House of Representatives

Explanatory Memorandum

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

GENERAL OUTLINE

Taxation Laws Amendment Bill (No.5) 1987

This Bill will amend -

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the Income Tax Assessment Act 1936 -

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to exempt from interest withholding tax interest paid to non-residents by offshore banking units (OBUs) on borrowings from non-residents in relation to offshore banking (proposal announced on 1 July 1986 and expanded on 9 April 1987);

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to provide roll-over relief (that is, deferral of liability) from tax on capital gains for re-organisations of resident unit trusts, commenced after the date of introduction of this Bill (9 December 1987), where a resident company is interposed between the unitholders and the trust (proposal announced on 29 September 1987);

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to tax as eligible termination payments lump sum payments made on the death of a member of a superannuation fund where the recipient had the option to take a pension or annuity instead of the lump sum (proposal announced on 12 January 1987);

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to tax as eligible termination payments lump sum payments, made on the death of an employee, member of a superannuation fund or depositor with an approved deposit fund, to a person who was not a dependant of the deceased person (proposal announced on 12 January 1987) and to disallow the roll-over of such payments if made after the date of introduction of this Bill;

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to impose conditions to be satisfied by annuities purchased as roll-over investments for eligible termination payments (proposal announced on 12 January 1987);

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as a corollary of imposing the new eligibility conditions for roll-over annuity investments, to require that roll-over annuities issued by life assurance companies, friendly societies, trade unions and other employee associations continue to meet those conditions during a year of income if the income derived from that annuity business is to be exempt from tax, and to make the exemption for income derived by those organisations from immediate annuity business not sourced in roll-over payments conditional upon meeting tests similar to those for roll-over annuities (the conditions for immediate annuities to apply to annuities purchased after the date of introduction of the Bill);

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to disallow the roll-over of eligible termination payments made on the commutation of, or as the residual capital value of, a roll-over annuity, where the payment is made on the death of the annuitant and the recipient is not the widow or widower of the deceased person (proposal announced on 12 January 1987);

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to extend the so-called "death benefits" tax exemption, which applies to certain eligible termination payments made to or for the benefit of dependants of a deceased person, to payments of the residual capital value of roll-over deferred annuities that are still in the deferment phase when the annuitant dies (proposal announced on 12 January 1987);

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to disallow deductions for contributions to a superannuation fund by persons who do not have superannuation support from another person, such as an employer, where the contribution consists of a rolled-over eligible termination payment (proposal announced on 12 January 1987);

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consistent with other recent legislation relating to the tax treatment of superannuation funds, to treat 'de facto' spouses on the same basis as legal spouses for the purposes of the eligible termination payment provisions;

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to make it clear that an annuity is presently payable at all times after the commencement of the first payment period;

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to remove, with effect from 21 November 1987, the three year write-off for expenditure on buildings used in scientific research or in other qualifying research and development activities (proposal announced on 20 November 1987);

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to exclude from deductibility as "research and development activities", expenditure incurred in respect of the development of computer software that is not for sale, rent, licence, hire or lease to 2 or more persons not associated with the developer (proposal announced on 20 November 1987);

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to back-date the operative dates of the provisions contained in the Taxation Laws Amendment Bill (No.4) 1987 that will enable a "shelf company" to satisfy the common ownership test necessary to establish a group relationship between companies, to the income year in which each of the relevant grouping provisions of the law was first made available, and to extend the operation of the provisions to shelf companies acquired by the issue of new shares associated with the redemption of the subscriber shares (proposal announced on 17 November 1987);

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to extend the coverage of the income tax law to include income derived by non-residents from a range of activities in the offshore areas of Australia and its territories in addition to mineral exploration and exploitation activities which are already within its scope (proposal announced on 21 January 1987);

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to further extend the exemptions from Australian income tax for residents of certain Australian territories to include income derived in the offshore areas of those territories (proposal announced on 21 January 1987);

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to correct a technical deficiency in the description of the offshore areas to which the present income tax coverage of mineral exploration and exploitation activities extend, including those providing rebates for moneys paid on shares for the purposes of petroleum exploration, prospecting or mining (proposal announced on 21 January 1987);

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to exempt from withholding tax dividend income derived by the Australian branches of non-resident life assurance companies where such income is attributable to superannuation and certain life assurance policies;

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to extend the income tax rebate presently available in respect of taxable bonuses received under certain short-term life assurance policies to recipients of similar bonuses paid under policies issued by the State Government Insurance Corporation of Western Australia;

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to make minor changes to the provisional tax instalment provisions to deal with cases where a notice does not comply with the existing requirements of the law concerning the specification of due dates for payment;

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to make minor technical changes to Part IIIA dealing with the taxing of capital gains;

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the Taxation Laws Amendment Act (No. 4) 1987 -

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to modify its transitional provision related to the introduction of statutory thin capitalisation rules by extending, to 31 January 1988, the transitional year for taxpayers with an approved substituted accounting period ending after 30 November 1987 and before 31 January 1988 in lieu of 30 June 1988 (proposal announced on 30 November 1987).

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the Sea Installations Act 1987 -

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to delete from the Schedule to that Act a reference to the Income Tax Assessment Act 1936.

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the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987 -

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to repeal a redundant provision of the Sales Tax Assessment Act (No. 1) 1930;

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the Australian Capital Territory Taxation (Administration) Act 1969 -

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to give full effect to the proposal to bring the taxation treatment of debenture transfers in the ACT into line with the States by removing ACT stamp duty and tax on transfers of debentures (proposal announced on 16 July 1987);

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the Income Tax Act 1986, the Income Tax Rates Act 1986 and the Taxation Laws Amendment (Fringe Benefits and Substantiation) Act 1987 to make consequential technical changes.

Income Tax (Offshore Banking Units)(Withholding Tax Recoupment) Bill 1987

This Bill will declare and impose income tax on the "lost withholding tax amount" (a term defined in proposed new subsection 128NB(2) of the Income Tax Assessment Act 1936) in respect of certain dealings by current and former offshore banking units.

FINANCIAL IMPACT

Taxation Laws Amendment Bill (No.5) 1987

The direct revenue cost of the exemption from interest withholding tax for offshore banking is estimated at S2 million. This cost may be offset to some extent by higher company tax collections from any increase in the level of offshore banking business profits.

The nature of the proposed amendments of the capital gains and capital losses roll-over provisions contained in this Bill are such that a reliable estimate of the potential revenue effect cannot be made.

The package of measures affecting the taxation of eligible termination payments and annuities is expected to result in a net revenue gain of $4 million in 1986-87 and $30 million in a full year.

The amendments of the research and development concession are estimated to produce revenue savings of $5 million in a full year.

The amendments proposed in relation to the satisfaction of the common ownership test by a shelf company should have a negligible revenue impact.

Extending the scope of existing income tax exemptions for certain territory residents is not expected to have any effect on revenue.

Unquantifiable revenue losses will be prevented by extending Australia's income tax coverage of the offshore areas.

Restoration of the exemption from income tax of dividend income derived by Australian branches of non-resident life assurance companies, where that income is attributable to superannuation and certain life assurance policies, will have a negligible effect on the previously estimated net cost of the imputation system and related measures.

The revenue forgone by allowing the income tax rebate in respect of certain life assurance policies issued by the State Government Insurance Corporation of Western Australia will be offset by amounts which the Western Australian Government has agreed to pay to the Commonwealth as reimbursement for the rebate.

The amendments of the provisional tax instalment provisions are not expected to have any significant effect on revenue.

The cost of modifying transitional provisions of the thin capitalisation legislation is expected to be minimal.

The revenue forgone by abolishing ACT stamp duty and tax on transfers of debentures is estimated to be less than $250,000 in a full year.

Income Tax (Offshore Banking Units)(Withholding Tax Recoupment) Bill 1987

The revenue gain flowing from this measure is expected to be minimal. This is because the penal rate of tax which the Bill imposes is such as to discourage the dealings which would attract the tax.

MAIN FEATURES

The main features of the Bills are as follows:

Taxation Laws Amendment Bill (No.5) 1987

Offshore Banking Units (Clauses 6-7, 20-24, 28-32, 38-39 and 41-42)

This Bill will implement the proposal, announced initially on 1 July 1986 and in more detail on 9 April 1987, to exempt from interest withholding tax interest paid to non-residents by offshore banking units that operate in Australia and provides the legislative framework for the arrangements to apply in relation to that exemption.

The interest withholding tax exemption is, by the Bill, to be confined to certain eligible financial entities, being authorised banks subject to the Banking Act 1959, State Banks and other financial institutions authorised to deal in foreign exchange, where those entities are declared by the Treasurer in a Gazette notice to be offshore banking units. An offshore banking unit's activities may be conducted by an existing financial entity operating through a separate department, with separate accounts. Where a separately incorporated body is established for this purpose, that body would need to qualify as an eligible financial entity in its own right in order to attract the benefits of exemption.

The interest withholding tax exemption will apply where, in any currency, an offshore banking unit borrows, or accepts deposits from non-residents and where, in foreign currencies only, it borrows or accepts deposits from Australian residents. An offshore banking unit will be able to convert its foreign currency borrowings into Australian dollars, or into any other currency, before on-lending them.

Because the interest withholding tax exemption is basically intended to encourage offshore transactions and in particular on-lending only to non-residents, an offshore banking unit's funds that are exempt from interest withholding tax are not to be directly or indirectly lent to or deposited with Australian residents (other than another offshore banking unit). The Bill will not prohibit such lendings or deposits but, in combination with an associated measure, the Income Tax (Offshore Banking Units)(Withholding Tax Recoupment) Bill 1987, provides a significant disincentive through the proposed imposition of tax at a penal rate (but subject to remission in appropriate circumstances) in relation to withholding tax that would otherwise be payable on such transactions. The "lost withholding tax" is an amount determined in accordance with a prescribed formula contained in the legislation.

Although an offshore banking unit will be able to borrow from both non-residents and residents, only the former borrowings - in the Bill called "tax exempt loan money" - will generally attract the interest withholding tax exemption. To satisfy the legislative provisions it will be necessary that the accounting records of an offshore banking unit separately identify the amount of tax exempt loan moneys and other funds. Where an offshore banking unit receives a deposit from another such unit (the transfer being called an "offshore loan" in the Bill), the recipient offshore banking unit will be required to record the extent to which the funds received are tax exempt loan moneys.

The interest withholding tax exemption will have effect in relation to relevant interest payments (i.e., interest and amounts in the nature of interest) made in respect of relevant borrowings contracted for after 1 July 1986, but will not apply to relevant interest payments made before the payer becomes an offshore banking unit.

The Bill also contains provisions that will amend the relevant provisions of the Principal Act that are concerned with foreign source income and losses of residents so that:

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foreign tax credits generated in respect of offshore banking income will be available for offset only against the Australian tax payable on such income;

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the transfer by an offshore banking unit which is a wholly-owned subsidiary in a company group of excess foreign tax credits to any other company in the group will be precluded; and

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losses incurred by an offshore banking unit in a year of income in deriving offshore banking income will be quarantined for offset only against offshore banking profits of the offshore banking unit for a subsequent year or years of income.

Where an offshore banking unit is set up as a separate department within an entity, the maintenance of records separating the offshore banking unit's activities from the other activities of the entity will permit any foreign tax credits generated by an offshore banking unit to be appropriately quarantined. Similarly, it will be possible to ensure that any offshore banking unit losses incurred in a year of income are only offset against subsequent offshore banking unit profits. The Bill contains provisions quarantining credits and losses in this fashion.

Roll-over relief for capital gains tax purposes on the re-organisation of a resident unit trust (Clause 36)

Clause 36 will give effect to the proposal announced on 29 September 1987 to amend the capital gains and capital losses provisions to extend roll-over relief (that is, deferral of liability) to certain arrangements for the re-organisation of the affairs of a resident unit trust. Roll-over relief will be available where a resident company (not acting in the capacity of a trustee of a trust estate) is interposed between unitholders and a unit trust and the unitholders dispose of their units to the company solely in exchange for non-redeemable shares in the company. The amendments allow for the re-organisation of a unit trust to be carried out either by a direct exchange of units for shares or by the redemption or cancellation of units and an issue of shares.

The main requirements for allowance of roll-over relief where there is a disposal of units in a resident unit trust for shares in a resident company, are to be:

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the re-organisation commenced after the date of introduction of this Bill into the Parliament (9 December 1987);

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the consideration for the disposal consists solely of non-redeemable shares in the company;

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immediately after the re-organisation each of the former unitholders holds shares in the company in the same proportion as he or she held units in the unit trust immediately before the exchange, redemption or cancellation;

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the interest of each shareholder in the company immediately after the re-organisation is of the same value as the prior interest in the unit trust determined by comparing the value of the shareholding to the value of the units previously held;

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immediately after the re-organisation, the company is the sole unitholder in the unit trust and the former unitholders are the only shareholders in the company; and

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the company elects for roll-over relief to apply in respect of the re-organisation.

Where the required conditions have been satisfied, a unitholder (new shareholder) will be able to elect for roll-over relief. Any election must cover all the unitholder's units in the trust. The effect of the election is that there will be no capital gains tax liability in respect of the disposal to the company of units acquired after 19 September 1985. In addition, where the unitholder acquired all the units before 20 September 1985, the shares received by the unitholder as a result of the re-organisation will also be taken to have been acquired before 20 September 1985. This means that a later disposal of these shares by the taxpayer will not fall within the capital gains and capital losses provisions. If some only of a unitholder's units were acquired before 20 September 1985, an equivalent proportion of the shares received will be taken to have been acquired before that date. For shares taken to have been acquired on or after 20 September 1985, in determining a capital gain or a capital loss on a subsequent disposal of the shares the consideration in respect of the acquisition of the shares will be determined by reference to the relevant cost bases of the units.

For the company, the effect of the election for roll-over relief is that a proportion of the units in the unit trust may be taken to have been acquired before 20 September 1985. This will be determined by reference to the net value of assets of the unit trust that were acquired before 20 September 1985. For such remaining units as are taken to have been acquired on or after 20 September 1985, the amount of a capital gain or a capital loss on a subsequent disposal will be determined by taking into account the relevant cost bases of assets of the unit trust that were acquired on or after 20 September 1985 as reduced by any liabilities of the trust attributable to those assets.

Lump sum payments made as alternatives to superannuation pensions or annuities (Clause 11)

The Bill will give effect to the proposal announced on 12 January 1987 to tax as eligible termination payments lump sum payments made to a person following the death of a member of a superannuation fund where the person had a right to elect to receive a superannuation pension or an annuity instead of the lump sum. The amendment, which will apply to payments made after 12 January 1987, will treat the payments in a similar way to payments in commutation of a superannuation pension or annuity entitlement.

Lump sum payments to dependants of deceased superannuation fund members will continue to be treated as not being eligible termination payments provided there is no entitlement to receive a pension or annuity as an alternative.

Death benefits paid to persons other than dependants (Clause 11)

The Bill will also remedy a shortcoming in the law that allows certain payments, when made on death direct to persons who are not dependants, not to be taxed as eligible termination payments (i.e., payments by the former employer of a deceased person or from a superannuation fund or approved deposit fund of which the deceased person had been a member or depositor). The amendment will bring the law governing direct payments into line with that applying to payments of those kinds to the trustee of the estate of a deceased taxpayer, under which the payment is treated as an eligible termination payment except to the extent that dependants of the deceased will benefit from the estate.

The proposed amendment will ensure that death benefits paid direct to non-dependants are taxable by inserting new paragraphs in the definition of "eligible termination payment" to specifically deal with such payments. A complementary amendment is being made to the meaning of "dependant" for the purposes of the eligible termination payment provisions of the law so that a financially independent adult child of a taxpayer will not qualify as a dependant. The effect of the changes will be that the so-called "death benefits" exemption will be confined to payments made to or for the benefit of persons who are the spouse, former spouse or minor child of the deceased or who were actually financially dependent on the deceased person.

As announced on 12 January 1987, the proposed amendment has effect in relation to relevant payments made after 12 January 1987. By a related amendment, such payments made after the date of introduction of the Bill will not be permitted to be rolled over by way of the purchase of an annuity, as contributions to a superannuation fund or as deposits in an approved deposit fund.

Conditions of eligibility for roll-over annuity tax concessions (Clauses 11, 17, 18 and 19)

The Bill will give effect to the proposal announced on 12 January 1987 to prescribe conditions to be met by annuity contracts that attract the tax concessions associated with the purchase of annuities with rolled-over eligible termination payments, i.e., deferral of tax on the eligible termination payment and tax exemption for the annuity issuer on the income derived from the relevant annuity business. The new conditions apply to annuities purchased after 12 January 1987. An associated amendment of the definition of the term "dependant", to exclude from the definition adult children of a person who are not financially dependent on the person, will restrict the range of persons for whom residual benefits may be provided under a roll-over annuity contract.

The new eligibility conditions for roll-over annuities are principally concerned with the timing and amount of annuity payments. The purpose of the amendments is to prevent unreasonable deferment of annuity income and the tax thereon, having regard to the availability of the tax concessions just mentioned. Because the amendments will permit deferment of the commencement of an annuity income stream until the annuitant reaches the age of 65, the new conditions are directed at ensuring that a satisfactory income stream flows after that age is reached. The central condition under the new arrangements is that the Commissioner of Taxation must be satisfied that the annuity contract does not permit unreasonable deferment of annuity income during the period after the annuitant reaches 65 (or after the time when the purchaser of the annuity would have reached 65 had he or she not died). Among other things the Commissioner will be required to have regard to the pattern in which any guaranteed (or fixed) components of annual payments will be made, and also the time or times at which any bonus (or supplementary) payments may be made - and their amounts - having regard to the amounts of income derived by the issuer on which the bonuses are based, and the timing of the derivation of that income .

Having regard to the policy just outlined, it would be expected that guaranteed annuity payments after age 65 would not increase at an annual rate that exceeded that required to protect the purchasing power of the annuity. Also having regard to that policy, it would be expected that any bonus components of annual payments would reflect a consistent relationship between the amount of that bonus and the income of the annuity issuer by reference to which the bonus was calculated. It would also be expected that annuity bonuses, or supplements, if any, would be declared annually. The Commissioner will also be required to consider any other matters that are relevant to his being satisfied that the annuity contract does not permit unreasonable deferral of income.

Associated amendments will require that the annuity contract does not permit any residual capital value payable after the purchaser's 65th birthday to exceed the purchase price, nor the sum of any commutation payments payable after age 65 and during any term certain period for which the annuity is payable to exceed the purchase price (reduced in the case of commutation payments by amounts that have been excluded for tax purposes from payments of the annuity). Roll-over immediate annuities purchased after the date of introduction of the Bill will also be required to be purchased wholly with rolled-over eligible termination payments - as are roll-over deferred annuities under the existing law.

