consequence of extending eligibility for the spouse rebate to a taxpayer with a de facto spouse, the housekeeper rebate will now be available to a taxpayer in a de facto relationship on the same basis as it is available to a married taxpayer. This is where the housekeeper is wholly engaged in keeping house for the taxpayer and in caring for the taxpayer's spouse who is in receipt of an invalid pension under the Social Security Act 1947, or where the Commissioner is of the opinion that, because of special circumstances, it is just to allow a rebate.

A further effect of the recognition of de facto relationships will be that eligibility for spouse-related concessional rebates available under Subdivision A will be available to a taxpayer with a de facto spouse. Accordingly, a taxpayer who contributes to the maintenance of a parent of his or her de facto spouse will be eligible for the dependent parent rebate in accordance with the established qualifying conditions.

In addition, subject to the threshold of $2000 for general concessional rebates, a taxpayer with a de facto spouse will be eligible for rebates for medical, dental, optical, etc expenses (section 159P), funeral expenses (section 159Q) and, where the spouse is under 25 years of age, education expenses paid by the taxpayer in respect of that spouse (section 159T).

The proposed amendment will also affect a taxpayer's entitlement to the zone rebate allowable to residents of remote areas (section 79A) and taxpayers serving with an overseas United Nations force (section 23AB) or an Australian defence force in a designated overseas area (section 79B). The total rebate available to such taxpayers is composed of a basic rebate and a variable component based on the total of rebates for dependants allowable under section 159J. Entitlement to a rebate for a de facto spouse will, therefore, flow through to the zone rebate available to an eligible taxpayer.

Clause 20: Rebates for dependants

This clause proposes a number of amendments to section 159J of the Principal Act under which rebates of tax may be allowed to taxpayers who contribute to the maintenance of certain dependants. The amendments proposed are consequential on the extension of eligibility for the dependant spouse rebate to a taxpayer with a de facto spouse.

The clause proposes the addition of four new sub-sections to section 159J - sub-sections (5A), (5B), (5C) and (5D). The purpose of these new sub-sections is to deny a taxpayer more than one dependent spouse rebate, to allow in special circumstances a rebate where a taxpayer contributes to the maintenance of more than one spouse and to ensure that a taxpayer who contributes to the maintenance of a de facto spouse is not entitled to a daughter-housekeeper rebate.

Where a taxpayer contributes to the maintenance of both a legal and one or more de facto spouses, more than one de facto spouse or to more than one legal spouse in cases where foreign marriage laws permit polygamous marriages which are recognised under Australian law, new sub-section 159J(5A) will operate to ensure that the taxpayer is entitled to one dependent spouse rebate only. Where no spouse has a separate net income, the taxpayer will be entitled to the full amount of the rebate for one spouse. Where one or more spouses has separate net income sufficient only to reduce the amount of the rebate that would otherwise be allowable for that spouse, the rebate to be allowed will, subject to new sub-section (5B), be the lesser or least of the rebates that would otherwise be allowable in respect of each spouse.

By reason of the operation of the proposed new sub-section 159J(5B), the Commissioner will be authorised to allow a higher rebate than that permitted by sub-section (5A) (up to the maximum rebate allowable for one spouse) where the Commissioner is satisfied that special circumstances make it reasonable to do so. An example of such circumstances would be where a taxpayer and his or her legal spouse are estranged and, by application of the separate net income test, a greater rebate is allowable for the de facto spouse with whom the taxpayer lives.

Proposed new sub-section 159J(5C) also considers the case of a taxpayer who contributes to the maintenance of more than one spouse. If one spouse has a separate net income which is sufficiently high that the rebate which would otherwise be allowable in respect of that spouse is eliminated, the taxpayer will generally not be allowed a dependent spouse rebate. However, it is proposed that the Commissioner will be authorised to allow a rebate (up to the maximum rebate allowable for one spouse) where the Commissioner is satisfied that special circumstances make it unreasonable to deny the rebate entirely. An example of such circumstances would be where a taxpayer and his or her legal spouse are no longer living together but the taxpayer is contributing to the maintenance of the legal spouse and also is maintaining a de facto spouse. If the estranged spouse had a separate net income sufficiently high to eliminate the rebate that would otherwise be allowable, sub-section (5C) would operate to deny the rebate to the taxpayer for a de facto spouse, unless the Commissioner was satisfied that, because of special circumstances, it was unreasonable to deny the rebate. In such a case, the rebate would be allowed for the de facto spouse, subject to the separate net income test.

