Supplementary Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Glossary
The following abbreviations and acronyms are used throughout this supplementary explanatory memorandum.
| Abbreviation | Definition |
|---|---|
| Commissioner | Commissioner of Taxation |
| ETP | eligible termination payment |
| ITAA 1936 | Income Tax Assessment Act 1936 |
| ITAA 1997 | Income Tax Assessment Act 1997 |
| TLAB 5 2003 | Taxation Laws Amendment Bill (No. 5) 2003 |
General outline and financial impact
Thin capitalisation
Amendments 1 to 5, 8 and 9 amend Schedules 1 and 2 to the bill to ensure that the amendments to Division 820 (thin capitalisation rules) of the ITAA 1997 have their intended effect. Amendments 6 and 7 address issues identified in the application of the thin capitalisation rules.
Date of effect: The amendments to Schedule 1 will apply from the start of a taxpayer's first income year commencing on or after 1 July 2001. Amendments to Schedule 2 will apply for income years commencing on or after 1 July 2002.
Proposal announced: Not previously announced.
Financial impact: Nil.
Compliance cost impact: The amendments will not affect compliance costs.
Reducing tax on the excessive component of eligible termination payments
Amendments 10 to 13 amend Schedule 6 to the bill to ensure that the measure to reduce the effective rate of tax on the excessive component of an ETP paid by a superannuation fund will apply to an excessive component of a death benefit paid to a dependant of a deceased fund member, as was intended.
Date of effect: These amendments will apply to ETPs made on or after 1 July 2002.
Proposal announced: Not previously announced.
Financial impact: Nil.
Compliance cost impact: The amendments will not affect compliance costs.
Tax losses - consequential amendments to the consolidation provisions
Amendments 14 and 15 amend Schedule 8 to the bill to ensure that allowing corporate tax entities to choose the amount of prior year losses to deduct in a later year of income does not have unintended consequences for the consolidation loss rules.
Date of effect: 1 July 2002.
Proposal announced: The measure to allow corporate tax entities to choose the amount of prior year losses to deduct in a later year of income was announced in the 2002-2003 Federal Budget on 14 May 2002.
Financial impact: These are consequential amendments to the consolidation provisions and are not expected to have a revenue impact.
Compliance cost impact: These amendments are not expected to impact on compliance costs.
Chapter 1 - Thin capitalisation
Outline of chapter
1.1 Amendments 1 to 5, 8 and 9 refine a number of items in the thin capitalisation Schedules in the bill so that these items have their intended effect. Two new parts are added to Schedule 1 by amendments 6 and 7 to address an identified integrity risk and remove an anomaly in the thin capitalisation rules. There is a change to the explanatory memorandum that provides additional information on item 11 in Schedule 3.
Explanation of amendments
1.2 The amendments affect items 18 to 21 in Schedule 1 to the bill. These items detail new arrangements for borrowing securities in determining the maximum allowable debt of financial entities. The amendments insert a reference to 'financial entities' to clarify that the arrangements only apply to financial entities.
1.3 This amendment affects item 38 in Schedule 1 to the bill. Item 38 seeks to ensure that in determining the arm's length debt amount only Australian operations are included. The amendment inserts an important linking paragraph that will ensure that the provision operates as intended.
1.4 This amendment introduces a new part in Schedule 1 to the bill (Part 12). Because of the way in which worldwide equity is defined, it is possible for an Australian entity and its controlled foreign entities to have negative worldwide equity. The amendment will prevent an entity in this situation from using the worldwide gearing debt amount to determine its maximum allowable debt because otherwise the entity would be allowed more debt than assets for thin capitalisation purposes. This is an inappropriate outcome and the amendment is necessary to protect the revenue.
1.5 This amendment introduces a new part in Schedule 1 to the bill (Part 13). The amendment will ensure that all entities subject to the thin capitalisation rules use the same definition of non-debt liabilities. The current definition of non-debt liabilities only recognises a provision for a distribution of profit made by a corporate tax entity. The amendment allows all entities subject to thin capitalisation rules to exclude provisions for distributions of profit in their calculation of non-debt liabilities. This ensures, for example, that a company and a trust (in the same financial position) will have the same value for non-debt liabilities.
1.6 This amendment affects item 28 in Schedule 2 to the bill. The amendment addresses several unintended outcomes from the application of excluded equity interest introduced in TLAB 5 2003.
1.7 An equity interest (e.g. a share) is an excluded equity interest where it is issued prior to a valuation day (the time at which an entity's assets and liabilities are measured for thin capitalisation purposes) and cancelled shortly thereafter in order to allow the entity to hold a higher level of debt at the valuation day. Where an equity interest meets the definition of an excluded equity interest it is deducted from the assets of the entity thereby reducing the maximum allowable debt of the entity.
1.8 This amendment changes the meaning of excluded equity interest in TLAB 5 2003 to ensure that it is limited to transactions between associates and where the interest is on issue for less than 180 days. This will ensure that the measure is appropriately targeted.