Conditions for tax exemption for non roll-over annuity business of annuity issuers (Clauses 17, 18 and 19)

Income derived by life assurance companies, friendly societies, trade unions and other registered employee associations from their immediate annuity business is exempt from tax on the basis that the income will be taxed in the hands of the annuitant when paid out in annuity payments. The Bill will introduce conditions to be met by contracts in respect of immediate annuities that are not purchased wholly with rolled-over eligible termination payments if that tax exemption is to be obtained. The conditions, except for the "age 65" requirements, will be the same as those described above that will apply to roll-over annuities. The amendment is to apply to relevant immediate annuities purchased after the date of introduction of the Bill.

Exemption from tax for certain payments of the residual capital value of a roll-over deferred annuity (Clause 11)

Under the existing law, payments of the residual capital value of deferred annuities purchased with rolled-over eligible termination payments are taxed as eligible termination payments. This Bill will give effect to the 12 January 1987 proposal to exempt such payments from tax where the residual capital value payment is made to a dependant on the death of the annuitant during the deferment phase of the annuity, i.e., before the annuity commences to be payable. As announced, the amendment applies to payments under deferred annuity contracts purchased after that date.

Restriction on right to roll over certain eligible termination payments (Clause 11)

This Bill will give effect to the proposal announced on 12 January 1987 to disallow the roll-over of (and so not defer tax on) certain eligible termination payments made on death to persons other than the widow or widower of the deceased person. This amendment affects payments on commutation of, or of the residual capital value of, an annuity purchased with rolled-over eligible termination payments, where the payment is made after the death of the person to whom the annuity was payable. The amendment applies to residual capital value payments made after 12 January 1987 and commutation payments made after the date of introduction of the Bill. As mentioned earlier, the Bill will also disallow the roll-over of eligible termination payments made on death to persons who are not dependants of the deceased. That amendment will apply to relevant payments made after the date of introduction of this Bill.

Eligible termination payments rolled over to a non-employer sponsored superannuation fund (Clause 16)

An amendment being made by this Bill will ensure that the payment of an eligible termination payment to a superannuation fund by way of roll-over does not qualify for the tax deduction (annual maximum S1,500) allowed to taxpayers who do not have the superannuation support of an employer or some other person. Without the amendment it could be argued that the taxpayer would be entitled to the benefit of the tax deduction as well as deferral of tax on the rolled-over eligible termination payment. That was never intended. The proposed amendment was announced on 12 January 1987 and applies to roll-over payments made after that date.

De facto spouse to be treated as legal spouse (Clause 11)

This Bill will also ensure that de facto spouses will be treated in the same way as legal spouses for the purposes of the eligible termination payment provisions. The effect is that they will automatically qualify as dependants for the purposes of the provisions and will not be affected by the restriction on roll-over rights being introduced by this Bill that will apply to certain eligible termination payments made on death to persons other than the widow or widower of the deceased person.

Expenditure on research and development activities (Clauses 12, 13 and 38)

The Bill will give effect to two proposals, announced on 20 November 1987, to limit the special concessions for expenditure on scientific research and on other qualifying research and development activities.

The first of the announced proposals will remove the accelerated write-off for expenditure on the construction or acquisition of buildings that are used exclusively for the purposes of either scientific research (section 73A of the Principal Act) or other qualifying research and development activities (section 73B of that Act). At present, expenditure of this kind can be written off over 3 years under those sections provided that:

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in the case of buildings for use for scientific research - in each of those years:

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the person incurring the expenditure is carrying on a business for the purpose of producing assessable income; and

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the building is used only for scientific research purposes related to the carrying on of that business; and

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in the case of buildings used for qualifying research and development activities:

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the expenditure is incurred by a body corporate incorporated in Australia and registered with the Industry Research and Development Board;

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the expenditure is incurred under a contract entered into after 30 June 1985 and before 1 July 1991 (the deduction period) or, where the building is constructed by the eligible company, the construction commences during the deduction period; and

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the building commences to be used by the eligible company during the deduction period, and for a consecutive period of five years, exclusively for the purpose of the carrying on by, or on behalf of, the company of research and development activities.

The removal of these concessions will not apply in respect of expenditure incurred on a building that was constructed or acquired under a contract entered into on or before 20 November 1987 or, where the building is constructed by the eligible company, if construction commenced on or before that date. In these cases, the relevant concession will apply provided that on 20 November 1987 the person incurring the expenditure intended that the building would be used in circumstances where, if the concession had not been removed, the expenditure would have been eligible for the special 3 year write-off.

The second of the announced proposals will amend the special concession for research and development expenditure so that the development of computer software that is not for sale, rent, hire, licence or lease to 2 or more persons who are not associates of the developer will be excluded from the definition of "research and development activities" in section 73B of the Principal Act. At present, only the development of computer software that is not for sale, rent, hire or lease to another person is excluded. The intention of this exclusion is that expenditure incurred in the development of computer software required only for "in-house" purposes should not be deductible.

Satisfaction of common ownership test by shelf companies (Clauses 15, 32, 33 and 35)

The Bill will give effect to an announcement on 17 November 1987 to amend the provisions to be inserted in the income tax law by the Taxation Laws Amendment Bill (No.4) 1987 to allow a company (referred to as a "shelf company "), which is introduced into a company group in a year of income, to satisfy the 100% common ownership test necessary to establish a group relationship between companies in the year of income. The existence of a group relationship between companies enables the transfer between those companies of losses incurred in deriving income (section 80G), of excess rental property loan interest (section 82KZF), of excess foreign tax credits (section 160AFE) and of net capital losses (section 160ZP), and the rollover of an asset between companies for capital gains purposes (section 160ZZO).

The measures contained in this Bill will back-date the operative dates of the proposed shelf company provisions to the time at which each of the grouping provisions was first made available. The respective provisions of the Taxation Laws Amendment Bill (No.4) 1987 only provide for them to apply in relation to shelf companies acquired in the 1986-87 year of income or a subsequent year of income.

The provisions in section 80G dealing with a shelf company are therefore to apply for 1984-85 or a subsequent year of income and, as they apply in relation to section 82KZF, for the 1985-86 and 1986-87 income years. Those in sections 160ZP and 160ZZO are to apply for 1985-86 or a subsequent year of income. The provisions in section 160AFE will apply in relation to 1987-88 or a subsequent year of income.

Another change proposed by this Bill will extend the operation of the shelf company provisions of the Taxation Laws Amendment Bill (No.4) 1987 - which are only to apply where a shelf company is acquired by the transfer of its existing shares to the new corporate shareholders to a company acquired by another company (or companies) by way of the issue of shares to the new shareholders in association with the redemption of the original subscriber shares. This change will also apply from the income year in which each of the grouping provisions was first made available.

Certain sea installations and offshore areas to be treated as part of Australia (Clauses 9, 11, 27, 38 and 45-46)

The Bill will implement the proposal announced on 21 January 1987 to extend the coverage of the income tax law to income derived by non-residents from activities conducted in the offshore areas of Australia and its Island Territories. For consistency with the recent sea installations legislative package, these amendments will apply from 15 October 1987, not 21 January 1987 as previously announced. The proposed amendments will extend the scope of the activities covered to include 'environment related activities' within the meaning of the Sea Installations Act 1987. Very broadly, these are activities related to tourism, recreation, the carrying on of a business, or the exploitation of the sea's natural resources. The offshore areas covered have been redefined and extended but are generally those areas over which Australia exercises, or is entitled to exercise, jurisdiction.

As a consequence of these amendments, the current exemptions from Australian income tax, available under Division 1A of Part III of the Principal Act to residents of Norfolk Island and the Cocos (Keeling) Islands, will be extended to include income earned in the offshore areas around those Islands.

Further, the Bill will correct a technical deficiency in the existing law to affirm Australia's income tax coverage of income derived in the offshore areas from mineral exploration and exploitation. Associated provisions in section 160ACA relating to rebates for call moneys paid on shares in a petroleum mining company and used for the purpose of petroleum exploration, prospecting or mining will also be amended to correct a technical deficiency.

Finally, the reference, appearing in the Schedule to the Sea Installations Act 1987, to the Income Tax Assessment Act 1936, will be repealed. With the enactment of this Bill, that reference will no longer be necessary to expand Australia's income tax jurisdiction over the relevant offshore areas.

Dividend withholding tax (Clause 21)

The Bill will remedy an unintended consequence of the changes in the taxation of dividends paid to non-residents which were associated with the introduction of the imputation system of company taxation. An effect of those changes was that the unfranked portion of all dividends derived on or after 1 July 1987 by non-resident life assurance companies carrying on business in Australia through a permanent establishment in Australia became liable to withholding tax.

Prior to 1 July 1987 dividend income derived by such non-resident life assurance companies was generally subject to tax by assessment, but the dividend income attributable to superannuation and certain life assurance policies was excluded from assessable income.

This Bill will restore the exemption from income tax that previously applied to the dividends derived by those companies to the extent that the dividends are attributable to superannuation and certain life assurance policies. The exemption will apply to the unfranked portion of such dividends paid by resident companies on or after 1 July 1987.

Rebate of tax on amounts paid under certain life assurance policies (Clause 26)

Under the existing income tax law, bonuses - and other amounts in the nature of bonuses - received by a taxpayer during the first 10 years of a policy of life assurance issued after 7 December 1983 (or during the first 4 years of policies issued after 27 August 1982 and before 8 December 1983) are generally included in the taxpayer's assessable income and a rebate of tax equal to (currently) 29% of that amount is allowed. The rebate of tax is designed to broadly compensate for the tax paid by the life assurance company (in respect of its investment income) or by the friendly society (in respect of its life assurance business) that issued the policy.

State government insurance offices are, because of their status as public authorities for income tax purposes, exempt from income tax and the underlying reason for the allowance of the rebate does not apply in their case. However, in return for the New South Wales, Queensland and South Australian Governments agreeing to reimburse the Commonwealth for their respective shares of the estimated Commonwealth revenue forgone, the Taxation Laws Amendment Act (No.4) 1985 amended the Income Tax Assessment Act 1936 to extend the operation of the rebate provisions to assessable amounts received under life assurance policies issued by the Government Insurance Office of New South Wales, the State Government Insurance Office (Queensland)(now Suncorp Insurance and Finance) and the South Australian State Government Insurance Commission. The Income Tax Assessment Act 1936 was further amended by the Taxation Laws Amendment Act (No.4) 1986 to extend the rebate to assessable amounts received under life assurance policies issued by the State Insurance Office of Victoria following agreement by the Victorian Government to reimburse the Commonwealth for the estimated Commonwealth revenue forgone by allowing the rebate to holders of policies issued by that Office. This Bill proposes the further extension of those provisions to assessable amounts received under life assurance policies issued by the State Government Insurance Corporation of Western Australia. The Western Australian Government has agreed to reimburse the Commonwealth for the estimated Commonwealth revenue forgone by allowing the rebate in that State.

Instalments of provisional tax (Clause 37)

The Bill will make two amendments of the provisions governing the service of provisional tax instalment notices. The changes will permit notices to be served with due dates that fall after the end of the year of income for which the instalment is payable and ensure that, where an instalment notice fails to specify a due date for payment or specifies a due date that does not comply with the law, the notice will be treated as if it had specified a date in accordance with the law. The first amendment will ensure that delays in issuing income tax assessments will not prevent the collection of the following year's final instalment of provisional tax. The second will guarantee the validity of notices that, for example, are served late or, through set off for example, have no amount payable.

Amendment of the Taxation Laws Amendment Act (No.4) 1987 (Clauses 47 and 48)

The Bill will make it easier for some taxpayers to comply with the new thin capitalisation rules to be introduced into the Principal Act by the Taxation Laws Amendment Act (No.4) 1987 by extending, to 31 January 1988, the end of the "transitional year" for those taxpayers with approved substituted accounting periods ending after 30 November 1987 but not later than 30 January 1988 in lieu of 30 June 1988. The "transitional year" is, broadly, the period given to taxpayers affected by the thin capitalisation rules to adjust their debt/equity ratio so as to avoid, or minimise, the impact of those rules on their interest deduction claims.

In the absence of such an amendment, some taxpayers with accounting periods ending in December 1987 would have had little more than a month after the introduction of the Taxation Laws Amendment Bill (No.4) 1987 on 29 October 1987 to rectify any adverse debt/equity ratio position.

The change will give all affected taxpayers extra time to make any necessary adjustments, e.g., by arranging for the introduction of further equity, to preserve the tax deductibility of the whole, or a part, of their claims for interest incurred on foreign debt from non-arms length sources. The second accounting period for taxpayers affected by the proposed modification of the thin capitalisation rules will commence on 1 February 1988 and end with the close of their substituted accounting period in December 1988 or January 1989 in lieu of 30 June 1989.

ACT stamp duty and tax on transfers of debentures (Clauses 3 to 5)

The Bill will give full effect to the proposal, announced on 16 July 1987 in a joint statement by the Treasurer and the then Minister for Territories, to abolish from the date of announcement Australian Capital Territory stamp duty and tax on transfers of debentures. In the case of debentures transfered on registers kept outside the territory, abolition is to apply from 10 June 1986, the date when Australian Capital Territory tax became payable on registration, by a company incorporated in the ACT, of transfers of marketable securities listed in a register kept outside the Territory.

The proposal, which brings the Territory treatment of debenture transfers into line with that of the States, has already been given partial effect by the Australian Capital Territory Stamp Duties and Taxes Ordinance 1987.

The ordinance which came into effect on 1 August 1987 when responsibility for Australian Capital Territory stamp duty and taxes passed from the Commissioner of Taxation to the newly established Commissioner for Australian Capital Territory Revenue Collections, does not impose stamp duty and tax on transfers of debentures.

Before 1 August 1987 stamp duty and taxes in the Territory were imposed under Acts administered by the Commissioner of Taxation. This Bill will amend the Australian Capital Territory Taxation (Administration) Act 1969, to complement the effect of the Ordinance by abolishing stamp duty and tax on transfers of debentures between relevant dates of announcement and 1 August 1987. In the case of transfers of debentures, this means transfers made between 16 July and 31 July 1987 and, in the case of transfers of debentures listed in a register kept outside the Australian Capital Territory, transfers between 10 June 1986 and 31 July 1987.

Amendment of the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987 (Clauses 43, 44)

This Bill will amend the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987 to repeal a machinery provision of the Sales Tax Assessment Act (No. 1) 1930 which is no longer operative following the transfer of jurisdiction in tax cases to the Federal Court.

Income Tax (Offshore Banking Units)(Withholding Tax Recoupment) Bill 1987

This Bill will formally impose an income tax in respect of certain dealings by current and former offshore banking units. It complements proposed section 128NB to be inserted by the Taxation Laws Amendment Bill (No. 5) 1987 in the Income Tax Assessment Act 1936. That proposed section is part of the legislative measures designed to provide an interest withholding tax exemption for offshore borrowings by such units. It provides that an offshore banking unit will be liable to pay income tax, at a penal rate, where funds obtained with the benefit of the interest withholding tax exemption are applied by the unit in an unintended way. The income tax is to be based on the "lost withholding tax amount" determined by a formula provided in proposed section 128NA. The rate of tax is declared by this Bill to be 300% of the "lost withholding tax amount".

The tax is set at a penal rate to discourage offshore banking units from borrowing offshore free of interest withholding tax and then dealing with the borrowed funds in a manner which would erode Australia's withholding tax base, e.g., by lending to Australian residents.

A more detailed explanation of the provisions of the Bills is contained in the following notes.

NOTES ON CLAUSES

TAXATION LAWS AMENDMENT BILL (NO.5) 1987

PART I - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act (No.5) 1987.

Clause 2: Commencement

Subject to subclauses 2(2) to 2(6), the amending Act is, by subclause 2(1), to come into operation on the day on which it receives the Royal Assent.

By subclause 2(2), the amendments proposed by clause 14 to section 77F of the Income Tax Assessment Act 1936 will be deemed to have come into operation on 24 June 1986. The amendments are consequential upon amendments of the Management and Investment Companies Act 1983 that came into operation on that date.

By subclause 2(3), Part VI of this Bill will be deemed to have come into operation on 1 September 1987. This is the same commencement date as was proclaimed for the purposes of subsection 2(2) of the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987.

By subclause 2(4), the consequential amendment to the Schedule to the Sea Installations Act 1987 by Part VII of the amending Act is deemed to have come into operation on 6 November 1987, the date on which that Act received the Royal Assent.

Subclause 2(5) of the Bill provides that the amendment of the Taxation Laws Amendment Act (No.4) 1987 proposed to be made by Part VIII of the amending Act is to be deemed to have come into operation when section 51 of that Act commences. The amendment referred to is the proposed modification of the transitional arrangements regarding the thin capitalisation measures.

By subclause 2(6) the amendment of the Taxation Laws Amendment (Fringe Benefits and Substantiation) Act 1987, proposed to be made by Part IX of the amending Act, is to be deemed to have come into operation on the commencement of that Act. The amendment referred to is a minor drafting correction.

But for these subclauses, the amending Act would, by reason of subsection 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Royal Assent.

PART II - AMENDMENT OF THE AUSTRALIAN CAPITAL TERRITORY TAXATION (ADMINISTRATION) ACT 1969

Clause 3: Principal Act

This clause facilitates references to the Australian Capital Territory Taxation (Administration) Act 1969 which, in this Part, is referred to as "the Principal Act".

Clause 4: Interpretation

Section 4 of the Principal Act contains definitions of terms used in that Act and other interpretative provisions. Clause 4 of the Bill will amend the definition of the term "marketable security" to exclude debentures from that definition.

The effect of this amendment is that transfers of debentures will be exempt from Australian Capital Territory stamp duty and tax.

Clause 5: Application of Amendments

Subclause 5(1) specifies that in the case of a purchase of a debenture by a broker carrying on business in the Australian Capital Territory, the amendments proposed by this Bill apply from 16 July 1987, the date on which the proposal was announced to bring the taxation treatment of debenture transfers in the Territory into line with that in the States.

In the case of a sale of a debenture by a broker carrying on business in the Territory, subclause 5(2) ensures that the amendments to be made by clause 4 of this Bill are also to apply from 16 July 1987.

Subclause 5(3) has the effect that where tax is imposed on the registration of a transfer of a debenture that, immediately before the date on which the instrument of transfer was executed, was registered in a register kept outside the Territory by a company incorporated in the Territory, the amendments made by this Part of the Bill are to apply from 5pm on 10 June 1986.

Where stamp duty is imposed on the transfer of a debenture that, immediately before the date on which the instrument of transfer was executed, was registered in a register kept by a company in the Territory, subclause 5(4) specifies that the amendments proposed by the Bill apply to an instrument of transfer executed after 15 July 1987.

Subclause 5(5) specifies that section 58G of the Principal Act will not apply to registrations of debentures made after 15 July 1987 or, in the case of registrations on which tax was imposed by the Australian Capital Territory Tax (Transfers of Marketable Securities) Act 1986, after 10 June 1986.