Proposed sub-section 159J(5D) will operate to ensure that a taxpayer who contributes to the maintenance of a de facto spouse will not be allowed a rebate for a daughter-housekeeper. A taxpayer with a legal spouse is denied a rebate for a daughter-housekeeper under the existing tax law. Accordingly, this provision will ensure that a taxpayer who contributes to the maintenance of a de facto spouse is treated on the same basis.

Clause 21: Sole parent rebate

Existing section 159K of the Principal Act allows a rebate to a taxpayer who has the sole care of one or more dependants who are children under 16 years of age or students under 25 years of age and who is not entitled to a rebate for a spouse, daughter-housekeeper or housekeeper. This rebate is intended primarily for the benefit of a single, widowed or divorced parent caring for a child or qualifying student and who is not eligible for a rebate in respect of a daughter-housekeeper or housekeeper.

A taxpayer with a de facto spouse is at present denied the sole parent rebate because of the limiting effect of sub-section 159K(4). This clause proposes to remove this limitation. The consequential effect of the proposed general extension of Subdivision A to taxpayers in de facto relationships will make sub-section 159K(4) unnecessary.

Clause 22: Application of amendments

By this clause, which will not amend the Principal Act, the amendments made by clauses 19, 20 and 21 will apply to assessments for the 1984-85 and subsequent years of income.

Clause 23: Rebate in respect of certain pensions, etc.

This clause proposes to amend section 160AAA of the Principal Act to increase the taxable income level at or below which the maximum pensioner rebate of $250 is available and to provide new rebates of tax for taxpayers in receipt of social security unemployment, sickness or special benefits.

Under section 160AAA a taxpayer in receipt of an Australian social security or repatriation pension that is subject to tax in Australia may be entitled to a rebate of tax which is designed to ensure that persons wholly or mainly dependent on such pensions will not have to pay tax. The maximum rebate of $250 shades-out at the rate of 12.5 cents for each dollar by which the taxpayer's taxable income exceeds a specified level. The increase in this specified level proposed by this clause reflects the effect of the personal income tax rate scale that is to apply from 1 November 1984.

The proposed new rebates for recipients of social security unemployment, sickness or special benefits are $75 for married (including de facto married) beneficiaries and $50 for single beneficiaries. Both rebates will be shaded-out at the rate of 12.5 cents for each dollar by which the taxpayer's taxable income exceeds specified levels.

Paragraph (a) of sub-clause 23(1) proposes a formal amendment to section 160AAA which is consequential on the introduction of the new beneficiary rebates, and the need to ensure that a taxpayer who qualifies for both the pensioner rebate and the beneficiary rebate will only be entitled to whichever rebate provides the greater benefit.

Paragraph (b) will amend section 160AAA to increase the taxable income level - from $5,429 to $5,595 - at which the maximum amount of the pensioner rebate is available before it begins to shade-out. This proposed change reflects the effect of the new personal income tax rate scale that is to apply from 1 November 1984, and will mean that where an eligible taxpayer's taxable income (that is, total assessable income less allowable deductions) is $5,595 or less ($5,533 or less for 1984-85 - see sub-clause (3)), the full rebate of $250 will be allowed. The rebate cannot, however, in terms of existing section 160AD of the Principal Act, exceed the tax that would otherwise be payable. The rebate will be shaded-out where a taxpayer's taxable income exceeds $5,595 ($5,533 for 1984-85, see sub-clause (3)), and will shade-out fully at a taxable income of $7,533 in 1984-85 and $7,595 in subsequent years.

Paragraph (c) proposes the insertion of three new sub-sections - sub-sections (2) to (4) - in section 160AAA of the Principal Act to give effect to the new rebates.

To qualify for the relevant rebate, the assessable income of the taxpayer must, by virtue of new sub-section 160AAA(2), include an unemployment, sickness or special benefit paid under Part VII of the Social Security Act 1947. Where this basic criterion is met, entitlement to a rebate will be determined in accordance with new paragraph (2)(a), in the case of a taxpayer who is married (including de facto married - see new sub-section (4)) at any time during the year of income, or new paragraph (2)(b) in the case of unmarried taxpayers.