1.9 This amendment is consequential to amendment 8.
Correction to the explanatory memorandum
1.10 The following text should replace paragraph 1.122. This text provides additional detail on the calculation of retained earnings in the definition of equity capital.
1.11 Equity capital also includes:
- •
- general reserves and asset revaluation reserves;
- •
- opening retained earnings (less any distributions declared but not paid that are not attributable to the entity's earnings for the current year) or accumulated losses (i.e. negative retained earnings);
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- current year earnings (net of expected tax and distributions) or losses; and
- •
- provisions for distributions.
Chapter 2 - Reducing tax on the excessive component of eligible termination payments
Outline of chapter
2.1 Amendments 10 to 13 refine a number of items in Schedule 6 to the bill so that these items have their intended effect. That is, the amendments will ensure that the measure to reduce the effective rate of tax on the excessive component of an ETP paid by a superannuation fund will apply to an excessive component of a death benefit paid to a dependant of a deceased fund member.
Explanation of amendments
2.2 The amendments affect items 5 to 8 in Schedule 6 to the bill. Each of items 5 to 8 are identical in themselves, but apply in different situations. Items 5 to 8 insert a new rate of tax of 38% into the Income Tax Rates Act 1986 and specify the amount of an excessive component to which the new rate is applied.
2.3 The amount of the excessive component to which the new rate is applied involves calculating the amount that would have been the taxed element of the retained amount of the post-June 1983 component of the ETP if the amount of the excessive component of the ETP had been nil. The difference between that amount and the actual amount of the post-June 1983 taxed element is the amount to which the reduced tax rate applies.
2.4 Without the proposed amendment to Schedule 6, discussed in paragraph 2.6, these amounts would always be nil when a death benefit is paid to a dependant. This is because section 27AAA of the ITAA 1936 reduces all the components, except any excessive component, to nil (i.e. if there is an excessive component, only it will remain).
2.5 Therefore both parts of the calculation referred to in paragraph 2.3 would always be nil. Consequently the difference between the two amounts would always be nil and therefore the amount of the excessive component to which the lower tax rate of 38% would be applied would always be nil.
2.6 To overcome this result, the amendment instructs that the calculation is carried out disregarding section 27AAA of the ITAA 1936.
Example 2.1
Susan receives an ETP from the superannuation fund of her deceased husband, Tom. The amount of the ETP is $50,000 and it is entirely a post-June 1983 component (the whole of which is a taxed element).
Due to Tom's previous superannuation benefits, the Commissioner determines that $20,000 of the ETP is excessive. Therefore the taxed element of the post-June 1983 component is reduced to $30,000. Under section 27AAA of the ITAA 1936 the Commissioner further reduces the taxed element of the post-June 1983 component to nil.
If the excessive component had been nil and section 27AAA of the ITAA 1936 is disregarded, then the taxed element of the post-June 1983 component would have been $50,000. The difference between this amount and the taxed element of the post-June 1983 component of the ETP of $30,000 (after the Commissioner determined an excessive component, but still disregarding section 27AAA) is $20,000. This amount represents the post-June 1983 taxed element of the excessive component for the purposes of the measure and is taxed at 38%.Note: If section 27AAA is not ignored then the section would automatically reduce the $50,000 and $30,000 amounts in the previous paragraph of the example to nil. The difference between the two would be nil and consequently the entire excessive component would be taxed at 47%.
Chapter 3 - Tax losses - consequential amendments to the consolidation provisions
Outline of chapter
3.1 Amendments 14 and 15 refine a number of items in Schedule 8 to the bill so that these items apply appropriately to consolidated groups. The amendments ensure that allowing corporate tax entities to choose the amount of their prior year losses to deduct in a later year of income does not have unintended consequences for the consolidation loss rules in section 707-310 of the ITAA 1997.
Explanation of amendments
3.2 The amendments ensure that the limit on the amount of transferred losses able to be used by the head company of a consolidated group in section 707-310 of the ITAA 1997 is set on the assumption that the head company chooses to use all its available group losses. [Schedule 8, item 17B, paragraph 707-310(3A)(a)]
3.3 This ensures that choosing to use less than the available amount of group losses does not result in a head company using transferred losses before group losses of the same kind.
3.4 Group losses are losses incurred by the consolidated group itself. Transferred losses are losses incurred by members of the group prior to consolidating and are transferred to the head company upon entry to consolidation. The consolidation loss rules were designed so that group losses should be used before transferred losses.
3.5 Other choices made by the head company in the calculation of its actual taxable income will apply for the purposes of deriving the limit on the amount of transferred losses it can use. [Schedule 8, item 17B, paragraph 707-310(3A)(b)]
3.5 The amendments will also ensure that the amount of transferred losses able to be used by a head company is reduced to reflect the amount of available franking offsets. This is necessary to ensure that subsection 36-17(5) of the ITAA 1997, which prevents an entity from deducting an amount of prior year tax loss that would give rise to an excess franking offset, does not result in transferred losses being used before group losses of the same kind. [Schedule 8, item 17A, paragraph 707-310(3)(c) and item 17B, paragraph 707-310(3A)(c)]
3.6 The amendments will apply from 1 July 2002.