Section 58G prohibits the registration of a transfer of a marketable security in the books of a company or unit trust unless the transfer has been duly stamped or certain other requirements have been complied with.

PART III - AMENDMENT OF THE INCOME TAX ACT 1986

Clause 6: Principal Act

This clause facilitates references to the Income Tax Act 1986 which, in Part III of the Bill, is referred to as "the Principal Act".

Clause 7: Imposition of income tax

The Principal Act imposes income tax at rates declared by the Income Tax Rates Act 1986. Subsection 5(2) of the Principal Act excludes from its scope taxes that are payable in accordance with various sections of the Income Tax Assessment Act 1936 ("the Assessment Act").

Clause 7 of the Bill will amend subsection 5(2) of the Principal Act to a reference to proposed new section 128NB (see notes on clause 24). The amendment is necessary as the tax payable under that section is proposed to be imposed by the Income Tax (Offshore Banking Units) (Withholding Tax Recoupment) Bill 1987.

PART IV - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 8: Principal Act

This clause facilitates references to the Income Tax Assessment Act 1936 which, in Part IV, is referred to as 'the Principal Act'.

Clause 9: Certain sea installations and offshore areas to be treated as part of Australia

Clause 9 proposes several amendments of section 6AA of the Principal Act. Under current income tax law, residents of Australia are generally subject to Australian tax on all income regardless of whether it has a source in Australia or abroad, whereas non-residents are subject to Australian tax only on income that has a source in Australia. For purposes of the Principal Act relating to, or in connection with, mineral exploration and exploitation, the existing section 6AA extends the area deemed to be part of Australia to include certain offshore areas.

The proposed amendments of section 6AA will not alter the basic principle that Australia has income tax coverage in the offshore areas over which it exercises jurisdiction. Rather, the amendments will extend the areas covered by section 6AA to better reflect Australia's jurisdiction and extend the scope of the activities to be covered in line, broadly, with the recently enacted Sea Installations Act 1987 ("the Sea Installations Act") and with effect from 15 October 1987, the date of effect of that Act.

When section 6AA was first enacted, the only commercial activities foreseeable in the offshore areas were mineral exploration and exploitation. It is now appropriate to extend the coverage to a wider range of activities in light of proposed developments in those areas, particularly tourist facilities. At the same time, certain technical deficiencies in the provisions are to be corrected. Briefly, the amendments will:

•

in relation to the period commencing on 14 February 1983 and ending on 14 October 1987, correct a deficiency in the definition of "adjacent area" in section 6AA that has arisen as a consequence of technical amendments of the Petroleum (Submerged Lands) Act 1967;

•

in relation to the period after 14 October 1987:

•.

redefine the offshore areas included as part of Australia, thereby ensuring that Australia has taxation jurisdiction in those areas over which, according to international law, it is entitled to exercise control; and

•.

extend the scope of the activities covered to include environment related activities in certain offshore areas.

At the same time, the longstanding exemptions from Australian income tax afforded to residents of Norfolk Island and Cocos (Keeling) Islands will be preserved in relation to the offshore areas of those islands (see notes on clause 10).

Paragraph (a) of clause 9 will omit subsections 6AA(1) and (2) of the Principal Act and substitute new subsections 6AA(1) and (2).

New subsection 6AA(1), while similar to the existing subsection, restates and extends Australia's income tax coverage of offshore areas. New paragraphs 6AA(1)(a), (1)(b) and (1)(c) set out a range of activities in respect of which the subsection will have application for all purposes of the Principal Act. As with the existing subsection 6AA(1), the subsection is concerned with the purposes, direct and indirect, of the Principal Act in relation to certain activities of taxpayers or other persons in specified areas. The purposes specified are:

•

by paragraph 6AA(1)(a), purposes related to mineral exploration and exploitation where the activities occur in:

•.

an eligible external Territory as defined in new paragraph 6AA(4)(a), (subparagraph 6AA(1)(a)(i));

•.

a "Petroleum Act adjacent area" as defined in paragraph 6AA(4)(e), (subparagraph 6AA(1)(a)(ii));

•.

an "Installations Act adjacent area", as defined in new paragraph 6AA(4)(c), by means of a "sea installation", as defined in subsection 6AA(5) (subparagraph 6AA(1)(a)(iii)); or

•.

the "Papua New Guinea offshore areas", as defined in existing subsection 6AA(4), (subparagraph 6AA(1)(a)(iv));

•

by paragraph 6AA(1)(b), purposes related to an "environment related activity", defined in new paragraph 6AA(4)(b) to have the same meaning as it does in the Sea Installations Act, where the activity is carried on in any of the same areas as are described in paragraph 6AA(1)(a) (see above);

•

by paragraph 6AA(1)(c), purposes of the Act concerning, broadly, matters arising out of or connected with the exploration, exploitation or environment related activities described above. The paragraph is expressed in broad terms in order to ensure that all associated activities are within the scope of the subsection.

Words following paragraphs (a), (b) and (c) of the new subsection 6AA(1) expand upon the purposes of the Principal Act with which the subsection is concerned, to include purposes relating to income or profits from the described activities and in respect of dividends paid wholly or partially out of such profits.

Where the specified purposes and conditions exist, the new subsection 6AA(1) will operate so that the provisions of the Principal Act have effect, subject to the other provisions of section 6AA, as if:

•

the whole of each of the eligible external Territories and the Petroleum Act adjacent areas were and at all times had been part of Australia paragraph 6AA(1)(d));

•

each sea installation, when installed in an Installations Act adjacent area, were a part of Australia (paragraph 6AA(1)(e)); and

•

the Papua New Guinea offshore area were part of Papua New Guinea (paragraph 6AA(1)(f)).

New subsection 6AA(2) operates in an identical manner to the subsection it is replacing except that the scope has been extended to include environment related activities. It applies only to a company which is not incorporated in Australia but has:

•

its central management and control in Australia; or

•

its voting power controlled by Australian residents,

and which carries on business in the offshore areas which consists of activities that fall within subsection 6AA(1) (see earlier notes). In these circumstances, the company will be deemed, for the purposes of the definition of "resident" or "resident of Australia" in subsection 6(1) of the Principal Act, to be carrying on business in Australia (and thereby satisfy the requirements of that definition).

Where an area is deemed to be part of Australia by operation of new subsection 6AA(1), the subsection will have effect as if the area had always been part of Australia. However, new subsections 6AA(3B) and (3C), being inserted by paragraph (b) of clause 9, will ensure that the extended coverage of new section 6AA applies only from the dates set out in the following notes on those new subsections.

New subsection 6AA(3B) ensures that, except in the situation described in new subsection 6AA(3C) - see the notes which follow on that subsection - section 6AA does not operate to include as assessable income any income derived prior to 15 October 1987 that would not have been included if these amendments were not enacted.

By new subsection 6AA(3C), for the period commencing on 14 February 1983 (i.e., the date of commencement of the Petroleum (Submerged Lands) Amendment Act 1980) and ending on 14 October 1987 (the day preceding the commencement of new subsection 6AA(3C)), the reference in paragraph 6AA(4)(a), as in force during that period, to the Petroleum (Submerged Lands) Act 1967-74 will be deemed instead to be a reference to the former Petroleum (Submerged Lands) Act 1967 as in force immediately before the Petroleum (Submerged Lands) Amendment Act 1980 came into operation. This will correct an anomaly which arose from a technical change in the description of the adjacent areas by amendments of the Petroleum (Submerged Lands) Act made in 1980.

Paragraph (c) of clause 9 will omit subparagraphs 6AA(4)(a), (b) and (c) of the Principal Act and substitute new subparagraphs 6AA(4)(a), (b) and (c).

Paragraph 6AA(4)(a) defines an "eligible external Territory" to mean the area, being both land and sea (including the space above and below the area), within the territorial limits of:

•

the Territory of Ashmore and Cartier Islands (subparagraph 6AA(4)(a)(i));

•

the Coral Sea Islands Territory (subparagraph 6AA(4)(a)(ii)); or

•

the Territory of Heard and McDonald Islands (subparagraph 6AA(4)(a)(iii)).

Paragraph 6AA(4)(b) defines an "environment related activity" to have the same meaning as the term has in the Sea Installations Act. Broadly, this is any activity related to tourism, recreation, the carrying on of a business or the use of the sea's living resources and includes scientific and transport activities.

By paragraph 6AA(4)(c), "Installations Act adjacent area" is defined to have the same meaning as "adjacent area" has in the Sea Installations Act. Broadly, for the purposes of that Act, the "adjacent area" of a State or the Northern Territory is the relevant portion of the area which is made up of sea waters outside the outer limit of the Australian territorial sea and within the outer limit of the continental shelf or the Australian fishing zone, whichever is the further. The width of the Australian territorial sea is deemed, by the Sea Installations Act, to be never greater than 3 nautical miles. Other areas, including the space above and below, that are included as adjacent areas are:

•

the area around the Coral Sea Islands, which is deemed to be part of the Queensland "adjacent area";

•

the area around the Territory of Ashmore and Cartier Islands; and

•

the area around any other external Territory (including the Australian Antarctic Territory).

However, the seabed or subsoil of those other areas is excluded if Australia, under an agreement, does not exert jurisdiction over that seabed or subsoil.

Paragraph (d) of this clause will add a new paragraph (e) to subsection 6AA(4) of the Principal Act. The new paragraph will define "Petroleum Act adjacent area" - which expression appears in new paragraphs 6AA(1)(a) and (b) - as an area that is an adjacent area for the purposes of the Petroleum (Submerged Lands) Act 1967. This definition will preserve the original reference to the Petroleum (Submerged Lands) Act 1967 in order to identify the adjacent areas to be covered for the purposes of the mineral exploration and exploitation provisions of the Principal Act. The use of this reference will obviate the need for further technical amendments of the type proposed by new subsection 6AA(3C) if there is a change to the prescription of the adjacent areas to which the Petroleum (Submerged Lands) Act 1967 applies.

Section 6AA will apply, by proposed subparagraphs 6AA(1)(a)(iii) and (1)(b)(iii), to activities in an "Installations Act adjacent area", where they are carried out by means of a sea installation installed in that area. Paragraph (e) of clause 9 will insert new subsection 6AA(5) which effectively defines for those purposes the expression "sea installation installed in that area". By paragraph (a), the definition of "sea installation", in subsection 4(1) of the Sea Installations Act (being a manmade structure used for an environment related activity and including both fixed and floating structures) is notionally extended to include:

•

a resource industry fixed structure, as defined in subsection 4(2) of the Sea Installations Act to mean a structure that cannot be moved from place to place in its entirety and which is used in, or in connection with, mineral exploration or exploitation (subparagraph 6AA(5)(a)(i));

•

a resource industry mobile unit, as defined in subsection 4(3) of the Sea Installations Act to mean a vessel (or a structure that can float and be moved from place to place in its entirety) used in, or in connection with, mineral exploration or exploitation (subparagraph 6AA(5)(a)(i));

•

partly completed structures or vessels (subparagraph 6AA(5)(a)(ii)); and

•

the remains of structures or vessels (subparagraph 6AA(5)(a)(iii)),

but not extended to include fishing boats, fishing equipment and pearling vessels (Paragraph 6AA(5)(b)).

Taking this notional definition as the definition of "sea installation" in the Sea Installations Act, if under section 6 of that Act the sea installation would be treated as installed in a particular area, then the particular sea installation is a "sea installation installed in that area" for the purposes of section 6AA. Broadly, the effect of the relevant provisions of the Sea Installations Act is that an installation will be taken as installed in a Installations Act adjacent area if, at a particular time:

•

the installation is either in, or brought into contact with, the area's seabed (e.g., when a drilling platform or a floating hotel by its anchor, or other mooring device, is secured to the seabed);

•

the installation is either in, or brought into contact with, another installation which is installed (e.g., a ship secured at an anchored drilling platform); or

•

the installation, although not installed as above, remains in an area within a radius of 20 nautical miles for:

•.

a continuous period of 30 days preceding that time; or

•.

for one or more periods totalling 40 days during the 60 days preceding that time.

However, a ship or aircraft which might otherwise fall within the definition of sea installation, but which is in contact with:

•

part of the area's seabed; or

•

an installed sea installation,

for less than 5 days (30 days for a foreign ship) will not be taken to be installed in that area. This provision recognises that a ship, not otherwise excluded from the definition of sea installation, may nonetheless have cause to temporarily drop anchor but is not, in any real sense, 'installed'.

In addition, an attachment (or an attachment to an attachment, and so on) is, in determining if a structure is installed under section 6 of the Sea Installations Act, deemed by section 7 of that Act to be part of the installation.

Clause 10: Interpretation

As a consequence of the proposed amendments of section 6AA (see notes on clause 9), clause 10 proposes an amendment of section 24B of the Principal Act to ensure that residents of Norfolk Island or the Cocos (Keeling) Islands are not subject to Australian income tax on income sourced in those Islands' adjacent areas.

Proposed new subsection 24B(5) will, for the purpose of Division 1A of Part III of the Principal Act (other than section 24C which deals with residency), deem the adjacent area of a prescribed Territory to be part of the prescribed Territory. For this purpose, "adjacent areas" bears the meaning that it has in the Sea Installations Act 1987 (see notes on clause 9) and "prescribed Territory" is defined in existing subsection 24B(1) to include Norfolk Island, Christmas Island and the Cocos (Keeling) Islands.

Currently, a resident of Norfolk Island or the Cocos (Keeling) Islands is exempt from Australian income tax on income with a source in the land areas of either Territory. In effect, the amendment will ensure that such a resident is also exempt from tax on income that is derived in the adjacent areas of either of those Territories.

A further effect is that, during the period that Australian income tax is being phased in on Christmas Island, a rebate of tax under section 160ACD of the Principal Act may be available in relation to income earned by a resident of Christmas Island in the adjacent areas mentioned above or the adjacent area of Christmas Island. Correspondingly, a resident of Norfolk Island or the Cocos (Keeling) Islands may be eligible for the rebate on income sourced in the adjacent area of Christmas Island. The phasing-in period will last until the close of the 1987-88 income year.

Clause 11: Interpretation

Section 27A of the Principal Act contains definitions and other aids to the interpretation of Subdivision AA of Division 2 of Part III. Paragraphs (a) to (w) of clause 11 propose amendments of some of those definitions, paragraphs (y) and (z) the substitution of two definitions and paragraphs (za) and (zb) the insertion of three new definitions, all in subsection 27A(1).

Paragraph (a) of clause 11 inserts in paragraph (a) of the definition of "eligible service period" a reference to a new paragraph (aa) of the definition of "eligible termination payment" that is being inserted by paragraph (d) of this clause. This amendment will allow the eligible service period for those eligible termination payments to be calculated by reference to the employment of the deceased person referred to in paragraph (aa).

Paragraph (b) of the clause will insert in paragraph (b) of the definition of "eligible service period" references to new paragraphs (ba), (ca), (da), (db), (ga) and (gb) of the definition of "eligible termination payment" being inserted by paragraphs (f), (g), (h) and (k) of this clause. These changes will make the eligible service period for those eligible termination payments the aggregate of the relevant service periods for those payments. Complementary amendments are being made to the definition of "relevant service period" by paragraphs (p) to (w) of this clause.

The amendment of the definition of "eligible service period" proposed by paragraph (c) of clause 11 is consequential upon the amendment being made by paragraph (za) of this clause to insert a definition of "qualifying annuity" in subsection 27A(1) to describe annuities that will give rise to eligible termination payments under paragraphs (g) to (j) of that definition. Those annuities are at present described and defined as "eligible annuities". The term "eligible annuity" will be redefined by paragraph (z) of this clause and given a more limited function than in the past (see the note on that paragraph).

Paragraphs (d) to (n) of clause 11 will make changes to the definition of "eligible termination payment". Paragraph (d) will insert new paragraph (aa) in the definition. This paragraph, together with new paragraphs (ba) and (ca), proposed to be inserted in the definition by later paragraphs of the clause, will apply to payments made after 12 January 1987 (subclause 38(6)) and will mirror existing paragraphs (a), (b) and (c) of the definition as they apply to payments to the trustee of the estate of a deceased taxpayer, but the new paragraphs will apply only where payment is made other than to the trustee. The new paragraphs will apply after the death of a person described in the introductory part of the respective new paragraphs (subparagraph (i)) to payments to taxpayers who were not dependants of the deceased person at the time of death and are not dependants at the time of payment (subparagraph (ii)). For example, if a child of the taxpayer was under 18 at the date of death, the paragraph would not apply notwithstanding that the child was an independent adult at the time of payment. Subparagraph (ii) mirrors the operation of subsection 27A(4) in respect of paragraph (a), (b) and (c) eligible termination payments made to trustees of deceased estates. As mentioned, it is a prerequisite to the application of the paragraph that the payment not be made to a person as trustee of the deceased person's estate (subparagraph (iii)) (because payments to such trustees are already covered by paragraphs (a), (b) and (c)). The exclusions to paragraph (aa) described in sub-subparagraphs (aa)(iv)(B) and (C) mirror, to the extent they are relevant, the exclusions to existing paragraph (a) of the definition. Sub-subparagraph (A) will ensure that, where new paragraphs (aa) and (ba) would both apply to a particular payment, paragraph (ba) will prevail.

Paragraph (e) of clause 11 will extend the range of other paragraphs of the definition of "eligible termination payment" that are referred to in paragraph (b) of the definition as taking precedence over it where both paragraph (b) and the other paragraph would apply. The new paragraphs referred to are being inserted by later paragraphs of this clause.

By paragraph (f) of this clause new paragraph (ba) is being inserted in the definition of "eligible termination payment". The functions of the new paragraph and subparagraphs (ba)(i), (ii) and (iii) are explained in the note on paragraph (d) of this clause. Sub-subparagraph (ba)(iv)(A) and (C) mirror relevant exclusions from existing paragraph (b) of the definition. Sub-subparagraph (B) contains a list of other paragraphs of the definition that prevail where one of them and paragraph (ba) would both apply.

Paragraph (g) of clause 11 inserts new paragraph (ca) of the definition of "eligible termination payment". The functions of the new paragraph and subparagraphs (ca)(i), (ii) and (iii) are explained in the note on paragraph (d) of this clause. Subparagraph (ca)(iv) mirrors the exclusion contained in the final words of existing paragraph (c) of the definition.