New sub-paragraph 160AAA(2)(a)(i) is to the effect that where a married taxpayer's taxable income is $7,989 or less, a rebate of $75 is to be allowed. Generally it will be accepted that a taxpayer will be eligible for a rebate under this sub-paragraph if, at any time during the year of income, he or she is in receipt of a benefit which is paid at the married rate. The rebate cannot, however, in terms of existing section 160AD of the Principal Act, exceed the tax that would otherwise be payable.

By new sub-paragraph 160AAA(2)(a)(ii) the rebate will be shaded-out where a married taxpayer's taxable income exceeds $7,989. In such a case, the rebate of $75 is to be reduced by 12.5 cents for each $1 of the excess. For example, if the 1984-85 taxable income of a taxpayer were $8,229, the maximum rebate - $75 - would be reduced by $30 to $45. The rebate will shade-out fully at a taxable income of $8,589.

New sub-paragraph 160AAA(2)(b)(i) specifies that where an unmarried taxpayer's taxable income is $4,783 or less, the rebate to be allowed is $50. As with the $75 rebate for married taxpayers, this rebate cannot, in terms of existing section 160AD of the Principal Act, exceed the tax that would otherwise be payable. Under new sub-paragraph 160AAA(2)(b)(ii), the rebate will be shaded-out where a taxpayer's taxable income exceeds $4,783. In such a case, the rebate of $50 is to be reduced by 12.5 cents for each $1 of the excess. For example, if the 1984-85 taxable income of a taxpayer were $5,103, the maximum rebate - $50 - would be reduced by $40 to $10. The rebate will shade-out fully at a taxable income of $5,183.

New sub-section 160AAA(3) will deal with the situation where a taxpayer is entitled to both the pensioner rebate under sub-section (1) and one of the beneficiary rebates under new sub-section (2). By paragraph 160AAA(3)(a), where a taxpayer is so entitled to both rebates and the amount of them is the same, only one of the rebates will be allowed in the taxpayer's assessment. Where a taxpayer is entitled to both rebates but their amounts are not the same, paragraph 160AAA(3)(b) will ensure that the taxpayer is allowed the greater of those rebates.

New sub-section 160AAA(4), which is relevant to the application of paragraph 160AAA(2)(a), is to the effect that a man and a woman living together as husband and wife on a bona fide domestic basis, although not legally married, are to be treated for the purposes of the section as if they are legally married.

By sub-clause (2), the amendments to section 160AAA proposed by sub-clause (1) are to first apply in income tax assessments of the 1984-85 year of income, but this is subject to sub-clause (3) which is a transitional provision having application in relation to the pensioner rebate for that year only.

In applying amended sub-section 160AAA(1) in 1984-85 assessments, the taxable income level at or below which the maximum existing pensioner rebate of $250 is to be available is, by virtue of sub-clause (3), to be $5,533 - reflecting the part-year effect of the new personal income tax rate scale that is to apply from 1 November 1984. The rebate of $250 will be allowed where taxable income does not exceed $5,533 and will shade-out at the rate of 12.5 cents for each $1 of taxable income in excess of $5,533. The rebate for 1984-85 will thus shade-out fully at a taxable income of $7,533.

Clause 24: Interpretation - Provisional tax

This clause proposes an amendment to section 221YA of the Principal Act consequential upon the insertion in that Act - by section 21 of the Income Tax Assessment Amendment Act (No. 3) 1984 - of section 77F, which authorises deductions for eligible capital subscriptions to licensed management and investment companies.

Broadly, provisional tax payable by a taxpayer in respect of a year of income is calculated by reference to the taxpayer's provisional income in relation to that year. Generally provisional income of a taxpayer is the taxable income of the next preceding year of income - but this is varied in certain circumstances. Where the taxable income of a taxpayer has been affected by an income equalization deposit or withdrawal, or by capital expenditure on a qualifying Australian film, the provisional income of the taxpayer is the amount that would have been the taxable income but for that income equalization deposit or withdrawal or that capital expenditure on a qualifying Australian film.