Paragraph (h) of the clause will insert two new paragraphs in the definition of "eligible termination payment", applicable to payments made after 12 January 1987 (subclause 38(6)). Both paragraphs (da) and (db) will apply to payments made after the death of a person by reason of the deceased person's membership of a superannuation fund, irrespective of the source of the payment (subparagraphs (da)(i) and (db)(i)) (for example, an associate of the fund trustee or the deceased person's employer). The other condition to be met before the paragraphs apply is that the payment is taken in circumstances where an option existed to take a superannuation pension instead, but - reflecting paragraph (i) - not necessarily from the person making the payment (subparagraphs (da)(ii) and (db)(iii). Paragraph (da) will apply where the payment is made to the trustee of the deceased person's estate and paragraph (db) where the payment is made to someone else (subparagraph (db)(ii)). Because the law is, in effect, treating these payments as equivalent to payments by way of the commutation of the relevant pension alternative, the amount of the eligible termination payment is net of the amount that would have been the unused undeducted purchase price of the pension (a term defined in subsection 27A(1)). Paragraph (k) of this clause will insert corresponding new paragraphs (ga) and (gb) in the definition of "eligible termination payment" to apply where the alternative to the payment is an annuity rather than a superannuation pension.

The amendment being made by paragraph (j) of clause 11 is made necessary by the insertion, by paragraph (za) of the clause, of a definition of "qualifying annuity" in subsection 27A(1) to describe annuities that will give rise to eligible termination payments under paragraphs (g) to (j) of that definition. Those annuities are at present described and defined as "eligible annuities". As explained in the note on paragraph (z) of this clause, the term "eligible annuity" is to be redefined and given a more limited function than hitherto.

Paragraph (k) of the clause will insert two new paragraphs in the definition of "eligible termination payment", paragraphs (ga) and (gb), applicable to payments made after 12 January 1987 (subclause 38(6)). The roles of the paragraphs correspond to those of new paragraphs (da) and (db) as described in the note on paragraph (h) of this clause, except that paragraphs (ga) and (gb) apply where the alternative to the payment is an annuity, not a pension. The other difference between these paragraphs and paragraphs (da) and (db) is that, when determining for the purposes of paragraph (ga) or (gb) what would have been the unused undeducted purchase price of the annuity alternative, the purchase price has to be ascertained, while still in accordance with paragraph (b) of the definition of "purchase price" in subsection 27A(1), by reference only to contributions made to the superannuation fund. That means, for example, that if the fund member made no contributions and the annuity option would have been activated by way of the fund trustee purchasing the annuity at the time payment fell due, there would be no unused undeducted purchase price for the purposes of paragraph (ga) or (gb).

Paragraphs (m) and (n) of the clause have a corresponding function to that of paragraph (j), which is explained in the note on that paragraph.

Paragraphs (p) to (w) of clause 11 will all amend the definition of "relevant service period". The purpose of the changes is to ensure that, when the definition is applying for the purposes of ascertaining the eligible service period in relation to a payment to which paragraph (ba), (ca), (db) or (gb) of the definition of "eligible termination payment" applies, the period during which the other person referred to in those paragraphs was a fund member or depositor, as appropriate, can be counted as a relevant service period.

Paragraph (y) of clause 11 will redefine the term "dependant" for the purposes of Subdivision AA. The new definition is in two parts. The first, paragraph (a), preserves the existing meaning of the term for certain limited purposes of the Subdivision. The conditions in which the existing meaning will continue to apply deal with payments to superannuation funds where it is necessary to preserve consistency with other parts of the Principal Act that affect the securing of superannuation benefits, such as the definitions of "dependant" in sections 82AAA and 82AAS, and with the Occupational Superannuation Standards Act 1987 (see the definition of "dependant" in subsection 3(1) of that Act as proposed to be amended by the Taxation Laws Amendment Bill (No.4) 1987).

Paragraph (b) of the new definition will apply for all other purposes of the Subdivision. That is, this paragraph will apply principally for the purposes of the new paragraphs (aa), (ba) and (ca) of the definition of "eligible termination payment", the new subsections 27A(4A) and (5BA) and the new paragraph 27A(12)(c), all of which are being inserted or substituted, as the case may be, by clause 11. This paragraph of the definition will also apply for the purposes of existing subsection 27A(4), but only to payments made after the date of introduction of this Bill (see the note on subclause 38(3)).

Paragraph (z) of clause 11 inserts a new definition of the term "eligible annuity". Paragraph (a) of the new definition is the same as paragraph (a) of the existing one. Paragraph (b) of the new definition will take the place of the existing paragraphs (b) and (c) and add conditions that are to be satisfied by an annuity purchased after 12 January 1987 (subclause 38(4)) before payments to purchase it will qualify under paragraph 27A(12)(c) as representing the roll-over of an eligible termination payment. The definitions of "qualifying annuity" and "eligible policy" proposed to be inserted by this clause are, in part, dependent on the new definition of "eligible annuity". The former definition of "eligible annuity" will apply to annuities purchased on or before 12 January 1987. The new definition of eligible annuity will not be used in the definition of "eligible termination payment", having been replaced by the wider expression "qualifying annuity" (see the note on paragraph (za) of this clause).

By subparagraph (b)(i) an eligible annuity must be either an immediate annuity purchased on or before the date of introduction of the Bill, whether or not the purchase price consists wholly of payments by way of the roll-over of eligible termination payments (Sub-subparagraph (b)(i)(A)), or any annuity, whether immediate or deferred, as long as it is purchased wholly with roll-over payments (Sub-subparagraph (B)). The latter sub-subparagraph will apply to deferred annuities purchased after 12 January 1987 (see the note on subclause 38(4)) and to immediate annuities purchased after the date of introduction of the Bill.

Subparagraph (b)(ii) of the definition of eligible annuity requires the annuity contract not to permit any 'residual capital value' (a defined term in subsection 27A(1)) payable after the purchaser reaches the age of 65 - or, in a case where the purchaser dies before 65 and the annuity becomes payable to another person, after the time at which the purchaser would have turned 65 - to exceed the purchase price. Consistent with subsection 27H(2) of the Principal Act, it will not be necessary for the residual capital value to be specified in the contract. The contract will, however, have to make it clear that it does not permit payment of a residual capital value that is excessive in terms of this subparagraph. Similarly, subparagraphs (iii) and (iv) limit the size of payments by way of commutation that are to be permitted to be made under eligible annuity contracts after the purchaser turns 65, or would have turned 65 had he or she not died. The maximum permissible commutation payment (or aggregate of two or more partial commutation payments) is to be an amount equal to the purchase price of the annuity less any components of annuity payments that have been excluded from assessable income under section 27H as deductible amounts, that is, as amounts representing the return of 'undeducted purchase price' (a defined term). This maximum permissible commutation payment is described in subparagraphs (iii) and (iv) as the "reduced purchase price", a definition of which is being inserted by paragraph (za) of this clause. Subparagraph (iii) deals with the case where the commutation payments are permitted during the term of a 'term certain' annuity. Subparagraph (iv) applies where the commutation payments are permitted during the 'term certain' period of an annuity that is payable for the life of a person (or the last survivor where there are two or more nominated life annuitants) (Sub-subparagraph (b)(iv)(A)) but for a minimum term certain period (sub-subparagraph (B)). Where commutation payments are permitted by the contract to be made after the end of the term certain, subparagraph (b)(iv) does not impose a restriction on the size of those payments. The conditions set down in subparagraphs (ii), (v) and (vi) would, of course, still have to be satisfied.

Subparagraph (b)(v) will make it a condition of being an eligible annuity that the Commissioner of Taxation is satisfied that the pattern, or profile, of proposed annuity payments provided for under the contract does not represent unreasonable deferral of the annuity income to which the annuitant is entitled under the contract. This condition seeks to give effect to a policy that, because the income from the eligible annuity business of the organisation issuing the annuity (such as a life assurance company or a friendly society) is excluded from assessable income under Division 8 or 8A of Part III of the Principal Act, the parties to an eligible annuity contract ought not be free to arrange the annuity payments schedule for the period after the annuitant reaches the age of 65 in such a way as to shift significant amounts of annuity income (and thus defer tax) from the earlier to the later parts of that period.

It is commonly accepted as a fundamental feature of annuities that the amount of each periodical annuity payment must be determinable, at the date of payment, from or under the terms of the annuity contract. Within that constraint an annuity payment could consist of both a guaranteed component and a 'bonus' (or supplement) component and subparagraph (v) deals separately with each. Sub-subparagraph (b)(v)(A) requires the Commissioner to consider the time or times at which any bonus elements of annuity payments that are to be made after the annuity purchaser turns 65 (or would have, in the case of an annuity that is payable after the purchaser's death) are payable under the contract. The Commissioner is also required to have regard to the time or times of derivation of the income of the annuity issuer by reference to which the bonus elements are calculated. The amount of a bonus would normally be determined at the discretion of the issuer and the contract would stipulate the conditions for its exercise. Having regard to the policy underlying the subparagraph, it would normally not be acceptable for bonuses that are declared after the annuitant turns 65 to be declared less frequently than annually, nor for a bonus to be paid over a period longer than the year following the date of its declaration. Nor would it be appropriate for the contract to permit annuity issuers to shift bonus income from earlier in the post-age 65 period to later by declaring successive bonuses in a pattern that did not reflect a consistent relationship between the amount of a bonus element and the income of the issuer by reference to which the bonus was calculated. This sub-subparagraph will apply irrespective of how the supplementary annuity component in question is described. The component simply has to depend for its size on the actual earnings of the issuer.

Sub-subparagraph (b)(v)(B) applies to the guaranteed (or fixed) component of an annuity payment referred to earlier in this note. This component is normally either specified in the contract or ascertainable by a method set out in the contract and is therefore payable irrespective of the actual earning performance of the annuity issuer. The sub-subparagraph requires the Commissioner to have regard to the relative sizes of the guaranteed components of the annuity payments that will, or are expected to, be made during the period of the annuity that falls after the annuity purchaser reaches the age of 65 (or would have, in the case of an annuity that is payable after the purchaser's death). Having regard to the policy underlying the subparagraph it would be expected that the guaranteed components would be equal or decreasing over the period or, if increasing over the period, increasing at a rate that did not exceed that required or expected to be required to protect the purchasing power of the annuity payments over the payment period.

Sub-subparagraph (b)(v)(C) requires the Commissioner to have regard to such other matters as the Commissioner considers relevant. Relevant matters would include whether the rate of indexation stipulated in the annuity contract for ascertaining guaranteed annuity payments was excessive (this would be relevant to sub-subparagraph (B)); whether the term of a term certain annuity or of a term certain period of a life annuity was excessive, having regard to the life expectation of the person or persons for whose life or lives the annuity is payable (for example, an unrealistically long term certain could achieve unreasonable deferral of annuity income even though combined with an otherwise acceptable rate of indexation); and other contractual arrangements that are relevant in making the comparisons required under sub-subparagraph (A) (some of these matters are mentioned in the note on that provision).

Subparagraph (b)(vi) makes it a condition of being an eligible annuity that the contract requires that the period in respect of which the first annuity payment is to be made will commence no later than the 65th birthday of the annuity purchaser (or, in the case of an annuity that is payable after the purchaser's death, the day on which the purchaser would have turned 65).

Paragraphs (za) and (zb) of clause 11 will insert the following three definitions in subsection 27A(1):

"qualifying annuity" is a term which replaces "eligible annuity" in paragraphs (g), (h) and (j) of the definition of "eligible termination payment" (see the note on paragraph (j) of this clause). A payment received as the residual capital value of a qualifying annuity or by way of commutation of a qualifying annuity will therefore give rise to an eligible termination payment. The new term describes two broad classes of annuity, viz., those that became eligible annuities under the law as it applied before the amendments being proposed by this clause took effect and those that satisfy either the proposed new definition of "eligible annuity" (being inserted by paragraph (z)) or the new conditions for immediate annuities set down in paragraph (b) of the definition of "eligible policy" as proposed to be redefined by clauses 17 and 18 for the purposes of Divisions 8 and 8A respectively. Paragraph (a) of the definition deals with the second class of annuity referred to above, although, through subparagraph (ii), it also refers to a portion of the first class. Subparagraph (a)(i) refers to annuities which satisfy the new conditions for eligible annuities and subparagraph (ii) refers to annuities which satisfy the new definitions of eligible policy. There is an overlap between the subparagraphs, just as there is an overlap between the paragraphs of the definition, primarily because of the width of the new definitions of "eligible policy". The reference to 12 January 1987 acknowledges that the proposed new definition of "eligible annuity" and, through it, paragraph (c) of the new definitions of "eligible policy" apply to annuities purchased after 12 January 1987 (see subclause 38(4)). An immediate annuity purchased after 12 January 1987 otherwise than with rolled-over eligible termination payments normally will not be an eligible annuity within the new meaning of that term, but will be the subject of an eligible policy under paragraph (b) of that term where the annuity is purchased after the date of introduction of this Bill if the conditions in that paragraph are met. The reference to annuities that have "at any time been" eligible annuities or the subject of eligible policies is an anti-avoidance measure to ensure that capital payments terminating an annuity will be taxed as eligible termination payments notwithstanding that (for example, because of a change in the terms of the contract) the annuity does not, at the time of termination, satisfy all of the conditions in the definition of eligible annuity or eligible policy, as the case may be. The purchase of an eligible annuity or eligible policy would have attracted either the tax exemption for rolled-over eligible termination payments or, at some time, the tax exemption for the income of the issuer of an eligible annuity or eligible policy, or both exemptions.

Paragraphs (b) and (c) of the definition refer to the first broad class of annuity mentioned earlier, viz., those purchased under the law as it applied to eligible annuities before the amendments being made by this Bill. Paragraph (b covers the majority of these "old" eligible annuities. The cut-off purchase date - "on or before 12 January 1987" - prescribed in subparagraph (b)(i) reflects the fact that the new definition takes over after that date. Subparagraph (ii) states that the paragraph applies only to annuities that were eligible annuities under the "pre-amendment" meaning of the term. Paragraph (c) of the definition of "qualifying annuity" will ensure that immediate annuities purchased in the transitional period between 12 January 1987 and the date of introduction of the Bill that fail one or more of the conditions in paragraph (b) of the new definition of "eligible annuity" (and therefore are not within subparagraph (a)(i) of this definition) or are not the subject of an eligible policy for the purposes of Division 8 or 8A (and are therefore not within subparagraph (a)(ii)) will give rise to eligible termination payments on termination - as they would have had the term "qualifying annuity" not replaced the term "eligible annuity" in the relevant paragraphs of the definition of "eligible termination payment".

"reduced purchase price" is defined for the purposes of subparagraphs (b)(iii) and (iv) of the definition of "eligible annuity" being substituted by paragraph (z) of clause 11 (see the note on that paragraph).

"spouse" is an inclusive definition that expands the ordinary meaning of the word to ensure that, for the purposes of the Subdivision, a de facto spouse will receive the same treatment under the law as a legal spouse. The expanded meaning of the term will apply primarily through the definition of "dependant" that is being inserted by paragraph (y) of this clause (see the note on that paragraph and, in particular, the note on paragraph (b) of the definition of dependant, which refers to certain provisions being inserted by this Bill in section 27A). The relevant application provisions for those amendments flow through to the definitions of "dependant" and "spouse". In addition to its application through the term "dependant" the expanded meaning of spouse will apply direct for the purposes of the proposed new subsections 27A(12C) and (12D) to be inserted by paragraph (zg) of this clause. The new meaning of "spouse" will apply for the purposes of the application of the term "dependant" in existing subparagraph 27A(3)(a)(ii), subsections 27A(4), (5), (5C) and (7) and paragraph 27A(12)(a) in respect of payments or contributions, as the case may be, made after the date of introduction of this Bill (see subclauses 38(3) and (7)).

Paragraph (zc) of clause 11 will insert new subsection 27A(4A) in the Principal Act. This, and subsection (5BA) proposed to be inserted by the next paragraph of the clause, will ensure that the so-called "death benefits" exemption is applied where a qualifying annuity is terminated on the death of the annuitant with a residual capital value payment, as long as the annuity was a deferred annuity that had been purchased after 12 January 1987 (subclause 38(8)) wholly with a rolled-over eligible termination payment or payments and was still in the deferment phase at the time of the annuitant's death (paragraph (b)) - usually that would mean that the annuitant died before the age of 65. Paragraph (4A)(a) identifies the type of eligible termination payment that the new subsection is dealing with, viz., a paragraph (h) residual capital value payment to the trustee of the estate of the deceased person. Once the conditions in paragraphs (a) and (b) are satisfied, the Commissioner of Taxation is required to reduce the amount of the eligible termination payment to reflect the extent to which dependants of the deceased will benefit from the estate. An identical discretion is given under the existing subsection 27A(4) for different types of eligible termination payment, including payments to the trustee of the estate of a deceased depositor with an approved deposit fund, with which the payments covered by the new subsection have an affinity.

Paragraph (zd) inserts new subsection 27A(5BA) to complement subsection 27A(4A) (see the note on the previous paragraph). Subsection (5BA) also deals with payments of the residual capital value of a roll-over annuity made on death, where death occurs during the annuity's deferment phase (paragraph (b)). The difference is that subsection (5BA) applies to paragraph (j)-type eligible termination payments, which are specifically defined as being payments on death but not to the trustee of the deceased's estate. Consequently, paragraph (a) provides for the payment to be taken outside paragraph (j) of the definition - and therefore not taxable as an eligible termination payment - if the recipient of the payment was a dependant of the deceased person either at the date of death or at the date of payment (e.g., a recipient who was a minor child at the date of death but a financially independent adult child at the time of payment would qualify for the concession).

Paragraph (ze) of clause 11 inserts new subsection 27A(7A) in the Principal Act. The new provision makes it clear that for annuities purchased after the date of introduction of this Bill (see subclause 38(5)), the expression "presently payable" in the definition of "immediate annuity" is to be read as including the period in respect of which the first annuity payment is payable. This clarification of meaning is of particular relevance for the purposes of subparagraph (b)(vi) of the new definition of "eligible annuity" proposed to be inserted by paragraph (z) of this clause (see the note on that paragraph). A contract would satisfy the requirement of subparagraph (b)(vi) (that is, that the annuity must become an immediate annuity by the 65th anniversary of the annuity purchaser's birth) if the first annual payment under the contract was required to be made within the first year of that date.

Paragraph (zf) of the clause will replace paragraph 27A(12)(c). The new paragraph is in substantially the same terms as the former paragraph. Subparagraph (c)(i), however, contains a reference to an eligible annuity "in relation to the taxpayer" that is new to the paragraph. The reference is needed because of the references to "the taxpayer" in subparagraphs (b)(ii) to (vi) of the new definition of "eligible annuity" being inserted by paragraph (z) of this clause. Where the annuity is purchased after 12 January 1987 the reference in the subparagraph to "eligible annuity" will be a reference to the new meaning of the term (see the note on subclause 38(4). The term will have its former meaning where the annuity is purchased on or before that date. Subparagraph (c)(ii) essentially repeats the equivalent part of the former paragraph. The reference to "dependants" in the subparagraph is to the meaning given in paragraph (b) of the new definition of that term proposed to be inserted by paragraph (y) of this clause - to apply where the payment is made after 12 January 1987 (subclause 38(3)). The former meaning of the term will apply where the payment is made on or before that date.

Paragraph (zg) of clause 11 will insert subsections 27A(12B), (12C) and (12D), which prescribe a range of eligible termination payments that are not to be permitted to be rolled-over under subsection 27A(12) so as to secure exemption from tax. Subsection 27A(12B) denies the right of roll-over to a group of payments made after the death of a person directly to someone other than a dependant of the deceased person. The relevant eligible termination payments are described in paragraphs (aa), (ba) and (ca) of the definition of that term, which are being inserted in the Principal Act by paragraphs (d), (f) and (g) of this clause.

Subsection 27A(12C) denies the right of roll-over of certain eligible termination payments made on death to persons other than the widow or widower of the deceased person. Paragraph (a) makes the subsection applicable to both paragraph (g) (commutation of annuity) and (h) (residual capital value of annuity) payments if they are made direct to the beneficiary and not to the trustee of the deceased person's estate. Paragraphs (b) and (c) set out the circumstances, all of which must exist, that will disqualify such a payment from roll-over. By sub-subparagraphs (b)(i)(A) and (B) the annuity itself has to have been purchased by way of the roll-over of an eligible termination payment; sub-subparagraph (b)(i)(C) and subparagraph (b)(ii) limit the subsection to payments made after the death of the annuitant; and paragraph (c) limits the application of the subsection (i.e., to disallow roll-over of the eligible termination payment) to cases where the recipient of the payment is not the deceased annuitant's widow or widower. The subsection will apply where the eligible annuity concerned was purchased after the date of introduction of this Bill if the payment is a paragraph (g) eligible termination payment, and where the eligible annuity was purchased after 12 January 1987 if the payment is a paragraph (h) eligible termination payment (subclause 38(9)).

Subsection 27A(12D) is a sister provision to subsection (12C). It will have the same consequence but will apply only to paragraph (j) residual capital value eligible termination payments which, by definition, can only be paid after the death of the annuitant to someone other than the trustee of the estate of the deceased person (paragraph (a)). Paragraph (b) is equivalent to sub-subparagraphs 27A(12C)(b)(i)(A) and (B) (see the previous note). Paragraph (c) matches paragraph 27A(12C)(c) (again see the previous note). The subsection will apply where the eligible annuity concerned was purchased after 12 January 1987 (subclause 38(10)).

Clause 12: Expenditure on scientific research

Clause 12 will amend section 73A of the Principal Act to terminate deductibility under that section for expenditure incurred on buildings for use for scientific research purposes.

Section 73A provides for the accelerated write-off of certain kinds of expenditure incurred in relation to scientific research. In particular, subsection 73A(2) provides that expenditure on the construction or acquisition of a building (including a part of a building or an alteration or addition to a building) for use for scientific research purposes, may be written off over three years, provided that:

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the person incurring the expenditure is carrying on a business for the purpose of gaining or producing assessable income; and

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the building is used only for scientific research purposes related to the carrying on of that business.

New subsection 73A(2A) will terminate the accelerated write-off for expenditure on buildings for scientific research purposes. However, the concession will still apply in certain circumstances where the taxpayer has, before 21 November 1987, effectively made a commitment to the acquisition or construction of a building exclusively for scientific research purposes. New subsection (2A) sets out the conditions that must be satisfied in order for the concession to continue to apply.

The first condition (subparagraph (a)(i)) will apply where the building (including a part of a building, an alteration or addition) is constructed or made by the taxpayer. In these cases, the building, etc., must have commenced to be constructed or made by the taxpayer before 21 November 1987. It should be noted that this condition will not be satisfied if, under a contract entered into on or after that date, a taxpayer acquires a building or a partially completed building construction of which was commenced by another person before that date.

The second condition (subparagraph (a)(ii)) will deal with the alternative situation where the building, etc., was either acquired by the taxpayer under a contract or the construction was undertaken pursuant to a contract entered into with the taxpayer. In these cases, a contract must have been entered into by the taxpayer before 21 November 1987. In circumstances where the construction was undertaken pursuant to more than one contract, as frequently occurs, it will only require one of those contracts to be entered into before that date. However, each of those contracts must cover work that is an integral part of the overall project planned at the time of entering into the first contract.

The third condition (paragraph (b)), which will apply in any case where the expenditure on the building, etc., was incurred after 20 November 1987, requires that on that date the taxpayer intended that:

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scientific research would conducted by or on behalf of the taxpayer in the building, the research being related to a business carried on by the taxpayer for the purpose of producing assessable income (subparagraph (b)(i)); and

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the building, etc., would be for use for scientific research purposes only (subparagraph (b)(ii)).

Clause 13: Expenditure on research and development activities

Clause 13 will amend section 73B of the Principal Act, which authorises accelerated write-off of expenditure incurred in respect of research and development activities. The clause proposes:

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the termination of the accelerated three year write-off for expenditure in respect of buildings used exclusively in research and development activities; and

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the exclusion, from the definition of "research and development activities", of the development of computer software that is not for sale, rent, licence, hire or lease to 2 or more persons who are not associated with the developer of the software.

Paragraph (a) of this clause proposes the insertion of two new definitions in subsection 73B(1), which sets out the definitions that are to apply for the purposes of section 73B, unless a contrary intention appears. The definitions are:

"associate", which is defined to have the same meaning as that term has by reason of the definition contained in subsection 26AAB(14) of the Principal Act. That definition specifies who is an associate in relation to a natural person, a company, a trustee of a trust estate or a partnership and, in broad terms, refers to those persons who by reason of family or business connections might appropriately be regarded as being associated with a particular person. The definition, in relation to any particular entity, includes relatives, partners, companies that effectively control or are controlled by the entity and the trustee of a trust estate under which the entity is directly or indirectly entitled to a benefit. Additionally, it includes the spouse (where appropriate) or any associate of an entity.

"non-associate", which is defined only in relation to an eligible company (i.e., a body corporate incorporated in Australia and registered with the Industry Research and Development Board), will mean a person who is not an associate of an eligible company.

The two definitions of "associate" and "non-associate" are necessary for the purpose of the amendments being proposed by this clause to exclude from the definition of "research and development activities" the development of computer software that is not for application by persons unassociated with the developer of the software (see the notes on paragraphs (b) to (e) of this clause).

Paragraph (b) of this clause proposes the insertion of new subsection 73B(1A), which is an interpretative provision related to the definition of "associate" proposed, by paragraph (a) of this clause, to be inserted in subsection 73B(1). The definition of "associate" includes the spouse of any associate. It also includes a "relative" of a person, a term which is defined in subsection 6(1) to also include a spouse. Proposed subsection (1A) expands the definitions of "associate" and "relative" so that references to the spouse of an associate or relative are taken to include the de facto spouse of the associate or relative.

Paragraphs (c) and (d) propose the amendment of subsection 73B(2), which sets out activities that are not to be taken to be systematic, investigative or experimental activities for the purpose of the definition of "research and development activities" in subsection 73B(1). Unless activities are systematic, investigative or experimental in nature, or are carried on for a purpose directly related to such activities, they will not be qualifying research and development activities for the purpose of section 73B. These paragraphs, which are consequential upon the amendments proposed by paragraph (e), propose omitting from subsection (2) references to the development of certain computer software.

Paragraph (e) will insert new subsection 73B(2A), which will set out the circumstances in which the development of computer software by an eligible company will not qualify as a research and development activity in itself so that expenditure incurred in respect of that development will not be eligible to be written-off under section 73B. The development of computer software will not so qualify unless the software is developed for the purpose, or for purposes that include the purpose, of sale, rent, licence, hire or lease to 2 or more persons who are non-associates (as discussed above) of the company. For the purposes of the subsection a non-associate of the company and any associates of that non-associate will be counted as one person.

The new subsection will ensure that computer software development which attracts deductibility under section 73B is genuinely for the use of multiple clients of the developer and not, for example, merely for the use of the developer or associates.

The amendments made by paragraphs (d) and (e) will not affect the deductibility of expenditure on the development of computer software to facilitate the carrying out of a program of activities which would qualify as research and development activities as defined in subsection 73B(1). For example, computer software may be developed to make mathematical calculations in relation to research and development towards the production of a new piece of machinery.

By subclause 38(12) of the Bill the amendments to be made by paragraphs (a) to (e) will apply to expenditure incurred after 20 November 1987.

Paragraph (f) of the Bill proposes the insertion of new subsection 73B(5A), which will terminate the existing three year write-off that is allowed under section 73B for expenditure incurred by an eligible company on the construction or acquisition of a building, or a part of a building, or an alteration or addition to a building. At present, such expenditure may be written-off under section 73B provided that:

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the expenditure is incurred under a contract entered into after 30 June 1985 and before 1 July 1991 (the deduction period) or, where the building is constructed by the eligible company, the construction commences during the deduction period; and

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the building commenced to be used, by the eligible company, during the deduction period and for a consecutive period of 5 years exclusively for the purposes of the carrying on by or on behalf of the company of research and development activities.

Subsection 73B(5A) will, however, ensure that the concession will be available where, before 21 November 1987, the eligible company has made a commitment to the acquisition or construction of a building exclusively for research and development purposes. Subsection (5A) sets out the conditions that must be satisfied for the concession's continuing application.

The first condition (paragraph (a)) will apply where a building, etc., is acquired by the eligible company. In this case, any contract under which the building, etc., is acquired must have been entered into by the taxpayer before 21 November 1987.

The second condition (paragraph (b)) will deal with the alternative situation where a building, etc., is constructed by the eligible company or for the eligible company pursuant to a contract entered into with the company. If the building, etc., is constructed by the eligible company, then the company must have commended that construction before 21 November 1987 (subparagraph (a)(i)). If the building, etc., is constructed for the company, then the contract pursuant to which that construction occurs must have been entered into by the company before 21 November 1987 (subparagraph (a)(ii)). In circumstances where the construction was undertaken pursuant to more than one contract, it will only be necessary for one of those contracts to be entered into before that date. However, each of those contracts must cover work that is an integral part of the building, etc., planned at the time of entering into the pre- 21 November 1987 contract. It should be noted that this condition will not be satisfied if a taxpayer acquires, under a contract entered into on or after that date, a building or a partially completed building the construction of which was commenced before that date by another person.

The third condition (paragraph (c)), which will apply in any case where the expenditure on the building, etc, was incurred after 20 November 1987, requires that, on that date, the eligible company intended that the building, etc., be for use by the company exclusively for the purpose of the carrying on, by it or on its behalf, of research and development activities.

Clause 14: Moneys paid on shares in management and investment companies

Section 77F of the Principal Act permits an investor in a licensed management and investment company to obtain a tax deduction equal to the moneys paid on shares in the prescribed share capital of the company.

"Prescribed share capital" is defined, in subsection 77F(1), to have the same meaning as in the Management and Investment Companies Act 1983 (the MIC Act). However, the definition in the MIC Act was repealed with effect from 24 June 1986, by the Statute Law (Miscellaneous Provisions) Act (No.1) 1986. The reason for the repeal of the definition was that the expression "share capital", in its ordinary usage, has the same meaning - ordinary and preference share capital - as the defined term.

Paragraph (a) will repeal the definition of "prescribed share capital" in subsection 77F(1). It will also omit references in section 77F to "prescribed share capital" and replace them with the expression "share capital". The proposed amendments are of a technical nature and make no substantive changes to affected provisions. References to "prescribed share capital" that are to be changed are those in paragraphs (2)(e) and (13)(a) and (b).

By sub-clause 2(2), the amendments will have effect from 24 June 1986, the date on which the amendments to the MIC Act came into operation.

Clause 15: Transfer of loss within company group

Clause 15 proposes to amend section 80G of the Principal Act as it will apply following the enactment of the Taxation Laws Amendment Bill (No.4) 1987 to enable a company that has never operated (referred to as a "shelf company") and is introduced into a company group in a year of income, to satisfy the 100% common ownership test necessary to establish a group relationship between companies in that year of income.

The amendments of section 80G proposed by clause 15 will:

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permit subsection 80G(5A), which is being inserted in the Principal Act by the Taxation Laws Amendment Bill (No.4) 1987, to apply in respect of shares in a shelf company acquired in the 1984-85 year of income (the year of income in which company losses were first transferable within a company group under section 80G) or a subsequent year of income; and

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insert a new subsection 80G(5B), to apply in respect of the 1984-85 income year or a subsequent year, so that a company acquired by the issue of new shares associated with the redemption of the subscriber shares may satisfy the 100% common ownership test in the year of its acquisition.

Amendments along similar lines are proposed by other clauses of this Bill in relation to the common ownership test for companies electing for transfers of excess foreign tax credits (clause 32) or of net capital losses (clause 33), or for the roll-over of an asset between companies for capital gains tax purposes (clause 35).

By section 80G a deduction for a loss is transferable only where there is 100% common ownership between the resident company that incurs the loss and the resident company to which the right to an allowable deduction for the loss is to be transferred. This test must be satisfied in the income year in which the loss is incurred, in the year in which it is to be allowable as a deduction to the transferee company and in any intervening year.

Under subsection 80G(1) the common ownership test as between companies must be satisfied during the whole of each relevant year of income. If either or both of the companies was not or were not in existence for part of a year, the test must be satisfied during that part of the year in which both companies were in existence. For these purposes, subsection 80G(5) treats a company as being in existence once it has been incorporated. However, under amendments proposed by the Taxation Laws Amendment Bill (No.4) 1987, subsection 80G(5) is to be subject to the operation of subsection 80G(5A). That subsection will deem a company (i.e., a shelf company), all the shares in which were acquired by one or more companies in the 1986-87 income year or a subsequent year, not to have been in existence during a period of a year, if in that period the company was dormant within the meaning of Part VI of the Companies Act 1981. This will allow such a shelf company to satisfy the 100% common ownership test in the year of income in which all of its issued shares are purchased from the original subscribers to the Memorandum of Association.

By paragraph (a) of clause 15, subsection 80G(5) is to be made subject not only to the proposed subsection 80G(5A) but also to proposed new subsection 80G(5B).

By paragraph (b), proposed subsection 80G(5A) will be amended so that it applies in respect of shares acquired in or subsequent to the 1984-85 year of income. That is, the subsection will apply from the year of income in which the facility for group companies to transfer deductions for losses first became available.

Paragraph (c) proposes to insert the new subsection 80G(5B) to enable a shelf company to satisfy the common ownership test in the year of its acquisition by a company group in the additional situation in which the shelf company issues shares to the new shareholder or shareholders (being the purchaser or purchasers of the company within the company group) and the original subscriber shares are redeemed.

New subsection (5B) will apply where:

•

during the 1984-85 income year or a subsequent year a "shelf company" issued shares to another company or companies (paragraph (a));

•

shares in the shelf company were owned by another person or persons immediately before the time of issue (paragraph (b));

•

immediately after that time, all the other issued shares in the shelf company were redeemed by the shelf company (paragraph (c)); and

•

the shelf company was dormant within the meaning of Part VI of the Companies Act 1981 in the period (referred to as the "dormant period") between the time it was incorporated and the time of issue of the shares referred to in paragraph (a) (paragraph (d)).

Where these requirements are satisfied, proposed subsection 80G(5B) allows the shelf company to be taken, for the purposes of subsection 80G(1), not to have been in existence during the dormant period. The effect will be to admit the existence of a group relationship pursuant to subsection 80G(1) between the shelf company and the company or companies to which the new shelf company shares were issued in relation to the year of income in which those shares were issued (and the other shares of the shelf company were redeemed).

The amendments proposed to section 80G by clause 15 will also modify the application of section 82KZF of the Principal Act, which allows a company to transfer to one or more other companies in a group all or part of any excess of rental property loan interest for a year of income, that otherwise would be deemed to be incurred by the company in the succeeding year of income (under the negative gearing provisions). By subsection 82KZF(2), the tests contained in section 80G which determine whether a company is a group company in relation to another company must be satisfied for section 82KZF to operate.

Consequently, section 82KZF will permit the transfer of any excess rental property loan interest in accordance with that section to or from a shelf company introduced into a company group in a year of income in the circumstances referred to in proposed subsection 80G(5B). However, because the limitation imposed by section 82KZD of the Principal Act on deductions for interest on borrowings used to acquire rental property investments is to be removed by clause 71 of the Taxation Laws Amendment Bill (No.4) 1987 with effect from the commencement of the 1987-88 year of income, the amendments proposed to section 80G will have effect for the purposes of the operation of section 82KZF only for the 1985-86 and 1986-87 years of income.

Clause 16: Deductions for superannuation contributions by eligible persons

This clause will insert subsection 82AAT(3) in the Principal Act to ensure that, where a contribution made after 12 January 1987 to a superannuation fund, for the benefit of a person who is not provided with superannuation support by another person, such as an employer, is treated as the roll-over of an eligible termination payment, the contribution will not entitle the contributor to a deduction under section 82AAT. Under the section, a taxpayer without superannuation support is entitled to a maximum deduction of S1500 per annum for contributions to obtain superannuation benefits.

Clause 17: Interpretation

Introductory Note

Clause 17 proposes a number of changes to section 110 of the Principal Act, which contains definitions of terms used in Division 8 of Part III. That Division has special provisions that are used in ascertaining the taxable income of life assurance companies. Of particular relevance in the context of these amendments is section 112A, which excludes from assessable income, broadly speaking, the income derived by a life assurance company from its business relating to eligible policies. Prior to the amendments being made by this Bill, the term "eligible policy" in effect referred to superannuation policies and policies in relation to eligible annuities. The new definition of "eligible annuity", being inserted by clause 11, is narrower than the former one and applies for a narrower purpose (see the notes on paragraphs (z) and (za) of that clause). In particular, the definition of "eligible annuity" will not apply to immediate annuities not purchased wholly by way of the roll-over of eligible termination payments and, of course, will not apply to pre-amendment eligible annuities. The new definition of "eligible policy", through which the Division 8 tax concession will continue to operate, therefore has to include policies in relation to not only the "new-style" eligible annuities but also the "old-style" ones and any immediate annuities not purchased wholly with roll-over payments (subject to new conditions, and to a transitional arrangement for immediate annuities purchased between 12 January 1987 and the date of introduction of the Bill), as well as the superannuation policies covered by the former definition.