Clause 24 will insert references to section 77F in paragraphs (b), (d) and (e) of sub-section 221YA(5). This will have the effect that where a taxpayer has been allowed a deduction under section 77F in a year of income, the provisional income of that taxpayer will be adjusted to the amount that would have been the taxable income of that year but for the allowance of the deduction under section 77F. The amendments also cover those situations where the taxable income of a taxpayer has been calculated after taking into account any combination of income equalization deposits and withdrawals, capital expenditure on a qualifying Australian film and eligible capital subscriptions to licensed management and investment companies.

Clause 25: Provisional tax for 1984-85 Year of income

The purpose of this clause, which will not amend the Principal Act, is to specify the basis for calculating 1984-85 provisional tax for taxpayers who do not "self-assess". Broadly, the clause will ensure that the provisional tax is to be calculated by applying 1984-85 rates of tax and medicare levy to 1983-84 taxable incomes as increased by 10 per cent. With the exception of the averaging rebate which is discussed below, rebates are to be taken into account as allowed in 1983-84 income tax assessments.

Where a taxpayer chooses to "self-assess", that is, to have 1984-85 provisional tax based on his or her own estimate of 1984-85 income, the provisional tax will be, basically, the amount calculated by applying 1984-85 rates of tax and medicare levy to that estimated income and by deducting estimated 1984-85 rebates.

For a taxpayer whose 1983-84 taxable income reflects a deduction allowed for capital moneys expended in producing a qualifying Australian film or for subscriptions to shares in licensed management and investment companies, 1984-85 provisional tax will be calculated as if no such deduction had been allowed, with the taxable income so adjusted increased by 10 per cent.

For primary producers who do not "self-assess", the clause will require that, for provisional tax purposes, any averaging rebate to which the primary producer is entitled, be recalculated using 1983-84 taxable income (as adjusted for any income equalization deposits or withdrawals, capital expenditure on a qualifying Australian film or subscription to shares in licensed management and investment companies) as increased by 10 per cent. 1984-85 rates of tax will be applied, on the basis of the average income for 1983-84 assessment purposes - the average income itself will not be recalculated to reflect the notional 10 per cent increase in taxable income for provisional tax purposes. A primary producer may qualify for a part only of the averaging benefit in 1983-84, that is, his or her income other than from primary production in that year may have exceeded $5,000. In such a case the clause will ensure, in effect, that the proportion of the averaging adjustment - equal to the proportion which income from primary production bears to total taxable income - to be taken into account in calculating 1984-85 provisional tax is the same as the 1983-84 proportion. That is, it is not to be reduced to reflect the notional 10 per cent increase in income other than from primary production.

For taxpayers deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premiums), or section 158D (abnormal income of authors or inventors) of the Assessment Act, provisional tax, before deduction of rebates, is to be calculated by applying to their 1983-84 taxable income increased by 10 per cent, the 1984-85 rate of tax applicable to their 1983-84 notional income. That is, the rate of tax is not to be increased to reflect a 10 per cent increase in notional income.

Taxpayers who were minors, that is, under 18 years of age, at 30 June 1984 were liable for tax for 1983-84 under the income tax provisions applying to minors if, in the case of a non-resident, the minor had any eligible taxable income for the purposes of Division 6AA of Part III of the Assessment Act for that year or if, in the case of a resident, that eligible taxable income exceeded $416. For purposes of the 1984-85 provisional tax calculation, the portion of a minor's taxable income, as increased by 10 per cent, that is to be taken as eligible taxable income, is to be the same as that which the 1983-84 eligible taxable income of the taxpayer bore to his or her taxable income for that year.

Where an amount of income tax or medicare levy is payable in 1983-84, an amount, additional to the provisional tax (if any) otherwise payable, representing medicare levy for 1984-85 is to be incorporated in the 1984-85 provisional tax calculation. In these situations the medicare levy component of provisional tax will be calculated by applying the full year levy rate of 1% to 1983-84 taxable income moved up by 10%. The increased low income thresholds and ceiling to apply for levy purposes in 1984-85 will be taken into account. In addition, wherever a part or full exemption from levy was received by an individual in his or her 1983-84 assessment, the same exemption will be provided in the calculation of levy for 1984-85 provisional tax purposes.

Clause 26: Amendment of assessments

This clause, which will not amend the Principal Act, will ensure that the Commissioner of Taxation has authority to re-open an assessment made before this Bill becomes law if that should be necessary in order to give effect to the extension of provisions of the Principal Act proposed by clauses 9 and 10 in relation to gifts.