Paragraph (a) of clause 17 will insert in section 110 a new definition of the term "eligible policy", the need for which is explained in the introductory note to this clause. Paragraph (a) of the new definition refers to superannuation policies, as did paragraph (a) of the former one. Paragraph (b), which is the counterpart of the former paragraph (b), sets down the conditions that are to be satisfied by policies for immediate annuities purchased after the date of introduction of the Bill (subparagraph (b)(i)) where the purchase moneys do not consist wholly of rolled-over eligible termination payments (subparagraph (b)(ii)). The conditions, which are contained in subparagraphs (b)(iii) to (vi), mirror those contained in subparagraphs (b)(ii) to (v) of the proposed new definition of "eligible annuity" being inserted in subsection 27A(1) by paragraph (z) of clause 11, except that conditions in that definition that apply only after the annuitant's 65th birthday apply in this definition immediately. The detailed explanation of the eligible annuity conditions in the note on paragraph (z) of clause 11 applies, mutatis mutandis, for the purposes of these subparagraphs of the definition of "eligible policy". The less restrictive conditions in the "eligible annuity" definition can be met by policies in respect of immediate annuities purchased after the date of introduction of the Bill where the purchase moneys do consist wholly of rolled-over eligible termination payments. A policy that meets those conditions will be brought within the definition of "eligible policy" by proposed Paragraph (c). That paragraph also brings in deferred annuity policies purchased after 12 January 1987 wholly with roll-over payments and any immediate annuity policy, irrespective of the make-up of the purchase price, purchased after 12 January 1987 and on or before the date of introduction of the Bill, that satisfies the eligible annuity conditions. This latter group of immediate annuity policies are also made "eligible policies" by paragraph (d) of the definition as a sub-set of the immediate annuity policies brought in by reference to paragraph (c) of the definition of "qualifying annuity" (i.e., any immediate annuity purchased on or before the date of introduction of the Bill). The main function of paragraph (d) is to retain as eligible policies those policies that qualified as such under the former definition because they were effected in respect of annuities that were purchased on or before 12 January 1987 and were eligible annuities within the former meaning of that term.

Paragraph (b) of clause 17 omits the definitions of "deferred annuity" and "roll-over annuity". Those terms were necessary for the purposes of the former definition of "eligible policy" but are not relevant to the proposed new definition (as explained in the note on paragraph (a) of this clause).

Paragraph (c) of clause 17 will insert a definition of "reduced purchase price", a term used in subparagraphs (b)(iv) and (v) of the definition of "eligible policy" being inserted by paragraph (a) of this clause. The term is also used in subparagraphs (b)(iii) and (iv) of the definition of "eligible annuity" and its use is explained in the note on paragraph (z) of clause 11.

Paragraph (d) of clause 17 inserts subsection 110(2) in the Principal Act. The provision applies for the purpose of the definition of "immediate annuity" in the section and to that extent has a corresponding purpose to that of subsection 27A(7A) proposed to be inserted by paragraph (ze) of clause 11, which is explained in the note on that paragraph.

Clause 18: Interpretation

This clause proposes a number of changes to section 116E of the Principal Act, which contains definitions of terms used in Division 8A of Part III, by which the assessable income and allowable deductions of registered organisations are ascertained. Registered organisations are trade unions, friendly societies and employee associations. In particular, subsection 116G(1) relies on the definition of "eligible policy" through the reference in the subsection to eligible insurance business, which includes business in relation to eligible policies.

The amendments proposed by paragraphs (a) to (d) of clause 18, with one exception, correspond with the amendments being proposed by paragraphs (a) to (d) of clause 17 in relation to section 110 of the Principal Act. The notes on clause 17 therefore apply, mutatis mutandis, for the purposes of clause 18. The exception referred to above is that paragraphs (b) and (c) of clause 18 together replace the definition of "eligible annuity" in section 116E with the definition of "qualifying annuity". This term is to replace "eligible annuity" in subsection 116G(2) (see the note on clause 19). The new term is defined to mean the same as it does in subsection 27A(1) into which it is being inserted by paragraph (za) of clause 11 (see the note on that paragraph).

Clause 19: Assessable income of registered organisations

This clause will replace the reference to "eligible annuities" in subsection 116G(2) with a reference to "qualifying annuities". This reference identifies the annuity business income of registered organisations other than friendly societies that is not included in their assessable income. The change is necessitated by the narrowing of the function of the definition of "eligible annuity" (as explained in the introductory note to clause 17). The term "qualifying annuity" will include any annuity that is the subject of an "eligible policy" for the purposes of Division 8A. That, in turn, includes both "new-style" and "old-style" eligible annuities and new immediate annuities that have satisfied the conditions set down in the new definition of "eligible policy" proposed to be inserted in section 116E by clause 18 (see the note on that clause).

Clause 20: Interpretation provisions relating to offshore banking units

This clause inserts a new section, section 128AE, into Division 11A of Part III of the Principal Act. That Division imposes a liability to withholding tax on payments from Australia of dividends and interest to non-residents and certain other persons.

New section 128AE contains definitions and interpretative provisions which relate to the changes being made by the Bill to the withholding tax arrangements so as to exempt from withholding tax certain interest payments made by offshore banking units ("OBUs") on their offshore borrowings. Basically, the exemption will apply where deposits accepted or borrowings by an OBU in any currencies from non-residents, or in foreign currencies from residents, are on-lent only to non-residents.

The withholding tax exemption is to be confined to authorised banks that are subject to the Banking Act 1959, State banks and other foreign exchange dealers declared in a Gazette notice by the Treasurer to be OBUs. In practice, it is expected that an OBU will generally be established as a separate department of an eligible financial institution. It will be necessary in those cases, however, because of restrictions effectively imposed under these measures in relation to an OBU's activities, that it maintain separate accounts for tax purposes. An OBU which is established as a separately incorporated body would have to qualify as an eligible institution in its own right.

The practical operation of the withholding tax exemption for OBUs will require eligible institutions which wish to be declared an OBU to notify the Commissioner of Taxation and provide details of the arrangements being made for the separate operation of the OBU's activities.

Subsection 128AE(1) contains a number of definitions, each having the given meaning unless the contrary intention appears. These definitions are explained hereunder:

"offshore banking unit" is one in respect of which a declaration under proposed new subsection 128AE(2) is in force. Administrative procedures for obtaining this declaration are addressed in the introductory notes to this clause.

"offshore borrowing" is the term used in proposed new section 128GB of the Principal Act (refer to the notes on clause 23) to describe the borrowings by an OBU in respect of which the withholding tax exemption is to apply - it means a borrowing from a non-resident in any currency (paragraph (a)) or from a resident in a foreign currency (paragraph (b)).

"offshore loan" is the term used to describe those loans which can be made by an OBU without attracting liability under proposed section 128NB (see notes on clause 24) for payment of the special withholding tax recoupment referred to in that section. An OBU may make an offshore loan to a non-resident who it reasonably expects to remain a non-resident during the loan term (subparagraph (a)(i)) and provided that it can reasonably be expected that interest payments under the loan would not be, in whole or in part, an outgoing incurred in carrying on business by the non-resident at or through a branch in Australia (subparagraph (a)(ii)). By paragraph (b) a loan to another OBU will constitute an offshore loan.

"prevailing borrowing rate" and "prevailing borrowing term" are factors taken into account to ascertain the amount of the special tax (see the notes to clause 24 regarding proposed new section 128NB) which will apply where an OBU uses "tax exempt loan money" (see the notes which follow regarding that defined term) generated from an "offshore borrowing" for a purpose other than that in respect of which the withholding tax exemption was granted.

"tax exempt loan money" is the term used, broadly, to describe that part of offshore borrowings in respect of which an interest withholding tax exemption will be treated as having been available. The definition has application in determining whether dealings in those borrowings are liable to attract the special tax under proposed section 128NB. Proposed new subsections 128AE(5) to (11) (inclusive) operate to deem money to retain (or lose) its status as tax exempt loan money in certain situations.

"transfer to a person" relates generally to references in later subsections of section 128AE to transfers of tax exempt loan moneys and is defined to include the application of an amount for a person's benefit.

Subsection (2) provides for the Treasurer to declare a person or entity to be an OBU for the purposes of Division 11A of Part III of the Principal Act. The Treasurer's declaration will be effected by a notice published in the Gazette which declares a person or entity, being in one of the following categories, to be an OBU:

•

a savings or trading bank within the meaning of subsection 5(1) of the Banking Act 1959 (paragraph (a));

•

a State bank (paragraph (b)); or

•

a person whom the Treasurer is satisfied is appropriately authorised to deal in foreign exchange (Paragraph (c)).

Subsection (3) ensures that the declaration provided for in subsection (2) cannot come into force before it is published. (However, the transitional provisions of clause 39 of the Bill will apply where a person becomes an OBU pursuant to subsections 128AE(2) and (3) within a period of 6 months after the commencement of those provisions, i.e., within 6 months of Royal Assent to this Bill).

Subsection (4) provides for an "offshore borrowing" of an OBU to be treated as tax exempt loan money of that OBU for the purposes of Division 11A of Part III of the Principal Act where the lender would, but for the exemption in proposed section 128GB, be liable to pay withholding tax.

Subsection (5) will effectively enable tax exempt loan money to retain its status where it is applied by an OBU in making an "offshore loan" and the loan is repaid.

Subsection (6) refers specifically to a borrowing by one OBU from another OBU and deems the tax exempt loan money of the lending OBU to retain its status in the hands of the borrowing OBU.

Subsection (7) describes situations where a transfer of money by an OBU will deprive the money of its status as tax exempt loan money, either in the hands of the transferor (paragraph (a)) or the transferee (paragraph (b)). Under paragraph (a), the amount transferred ceases to be tax exempt loan money of the transferor unless subsections (10) or (11) apply. By paragraph (b), the amount transferred loses its status in the transferee's hands unless subsection (6) applies.

Subsection (8) gives the Commissioner of Taxation a discretion, in cases where moneys are a mixture of tax exempt loan money and other money and it is impracticable to determine precisely the relevant components of the mixture, to deem an appropriate part of the moneys to have been tax exempt loan moneys of the transferor if the moneys are transferred by someone who is or has been an OBU.

Subsection (9) addresses the situation where an OBU which is established as a separate department of an eligible financial institution transfers or makes available tax exempt loan money to another department of the institution under internal accounting arrangements in such a way that it may become available for transfer to other persons (other than by way of an "offshore loan" or repayment of an "offshore borrowing") - i.e., to an Australian resident or to a non-resident carrying on business in Australia through a permanent establishment. Paragraph (a) provides that, in such a case, the OBU is deemed to have made a transfer of tax exempt loan money to another person other than by way of an "offshore loan" or repayment of an "offshore borrowing". As a result the special withholding tax recoupment referred to in new section 128NB (see the notes on clause 24) will apply. Paragraph (b) provides for any actual transfer of the tax exempt loan money by the OBU to be disregarded in such a case, so as to preclude a further liability arising pursuant to section 128NB on the actual transfer.

Subsection (10) ensures that when an OBU receives tax exempt loan money and converts it to a different currency the amount received is deemed to be the amount paid out in exchange (paragraph (a)). Further, the amount transferred is, by paragraph (b), deemed not to have been transferred. This preserves the status of the relevant funds.

By subsection (11), when an OBU receives tax exempt loan money and transfers it by way of deposit for the purposes of temporary safe-keeping pending the making of an "offshore loan" or repayment of an "offshore borrowing", there will be no loss of exempt status. Paragraph (a) deems the money held on deposit and upon being repaid, to be the same tax exempt loan money as was transferred. By paragraph (b), the transfer is treated as not having taken place so preserving the exempt status of the OBU's moneys which, but for this paragraph, would be lost.

Subsection (12) sets out, for the purposes of the section, the circumstances in which moneys are to be taken to be lent or borrowed. Paragraph (a) treats the deposit of money with a bank or financial institution as being a loan to that bank or financial institution. By paragraph (b), a payment for the issue of a security is treated as a borrowing in the hands of the issuer who receives the payment. The subsection is required for purposes of the definitions of "offshore borrowing" and "offshore loan" contained in subsection 128AE(1).

Clause 21: Liability to withholding tax

This clause will amend section 128B of the Principal Act to exempt from withholding tax dividend income derived by certain non-resident life assurance companies that is attributable to superannuation policies and certain life assurance policies (referred to as "eligible policies"). It will also make a consequential amendment to that section to exclude interest to which proposed new section 128GB will apply.

Broadly, section 128B of the Principal Act imposes liability to withholding tax on non-residents who derive, inter alia, dividends paid by Australian resident companies. Withholding tax is imposed at the general rate of 30 per cent, but may be reduced to 15 per cent where the dividend is derived by a resident of a country with which Australia has a comprehensive double taxation agreement and is not effectively connected with a permanent establishment in Australia of that person, or is derived by a resident of Papua New Guinea. The withholding tax is a final tax and applies whether or not the non-resident has other income subject to Australian tax. To that end, section 128D of the Principal Act excludes from the Australian assessable income of a non-resident, dividends on which withholding tax is payable.

The treatment of dividends derived by non-residents has changed since the imputation system was introduced on 1 July 1987. Prior to its introduction, withholding tax did not apply to dividend income derived by a non-resident who carried on business in Australia at or through a permanent establishment (branch) of the non-resident in Australia. Such income was included in the assessable income of the non-resident and subjected to tax by the normal assessment procedures of the Principal Act.

However, section 112A of the Principal Act excludes from the assessable income of a life assurance company so much of the company's investment income, including dividend income, as is attributable to eligible policies. Therefore, dividends derived prior to 1 July 1987 by a non-resident life assurance company through its Australian branch were exempt from tax under both the withholding and assessment bases of taxation to the extent that the dividends were attributable to eligible policies.

With the introduction of the imputation system, withholding tax applies to dividend income derived on or after 1 July 1987 by a non-resident, irrespective of whether the non-resident carries on business in Australia at or through an Australian branch, except to the extent to which the dividends have been franked in accordance with section 160AQF. The effect of this change is to subject a non-resident life assurance company, which derives dividends through an Australian branch, to withholding tax on the unfranked portion of the dividends even though some part of the dividends may be attributable to eligible policies.

Paragraph (a) of this clause will insert in subsection 128(1) of the Principal Act a reference to the new subsection 128B(3A) to be inserted by paragraph (c). The effect of this amendment is to make the operation of section 128B subject to the exemption to be conferred by that new subsection.

Paragraph (b) will amend subsection 128B(3) by including interest specified in proposed new section 128GB in the categories of income declared in that subsection as income to which section 128B will not apply and thereby will not be subject to the interest withholding tax liability provisions contained in subsections 128B(2), (2A) and (5).

The interest payments described in proposed new section 128GB - and to which, by virtue of this clause, withholding will not apply - are those payable by an offshore banking unit on "offshore borrowings". (See the notes on clause 20 for an explanation of the meaning of that term.)

Proposed new subsection 128B(3A) proposed to be inserted by paragraph (c) of this clause, will have the effect of exempting from withholding tax that percentage of the unfranked portion of dividend income derived by a non-resident life assurance company through an Australian branch of the company which is attributable to eligible policies. The percentage will be determined by the formula contained in section 112A that now operates to apportion the investment income of life assurance companies between the tax exempt portion attributable to eligible policies and the assessable portion attributable to other life assurance policies. Section 112A will continue to exclude from assessable income of such a company the amount exempted from withholding tax by new subsection 128B(3A).

By subclause 38(13) of the Bill the amendments to be made by paragraphs 21(a) and (c) will apply to dividends paid to a shareholder on or after 1 July 1987.

Clause 22: Certain income not included in assessable income

This clause will amend section 128D of the Principal Act by bringing proposed section 128GB within the scope of its application. Section 128D provides that income upon which withholding tax is payable, or which would be payable but for specific exclusions, is not to be included in the assessable income of a person. The purpose of this amendment is to add to the list of specific exclusions from assessable income interest that is exempted from withholding tax under proposed section 128GB.

Clause 23: Division not to apply to interest payments on offshore borrowings by offshore banking units

This clause will add proposed section 128GB to the Principal Act. Subsection (1) specifies that the section will apply to interest paid in respect of an "offshore borrowing" provided that, when the borrowing took place, the borrower was an OBU. There is no requirement that, when the interest is paid in respect of the "offshore borrowing", the payer be an OBU.

Subsection (2) specifies that interest withholding tax is not payable under Division 11A of Part III of the Principal Act in respect of interest payments described in subsection (1).

Subsection (3) is an anti-avoidance measure to exclude interest payments on certain "offshore borrowings" from withholding tax exemption under the section. The particular arrangement dealt with under this subsection is one where a "foreign lender" and the "real borrower" (a non-resident) use an OBU situated in Australia as a mere conduit for the loan transaction. The tests to be applied in order to determine whether to deny the interest withholding tax exemption are set out in paragraphs (a), (b) and (c) of the subsection.

Paragraph (a) prescribes the two basic elements necessary for an arrangement to be caught by this subsection. First, subparagraph (a)(i) stipulates that a person called a 'conduit bank' (viz, an OBU) is to make an "offshore borrowing" of an amount from a "foreign lender". Subparagraph (a)(ii) looks to whether the 'conduit bank' has made available the amount borrowed (or a similar amount) as an "offshore loan" to another person (the "real borrower").

Under paragraph (b), it is necessary for the interest payable under an arrangement described in paragraph (a) to be interest that would otherwise be eligible for the exemption from interest withholding tax provided by section 128GB in respect of an offshore borrowing by an OBU.

Paragraph (c) contains the final of these cumulative tests, which is that the interest rate paid by the OBU on the "offshore borrowing" is the same as or, in the Commissioner's opinion, similar to, the rate received on the "offshore loan".

Subsection (4) gives a wide meaning to the term "arrangement" used in paragraph (a) of subsection (3).

Clause 24: Special tax payable in respect of certain dealings by current and former offshore banking units

Proposed new section 128NB, to be inserted into the Principal Act by this clause, provides for the payment by an OBU of income tax on the "lost withholding tax amount" when an OBU applies "tax exempt loan money" other than by way of an "offshore loan" or repayment of an "offshore borrowing" within the meaning of those expressions in subsection 128AE(1) (see notes on clause 20).

The income tax payable by an OBU in these circumstances is to be imposed by the Income Tax (Offshore Banking Units)(Withholding Tax Recoupment) Act 1987 on the 'lost withholding tax amount' in respect of the relevant transfer of funds, and at the penal rate declared in that Act of 300 per cent of that lost withholding tax amount. That rate is designed to effectively make good the withholding tax that, but for proposed new section 128GB, would have been paid on the interest on the "offshore borrowing" by an OBU, and add an amount equal to twice that withholding tax (see later notes on the provisions of that proposed Act).

This special income tax liability is provided for by new section 128NB against the background that an interest withholding tax exemption will apply under new section 128GB in respect of interest payable by an OBU on an "offshore borrowing" irrespective of how the borrowed funds are applied, that the primary purpose of that exemption is to facilitate offshore dealings with non-residents by OBUs, and that an appropriate sanction against the application by an OBU of relevant borrowings in an unintended way is necessary to protect the withholding tax base.

Subsection 128NB(1) sets out the conditions to be satisfied before an income tax liability can arise under the section. These conditions have been outlined in the preceding paragraphs.

Subsection (2) establishes a formula for determining the 'lost withholding tax amount' in respect of those transfers which will attract a tax liability under subsection (1). The formula contained in this subsection takes account of the practical difficulties of determining the offshore borrowings that are the subject of such a transfer and the amount of the withholding tax forgone by the exemption accorded by section 128GB. The formula is:

IWT rate * PB rate * PB term * TA


These four components are shorthand expressions for, respectively:

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the current interest withholding tax rate declared by the Parliament (10 per cent);

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the prevailing borrowing rate, i.e., the general rate at which the OBU was borrowing when it made the transfer which attracts the special tax;

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the prevailing borrowing term, i.e., the general term of the borrowings being made by the OBU at the time of that transfer; and

•

the amount of tax exempt loan money transferred.

Subsection (3) makes the tax payable under the section on the lost withholding tax amount due and payable 21 days after the end of the month in which the transfer to which it relates occurs (paragraph (a)). Paragraph (b enables the Commissioner, in special circumstances, to extend the date on which the tax is due and payable.

Subsection (4) effectively adopts for purposes of section 128NB many of the withholding tax provisions of section 128C of the Principal Act. All subsections with the exception of subsections 128C(1) and (4AA) are thus to be regarded as referring to section 128NB tax when they refer to withholding tax. Effectively, the main provisions of section 128C, that cover the liability for, and remission of, additional tax where a withholding tax remains unpaid, will apply to unpaid section 128NB tax.

Subsection (5) enables the Commissioner to remit the whole or part of an amount of tax payable under the section in relation to a transfer by an OBU of tax exempt loan money.

Paragraph (a) sets out the preconditions which are to exist and in respect of which the Commissioner is to be satisfied before a remission of section 128NB tax can occur. For example, the tax could be remitted if an OBU mistakenly believed, on reasonable grounds, that it was making an "offshore loan" with tax exempt loan money when, in fact, the loan was to a resident. Subparagraph (a)(i) specifies this as a circumstance for remission, others being a mistaken belief that:

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the borrower was another OBU;

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the interest payable to the OBU by the borrower would be an outgoing of a particular kind, e.g., that it would not be an outgoing incurred by a non-resident in carrying on a business in Australia; or

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the transferred money was not tax exempt loan money.

Subparagraph (a)(ii) requires, in addition, that the Commissioner be satisfied, before remitting any of the tax, that the OBU had taken reasonable steps to ascertain the facts on which it had mistakenly relied.

In addition, paragraph (b) permits remission by the Commissioner where he is satisfied that special circumstances exist which justify remission of some or all of the section 128NB tax.

Clause 25: Stripped securities

This clause proposes an amendment to correct a typographical error in subsection 159GZ(4) of Division 16E of the Principal Act, which is concerned with the determination of the deduction allowable for the underlying cost of each stripped security on the sale of such a security. The words "proportion of" are to be replaced by the words "proportion as", thereby rectifying the drafting of the subsection.

Clause 26: Rebate in respect of amounts assessable under section 26AH

Section 160AAB of the Principal Act authorises a rebate of tax in respect of bonuses, and other amounts in the nature of bonuses, received under life assurance policies and included in assessable income by virtue of section 26AH of the Principal Act. Section 26AH includes as assessable income bonuses and similar amounts paid on certain life assurance policies issued by a life assurance company or friendly society after 27 August 1982 and, depending on the date of commencement of a policy, applies to such amounts received either during the first 4 years or during the first 10 years of the policy. The rebate is intended to compensate for income tax that has been paid to the Commonwealth by the life assurance company in respect of its investment income or by the friendly society in respect of its life assurance business. Accordingly, the rebate is generally only available where the policy is issued by a life assurance company the investment income of which is subject to income tax or by a friendly society.

However, the rebate is also available in respect of policies issued by certain State government insurance offices that pay to their respective State Treasuries an amount equal to the Commonwealth income tax that would be payable if they were not exempt. In return for extending the rebate in respect of these policies, the relevant State Governments have agreed to reimburse the Commonwealth for the estimated revenue forgone by allowing the rebate.

Paragraph (b) of clause 26 will insert new paragraph 160AAB(1)(g) in the Principal Act to extend the rebate authorised by section 160AAB to life assurance policies issued by the State Government Insurance Corporation of Western Australia, established under the Western Australian State Government Insurance Commission Act 1986 which came into operation on 1 January 1987. In return for extending the operation of section 160AAB as proposed, the Western Australian Government has entered into an agreement to reimburse the Commonwealth for the estimated revenue forgone by allowing the rebate in respect of amounts received from 1 July 1987.

By subclause 38(16) of the Bill, this amendment will apply in relation to taxable bonuses received on or after 1 July 1987.

Clause 27: Rebate for moneys paid on shares for the purposes of petroleum exploration, prospecting or mining

This clause proposes a technical amendment of subsection 160ACA(1) of the Principal Act to make it clear that the definition of "adjacent area" in that subsection is linked to the terms of the Petroleum (Submerged Lands Act 1967 as in force on 13 February 1983 and not to the terms of that Act as varied by the Petroleum (Submerged Lands) Amendment Act 1980. This will rectify an anomaly arising from a technical change by the latter Act to the prescription of the adjacent areas.

Clause 28: Interpretation

This clause will amend section 160AE of the Principal Act, which is the interpretation section of Division 18 of that Act. Division 18 provides for credits to be allowed in Australian income tax assessments for income tax paid in foreign countries on foreign income derived by Australian residents which is also subject to tax in Australia.

Under the Bill, "offshore banking income" (a defined term - see the notes which follow on proposed new subsection 160AE(4)) will be quarantined from all other foreign source income for the purpose of allowing foreign tax credits, so that foreign tax credits attached to the foreign source component of offshore banking income can be applied only against the Australian tax on that component of income. This treatment is similar to the separate quarantining of certain interest income under the Division.

Paragraphs (a) and (b) of clause 28 will amend paragraph 160AE(3)(e) to ensure that interest that is "offshore banking income", a term defined in proposed new subsection 160AE(4), will not constitute "interest income" for the purposes of Division 18 (and will thus be separately quarantined).

Paragraph (c) proposes the addition of new subsections 160AE(4), (5) and (6).

New subsection 160AE(4) will define the term "offshore banking income" for the purposes of the Division. By Paragraph (4)(a), the term will mean all income (interest, fees, commissions or other amounts) derived by a person (i.e., an offshore banking unit - an "OBU") from offshore banking transfers. The term is explained in the notes on proposed new subsection 160AE(5) and, for this purpose, such transfers are taken to be the only source of income of an OBU.

Paragraph (4)(b) provides that the "offshore banking income" definition encompasses dividends paid to a person from profits derived from offshore banking transfers of another company. The paragraph thereby ensures that offshore banking income retains its identity when paid out in the form of dividends to shareholders.

Proposed new subsection 160AE(5) explains the special meaning given to the expression "offshore banking transfer" as used in proposed subsection (4). As noted above, that subsection provides that "offshore banking income" can originate only from the making of offshore banking transfers. Subsection (5) recognises that offshore banking transfers can originate from all "offshore borrowings" (a defined term - see the notes on proposed subsection 128AE(1) but, broadly, foreign currency borrowings from residents and non-residents alike).

The effect of the subsection is to treat all "offshore borrowings", whether or not benefiting from an interest withholding tax exemption, as tax exempt loan moneys.

The significance of treating all offshore borrowing as tax exempt loan moneys is that any use of those moneys by way of a loan or transfer is dealt with as an offshore banking transfer. When read with subsection (4), this will mean that income generated by such a transfer will be "offshore banking income" for the purposes of Division 18 of the Principal Act.

Subsection (6) is an interpretative provision ensuring that expressions used in subsection 160AE(5) which are also used in Division 11A of the Principal Act have the same meaning in that subsection as in Division 11A.

Clause 29: Credits in respect of foreign tax

This clause will amend subsection 160AF(7) of the Principal Act - by omitting the existing subsection and substituting a new subsection - and provide for the quarantining of foreign tax credits in respect of "offshore banking income". It will thus ensure that credit for foreign taxes on offshore banking activities will be allowed in Australian assessments only up to the amount of the Australian tax payable on the foreign source profits derived by an OBU.

Existing section 160AF authorises the allowance of credits in respect of eligible "foreign tax" (as defined in subsection 6AB(2) of the Principal Act) and establishes the procedures for ascertaining the amount of the credit that is to be allowed. Subsection (7) currently operates to quarantine certain foreign interest income from other foreign income for the purpose of allowing foreign tax credits.

The effect of this proposed amendment of subsection 160AF(7) will be to add another class of income, namely "offshore banking income", to the subsection so that the quarantining provisions will apply to three separate classes of foreign source income - "interest income", "offshore banking income" and "other income" - for the purposes of allowing foreign tax credits.

Paragraphs (a), (b) and (c) of the new subsection 160AF(7) describe the three classes of income in respect of which foreign tax credits are to be quarantined.

New paragraph (d) enables section 160AF to apply separately to each class of income and new paragraph (e) stipulates that, for the purposes of the application of the foreign tax credit provisions of section 160AF, each class of income is to be treated as the whole of the foreign income.

Clause 30: Certain dividends deemed to be offshore banking income

This clause will insert proposed new section 160AFAA into Division 18 of the Principal Act to secure the intended operation of the quarantining measures proposed for "offshore banking income" against avoidance. The new section will ensure that the character of such income cannot be changed artificially by avoidance arrangements, but will continue to retain its identity. Without this provision, it would, for example, be possible to alter the character of offshore banking income simply by incorporating a foreign company to receive it and subsequently convert it into a dividend to be paid to an Australian taxpayer who otherwise would have received the offshore banking income directly. The new section will complement section 160AFA of the Principal Act which is designed to similarly ensure the effective quaranting for foreign tax credit purposes of certain interest income.

New subsection 160AFAA(1) treats dividends paid from a pool of offshore banking income as offshore banking income in the recipient taxpayer's hands.

Paragraph (a) contains the first of two conditions to be satisfied if the operative part of the subsection is to apply. It is that, in an income year, a dividend is paid to a taxpayer by a foreign company (defined by subsection 160AE(1) of the Principal Act to be a company that is not a resident of Australia). The second condition (in paragraph (b)) is that the foreign company is, at any time during the year of income, "related" to the taxpayer (within the meaning of section 160AFB of the Principal Act). The operative part of the subsection then provides for a dividend, to the extent that it does not exceed the amount in the "transferred offshore banking income pool" (a term explained in new subsection 160AFAA(2)) of the foreign company to be treated as offshore banking income derived by the taxpayer receiving the dividend.

Proposed new subsection 160AFAA(2) sets out the basis for determining the amount of offshore banking income in the transferred offshore banking income pool. It is the sum of all amounts of "transferred offshore banking income" derived at or before a particular time by the foreign company less the sum of the amounts paid out as dividends before that time to the taxpayer and deemed by subsection 160AFAA(1) to be offshore banking income derived by the taxpayer, i.e., the balance in the pool.

Proposed new subsection 160AFAA(3) provides an explanation of the term "transferred offshore banking income" used in subsection (2). It means any income derived by a foreign company where:

•

the right to receive the income was transferred or assigned by the taxpayer to that company (paragraph (a)); and

•

but for that transfer or assignment, the income would have been offshore banking income in the taxpayer's hands (paragraph (b)).

Clause 31: Losses of previous years

This clause will amend section 160AFD of the Principal Act, which is concerned with the quarantining of an overall foreign loss incurred in relation to a class of income derived from a foreign source for offset only against subsequent income of the same class from the same foreign source. It will replace existing subsection 160AFD(6) with a new subsection (6), dividing income into three separate classes rather than the two classes appearing in the present subsection. The new class of income is "offshore banking income" and, like the other two, it will constitute a single class of income.

The amendment will enable foreign offshore banking income losses to be carried forward and offset only against foreign offshore banking income profits from the same foreign source.

The separate classes of foreign income referred to in subsection 160AFD(6) apply also for purposes of subsection 51(6) and 80(8) of the Principal Act and section 35 of the Taxation Laws Amendment (Foreign Tax Credits) Act 1986. Those provisions apply to limit the deductions allowable under subsection 51(1) in a year of income to the relevant amount of a class of foreign income derived from a foreign source - and effectively preclude losses incurred by a taxpayer in a year of income in deriving a class of foreign income from a foreign source from being carried forward for deduction against later year Australian source income or other foreign class/source income. The amendment of subsection 160AFD(6) will have consequential effects for the purposes of those provisions.

Clause 32: Transfer of excess credit within company group

Section 160AFE of the Principal Act applies where the amount of foreign tax paid by a company on a class of income (within the meaning of subsection 160AFE(8)) from a foreign source exceeds the Australian tax payable on that income. It enables that excess foreign tax credit to be transferred between companies within a wholly-owned company group and be set-off against Australian tax payable on income of the same class derived by another company in the group in the same income year.

The provisions of section 160AFE which determine, for purposes of the section, the circumstances in which a company is a group company in relation to another company, and which allow the transfer of an excess foreign tax credit to that other company, operate in the same manner as those contained in section 80G of the Principal Act (which apply to the transfer of income losses within a company group).

Consistent with the amendments proposed to be made to section 80G of the Principal Act (refer to the notes above in relation to clause 15 of this Bill) by the Taxation Laws Amendment Bill (No.4) 1987, that Bill also proposes the amendment of section 160AFE to insert a new subsection (6A) so that a company that has never operated (a "shelf company"), may satisfy the 100% common ownership test necessary to establish a group relationship in the year of income in which its issued shares are purchased from the original subscribers to the Memorandum of Association.

Clause 32 proposes further amendments to section 160AFE of the Principal Act that will:

•

make the application of subsection 160AFE(6) subject not only to proposed subsection (6A) but also to proposed new subsection (6B) - paragraph (a) ;

•

ensure that proposed subsection 160AFE(6A) applies in relation to the 1987-88 income year and subsequent years, (consistent with the application of section 160AFE generally for those years of income) - paragraph (b);

•

insert new subsection 160AFE(6B), so that a shelf company will be able to satisfy the common ownership test in the situation where the company issues shares to the purchaser of the company (being a member of the company group) and the original subscriber shares are redeemed - paragraph (c). New subsection 160AFE(6B) will apply where:

•.

at a time in the 1987-88 income year or a subsequent year a "shelf company" issued shares to another company or companies (paragraph (a));

•.

shares in the shelf company were owned by another person or persons immediately before that time (paragraph (b));

•.

immediately after that time, all the other issued shares in the shelf company were redeemed by the shelf company (paragraph (c)); and

•.

the shelf company was dormant within the meaning of Part VI of the Companies Act 1981 in the period (referred to as the "dormant period") between the time it was incorporated and the time of issue of the shares referred to in paragraph (a) (paragraph (d)).

Where these requirements are satisfied a shelf company will be taken, for the purposes of subsection 160AFE(2), not to have been in existence during the dormant period. The effect will be to establish a group relationship pursuant to subsection 160AFE(2) between the shelf company and the company or companies to which the new shelf company shares are issued in relation to the year of income in which those shares were issued (and the other shares of the shelf company were redeemed).

The purpose of paragraph (d) of this clause is to prevent an offshore banking unit (OBU) from transferring any excess (i.e., unutilised) foreign tax credits in respect of offshore banking income. This clause will ensure that no such excess credits can be utilised by either the company of which the OBU is a separate department or by any other company in a 100 per cent commonly owned company group of which a separately incorporated OBU is a member.

The clause will achieve this by amending subsection 160AFE(8) of the Principal Act - which sets out the separate classes of income to which the transfer of excess credits provisions of section 160AFE relate - to exclude offshore banking income from the scope of the classes of foreign income in respect of which excess foreign tax credits can be transferred to another company in the group.

Clause 33: Transfer of net capital loss within company group

Clause 33 proposes to amend section 160ZP of the Principal Act, which allows a group company to transfer to one or more other companies in the group all or part of a net capital loss incurred for the purposes of Part IIIA of the Principal Act (treatment of capital gains and capital losses).

The provisions of section 160ZP which determine, for the purposes of the section, the circumstances in which a company is a group company in relation to another company, and which allow the transfer of a net capital loss to that other company, operate in the same manner as those contained in section 80G of the Principal Act (transfer of income losses within a company group).

Consistent with the amendments proposed to be made to section 80G of the Principal Act (refer to the notes above in relation to clause 15 of this Bill) by the Taxation Laws Amendment Bill (No.4) 1987, that Bill also proposes amendment of section 160ZP to insert a new subsection (6A) so that a company that has never operated (a "shelf company"), may satisfy the 100% common ownership test necessary to establish a group relationship in the year of income in which its issued shares are purchased from the original subscribers to the Memorandum of Association.

Clause 33 proposes further amendments to section 160ZP of the Principal Act that will:

•

make the provisions of subsection 160ZP(6) subject not only to proposed subsection (6A) but also to proposed new subsection (6B) - paragraph (a);

•

give proposed subsection 160ZP(6A) effect in relation to the 1985-86 income year and subsequent years, (consistent with the application of section 160ZP generally for those years of income) - paragraph (b);

•

insert new subsection 160ZP(6B) so that a shelf company will be able to satisfy the common ownership test in the situation where the company issues shares to the purchaser of the company (which is a member of the company group) and the original subscriber shares are redeemed - paragraph (c). New subsection 160ZP(6B) will apply where:

•.

at a time in the 1985-86 income year or a subsequent year a "shelf company" issued shares to another company or companies (paragraph (a));

•.

shares in the shelf company were owned by another person or persons immediately before that time (paragraph (b));

•.

immediately after that time, all the other issued shares in the shelf company were redeemed by the shelf company (paragraph (c)); and

•.

the shelf company was dormant within the meaning of Part VI of the Companies Act 1981 from when it was incorporated until the time of issue of the shares referred to in paragraph (a) (paragraph (d)).

Where these requirements are satisfied, proposed subsection 160ZP(6B) will allow a shelf company to be taken, for the purposes of subsection 160ZP(1), not to have been in existence during this dormant period. A group relationship may thus be established pursuant to subsection 160ZP(1) between the shelf company and the company or companies to which the new shelf company shares are issued in relation to the year of income in which those shares are issued (and the other shares of the shelf company were redeemed).

Clause 34: Transfer of asset to wholly-owned company

This clause will amend section 160ZZN of Part IIIA - Capital gains and Capital losses - of the Principal Act to correct two minor drafting deficiencies.

Section 160ZZN allows roll-over relief (that is, deferral of tax liability) for re-organisations involving transfers of assets by an individual, partnership or trust to a company where the sole consideration consists of shares or securities of the company, and where after the transfer the transferor holds all of the shares in the company.

Paragraph (a) will amend subparagraph 160ZZN(7)(b)(i) of the Principal Act by inserting "the" before the word "indexed".

Paragraph (b) will omit the word "asset" where it appears for the first time in subparagraph 160ZZN(7)(b)(ii) and substitute the words "shares or securities".

By subclause 38(18) of the Bill, these amendments will apply to assessments in respect of income of the year of income in which 20 September 1985 occurred (the date of effect of the capital gains and capital losses provisions) and all subsequent years.

Clause 35: Transfer of excess credit within company group

Clause 35 will amend section 160ZZO of the Principal Act. That section permits a roll-over for capital gains tax purposes of asset transfers between companies in the same group where the companies share 100% common ownership. The effect of a roll-over is to defer, for the purposes of Part IIIA of the Principal Act (treatment of capital gains or capital losses), a tax liability on capital gains that may otherwise arise by reason of the transfer of an asset that was acquired by the transferor company after 19 September 1985 when Part IIIA came into operation. In cases where an asset acquired before 20 September 1985 is transferred, a roll-over allows the transferee company to also be taken to have acquired the asset before 20 September 1985, so that the asset remains outside the scope of the tax on capital gains.

Section 160ZZO which determines the existence of a company group relationship, operates in the same way as section 80G (transfer of income losses between group companies).

Consistent with the amendments proposed to be made to section 80G (refer to the earlier notes in relation to clause 15 of this Bill) by the Taxation Laws Amendment Bill (No.4) 1987, that Bill also proposes an amendment of section 160ZZO to insert a new subsection (8A). This will allow a company that has never operated (a "shelf company") to satisfy the 100% common ownership test necessary to establish a group relationship in the year of income in which its issued shares are purchased from the original subscribers to the Memorandum of Association.

Clause 35 proposes further amendments to section 160ZZO of the Principal Act that will:

•

make the application of subsection 160ZZO(8) subject not only to proposed subsection (8A) but also to proposed new subsection (8B) - paragraph (a) ;

•

give new subsection 160ZZO(8A) effect in relation to the 1985-86 income year and subsequent years, (consistent with the application of section 160ZZO generally for those years of income) - paragraph (b);

•

insert new subsection 160ZZO(8B), by which a shelf company will be able to satisfy the common ownership test in the situation where the company issues shares to the purchaser of the company (being a member of the company group), the original subscriber shares being redeemed - paragraph (c). New subsection 160ZZO(8B) will apply where:

•.

at a time in the 1985-86 year of income or subsequently a "shelf company" issued shares to another company or companies (paragraph (a));

•.

other shares in the shelf company were owned by another person or persons immediately before that time (paragraph (b));

•.

immediately after that time, all those other issued shares in the shelf company were redeemed (paragraph (c)); and

•.

the shelf company was dormant within the meaning of Part VI of the Companies Act 1981 in the period between its incorporation and the time of issue of the shares referred to in paragraph (a) (paragraph (d)).

Where these requirements are satisfied, proposed subsection 160ZZO(8B) will allow a shelf company to be taken, for the purposes of subsection 160ZZO(3), not to have been in existence during the dormant period. The effect will be to establish a group relationship pursuant to subsection 160ZZO(3), between the shelf company and the company or companies to which the new shelf company shares are issued, in relation to the year of income in which those shares are issued (and the other shares of the shelf company are redeemed).

Clause 36: Exchange of units in a unit trust for shares in a company

Clause 36 proposes to insert two new sections - sections 160ZZPA and 160ZZPB - in Division 17 of Part IIIA of the Principal Act. The existing provisions contained in Division 17 set out the conditions that have to be met to obtain deferral of tax liability on a capital gain (referred to as a "roll-over"). Where an asset acquired before 20 September 1985 (the commencement date of the tax on capital gains) is transferred in circumstances in which it would have qualified for roll-over relief had it been acquired after 19 September 1985, the earlier acquisition date is also carried over.

The new sections will extend roll-over relief in the case of the re-organisation of the affairs of a resident unit trust (including one that is a public trading trust) where a resident company is interposed between the unitholders and the trust and where the re-organisation is effected either by a direct exchange of units for shares or by the issue of shares associated with the redemption or cancellation of the units. The former unitholders will be required to dispose of their units solely for non-redeemable shares in the company.

Proposed new section 160ZZPA, to be inserted in the Principal Act by clause 36, will extend roll-over relief to a re-organisation in which a resident company (not being a company in the capacity of a trustee of a trust estate) is interposed between unitholders in a resident unit trust and the trust, the unitholders exchanging their units solely for the consideration of obtaining shares in the company.

A number of requirements must be satisfied before the company and unitholders may elect that roll-over relief is to apply. The necessary conditions are set out in proposed subsection 160ZZPA(1).

Paragraph (a) of subsection 160ZZPA(1) specifies that section 160ZZPA will only apply to a scheme for the re-organisation of the affairs of a unit trust (subparagraph (i)) that was entered into, or commenced to be carried out, after the date of introduction of the Bill - 9 December 1987 (subparagraph (ii)). Another element is that two or more taxpayers (referred to as the "exchanging taxpayers") who are holders of all the units (referred to as "exchange units") in a unit trust dispose of all the exchange units to a company (referred to as the "interposed company") other than a company in the capacity of trustee of a trust estate.

It is a question of fact when a re-organisation is entered into, or commences to be carried out. However, the mere seeking of preliminary advice of a legal or accounting nature by a trustee or manager of a unit trust as to the efficacy of a re-organisation prior to the introduction of this Bill would not preclude the availability of roll-over relief.

The requirement that there be at least two unitholders excludes from roll-over relief under this section a re-organisation of a unit trust in which all the units are held by one taxpayer. Such a re-organisation may, however, qualify for roll-over relief under existing section 160ZZN of the Principal Act.

By paragraph (b) the consideration for the disposal of the units must consist of nothing except non-redeemable shares (referred to as "replacement shares" in the interposed company. For these purposes, subsection 160ZZPA(9) defines those shares which are not to be taken to be non-redeemable shares (see later notes on this subsection).

Paragraph (c) requires that the total number of replacement shares in the interposed company received by the former unitholders as a result of the re-organisation, equals, or is a multiple of, the total number of exchange units. If there were, for example, 10,000 exchange units, the number of replacement shares needed would be 10,000 or a whole number multiple of 10,000.

By paragraph (d), it will be a requirement that all of the exchange units held by a particular exchanging taxpayer are disposed of at the same time (referred to in section 160ZZPA as the "exchanging taxpayer's disposal time") .

Paragraph (e) specifies two conditions that need to be satisfied immediately after the time (referred to as the "completion time") of the last of the disposals of the units to the interposed company. First, the exchanging taxpayers must own all the shares in the interposed company (subparagraph (i)). Secondly, the interposed company must hold all the units in the unit trust (subparagraph (ii)). In this regard subsection 160ZZPA(10) sets out situations in which the exchanging taxpayers will be taken to own all the shares in the interposed company so that subparagraph 160ZZPA(1)(e)(i) is satisfied, although a minimal number of shares are in fact held by others.

If an exchanging taxpayer's disposal time occurred before the completion time (i.e., the time of the last of the disposals to the company), paragraph (f) requires that the taxpayer be the owner of the replacement shares for the entire period between these two points of time.

Paragraph (g) requires the unit trust be a resident unit trust in the year of income of the trust in which the completion time occurred. Existing subsection 160H(3) of the Principal Act prescribes the tests that must be satisfied for a unit trust to be regarded as a resident unit trust in a year of income for the purposes of Part IIIA - Capital gains and Capital losses - of the Principal Act.

Correspondingly, paragraph (h) requires that the interposed company be a resident of Australia at the completion time (see paragraph (e)). If the disposals of units by the unitholders to the company occur at different times, the company must be a resident for the whole period between the first disposal and the completion time.

Paragraph (j) deals with the case of an exchanging taxpayer in the capacity of a trustee of a trust estate and requires the taxpayer immediately after the disposal time (see paragraph (d)) to hold the replacement shares upon the same trust as the exchange units had been held. This means that the trust property must be held for the benefit of the same beneficiaries and upon the same terms and conditions as prior to the exchange.

Paragraph (k) stipulates that immediately after the completion time, each exchanging taxpayer must own the replacement shares in the interposed company in the same proportion as the exchange units were held in the unit trust. For example, a taxpayer who held 10 per cent of the issued units of the unit trust would be required to own 10 per cent of the shares in the interposed company. Subsection 160ZZPA(10) provides that in certain circumstances, a minimal number of shares not held by exchanging taxpayers are to be disregarded for the purposes of this test.

Paragraph (m), in effect, requires the interest of each shareholder in the interposed company after the re-organisation to be of the same value as the prior interest of the shareholder in the unit trust. The paragraph requires that the following equation be satisfied in relation to each exchanging taxpayer:

((MV of taxpayer's shares)/(MV of total shares)) = ((MV of taxpayer's units)/(MV of total units))


The meanings of the terms used in the equation are as follows:

MV of taxpayer's shares is so much of the market value of the replacement shares owned by the taxpayer immediately after the completion time (i.e., the time of the last of the disposals of units) as is attributable to the exchange units held by the company;

MV of total shares is so much of the market value of all the replacement shares immediately after the completion time as is attributable to the exchange units held by the interposed company;

MV of taxpayer's units is the market value of the units held by the exchanging taxpayer immediately before the taxpayer disposed of the units to the company; and

MV of total units is the market value of all the units in the trust immediately before the taxpayer disposed of his or her units to the company.

Paragraph (n) makes roll-over relief conditional on the interposed company having elected that the subsection apply in respect of all the disposals. The election must be by notice in writing given to the Commissioner within 2 months after the completion time, or within such further time as the Commissioner allows.

By paragraph (p) the notice referred to in paragraph (n) must be accompanied by a declaration in a form approved by the Commissioner with respect to the operation of section 160ZZPA. In this notice the public officer of the company will need to declare, that to the best of his or her knowledge and belief all the conditions necessary for roll-over relief in subsection 160ZZPA(1) have been satisfied.

Subsection 160ZZPA(2) sets out the conditions for, and declares the consequences of, a valid election made by an exchanging taxpayer which is supported by an election by the interposed company.

Paragraph (a) of subsection 160ZZPA(2) requires that either of two conditions be satisfied:

•

the taxpayer is a resident of Australia (subparagraph (a)(i)); or

•

each disposal of an exchange unit by the taxpayer constitutes the disposal of a taxable Australian asset (subparagraph (a)(ii)).

Taxable Australian assets are defined in section 160T of the Principal Act for the purposes of determining those assets which are subject to tax on capital gains when owned by non-residents of Australia.

Broadly, a unit in a resident unit trust will be a "taxable Australian asset" if a taxpayer and/or associates of the taxpayer beneficially owned, at any time during so much of the period of five years immediately prior to the disposal as occurred after 19 September 1985, at least 10 per cent of the issued units of the unit trust.

Paragraph (b) requires the exchanging taxpayer to elect that the subsection apply. The election must be made in respect of all the exchange units held by the taxpayer in the unit trust. Subsection 160ZZPA(4) sets out the requirements regarding the form, manner and timing of the election (see notes on that subsection).

Where the conditions in paragraphs (a) and (b) have been met the taxpayer will not be deemed to have disposed of the exchange units for the purposes of Part IIIA of the Principal Act. Paragraph (c) allows the replacement shares to be taken to have been acquired before 20 September 1985 if all the exchange units were acquired by the taxpayer before 20 September 1985.

Where paragraph (d) applies, the taxpayer will be taken to have acquired some of the replacement shares before 20 September 1985. This is where some, but not all, of the exchange units held by the taxpayer were acquired before 20 September 1985 (subparagraph (i)). In the notice of election, the taxpayer will need to specify which replacement shares are those to be taken as shares acquired before 20 September 1985 (subparagraph (ii)).

Subparagraph (2)(d)(iii) requires that the number of replacement shares nominated by the taxpayer in the election does not exceed the number calculated in accordance with the formula:

Shares * ((Pre CGT units)/(Total units))


where:

•

Pre CGT units is the number of exchange units acquired by the taxpayer before 20 September 1985;

•

Shares is the number of replacement shares owned by the taxpayer immediately after the completion time (paragraph (1)(e)); and

•

Total units is the number of exchange units held by the taxpayer and disposed of to the interposed company.

If this requirement is met, the taxpayer will be deemed, for the purposes of Part IIIA of the Principal Act, to have acquired the nominated shares before 20 September 1985.

By paragraph (e), each replacement share that is not deemed by paragraph (c) or (d) to have been acquired by the taxpayer before 20 September 1985 is to be taken as acquired on or after 20 September 1985 (referred to as a "post-20 September 1985 replacement share"). This is relevant for the purposes of proposed paragraph (2)(g) and subsection 160ZZPA(3).

By paragraph (f), each exchange unit that was acquired by the taxpayer on or after 20 September 1985 is to be taken to be a "post-20 September 1985 exchange unit" for the purposes of proposed paragraph (2)(g).

Paragraph (g) establishes the consideration that a taxpayer is to be deemed to have paid or given in respect of the acquisition of a replacement share taken as acquired on or after 20 September 1985 under paragraph (2)(e) (a post-20 September 1985 replacement share). This is relevant for the purpose of calculating capital gains or capital losses on a later disposal of the replacement shares.

Subparagraph (g)(i) applies for the purpose of ascertaining whether a capital gain has accrued to the taxpayer in the event of a subsequent disposal of a replacement share and deems consideration to have been paid or given as calculated in accordance with the formula:

(ICB of Post CGT units)/(Post CGT shares)


where:

ICB of post CGT units is the sum of the amounts that would have been the indexed cost bases to the taxpayer of post-20 September 1985 exchange units for the purposes of Part IIIA if the Part had applied in respect of the disposal of the units by the taxpayer to the interposed company; and

Post CGT shares is the number of post-20 September 1985 replacement shares (refer paragraph (2)(e)) owned by the taxpayer immediately after the time of the last of the disposals of units by unitholders to the interposed company (the completion time - paragraph (1)(e)).

Subparagraph (g)(ii) applies for the purposes of ascertaining whether the taxpayer incurred a capital loss in the event of a subsequent disposal of the share by the taxpayer. It requires the deemed consideration on acquisition to be calculated in accordance with the formula:

(RCB of post CGT units)/(Post CGT shares)


where:

RCB of post CGT units is the sum of the amounts that would have been the reduced cost bases to the taxpayer of post-20 September 1985 exchange units for the purposes of Part IIIA if that Part had applied in respect of the disposal of the units by the taxpayer to the interposed company; and

Post CGT shares is the number of post-20 September 1985 replacement shares owned by the taxpayer immediately after the completion time.

Subsection 160ZZPA(3) denies the benefits of indexation where a post-20 September 1985 replacement share is disposed of by an exchanging taxpayer within 12 months of the earliest day (provided that it is a day after 19 September 1985) on which any exchange unit was acquired by the taxpayer. It does so by substituting for the reference in paragraph (2)(g) to the indexed cost bases to the taxpayer of units the cost bases of the units.

Subsection 160ZZPA(4) sets out the requirements for an election under paragraph 160ZZPA(2)(b). Such an election is to be made by notice in writing and given to the Commissioner on or before the date of lodgment of the return of income of the taxpayer for the year of income in which the disposal of the exchange units took place, or within such further period as the Commissioner allows.

Subsection 160ZZPA(5) determines what proportion of units acquired by the interposed company from the former unitholders are to be deemed to have been acquired by the company before 20 September 1985 where the trustee of the unit trust acquired some of the trust assets before that date. The balance of the units will then be taken to have been acquired on or after 20 September 1985 so that a capital gain or capital loss may arise on a subsequent disposal. The deemed consideration in respect of the acquisition of that balance is to be calculated as set out in subsection (7). Under subsection (5), if:

•

at the completion time any of the assets of the unit trust were acquired by the trustee of the unit trust before 20 September 1985 (paragraph (a)) ;

•

the interposed company, by notice in writing accompanying the notice referred to in paragraph (1)(n), nominates certain exchange units to be taken to have been acquired before 20 September 1985 (paragraph (b)); and

•

the number of units so nominated does not exceed the number calculated in accordance with the formula (paragraph (c)):

Units * ((Net value of pre CGT assets)/(Net value of total assets))


then the units so nominated will for the purposes of Part IIIA of the Principal Act be taken to have been acquired by the company before 20 September 1985.

The components of the formula are:

Net value of pre CGT assets is the number of dollars in the market value of the assets of the trust acquired before 20 September 1985 as at the completion time reduced by the number of dollars in the liabilities of the unit trust attributable to those assets;

Units is the number of exchange units held by the company immediately after the completion time; and

Net value of total assets is the number of dollars in the market value of the assets of the unit trust as at the completion time reduced by the number of dollars in the liabilities of the unit trust at that time.

Subsection 160ZZPA(6) is relevant to the operation of subsections 160ZZPA(7) and (8). It specifies that all exchange units not deemed by subsection 160ZZPA(5) to have been acquired by the interposed company before 20 September 1985 are to be taken to have been acquired on or after 20 September 1985 ("post-20 September 1985 exchange units").

Subsection 160ZZPA(7) sets out the consideration that the interposed company is taken to have paid or given in respect of the acquisition of a post-20 September 1985 exchange unit. The cost bases of such units are to be determined by aggregating the cost bases, indexed cost bases or reduced cost bases respectively of those assets of the trust as were acquired after 19 September 1985 less any liabilities of the trust that are attributable to those assets. The appropriate cost bases for each asset are those which would have applied in determining a capital gain or capital loss if the assets had been realised by the trustee of the unit trust at the completion time.

Paragraph (7)(a) applies for the purpose of ascertaining whether a capital gain has accrued to the company in the event of a subsequent disposal of the unit. It requires the consideration deemed to have been paid in respect of the acquisition of a post-20 September 1985 exchange unit to be calculated in accordance with the formula:

(Net ICB of post CGT assets)/(Post CGT units)


where:

Net ICB of Post CGT assets is the sum of the amounts that would have been the indexed cost bases to the trustee of the unit trust, for the purposes of Part IIIA, of such of the assets of the unit trust as were acquired by the trustee on or after 20 September 1985 if those assets had been disposed of by the trustee at the time of the last of the disposals of units by unitholders to the company (the "completion time"), reduced by the liabilities of the unit trust to the extent that those liabilities are attributable to those assets; and

Post CGT units is the number of post-20 September 1985 exchange units held by the company immediately after the completion time.

Paragraph (7)(b) applies for the purposes of ascertaining whether the company has incurred a capital loss in the event of a subsequent disposal of an exchange unit by the company. In these circumstances, consideration will be deemed to have been paid in respect of the acquisition of a post-20 September 1985 exchange unit calculated in accordance with the formula:

(Net RCB of post CGT assets)/(Post CGT units)


where:

Net RCB of post CGT assets is the sum of the amounts that would have been the reduced cost bases to the trustee of the unit trust, for the purposes of Part IIIA, of such of the assets of the unit trust as were acquired by the trustee on or after 20 September 1985 if those assets had been disposed of by the trustee at the completion time, reduced by the liabilities of the unit trust attributable to those assets; and

Post CGT units is the number of post-20 September 1985 exchange units held by the company immediately after the completion time.

Subsection 160ZZPA(8) operates to deny indexation where a post-20 September 1985 exchange unit is disposed of by the interposed company within 12 months of the unit being acquired by the company. It does so by substituting for the reference in paragraph (7)(a) to the indexed cost bases of assets to the trustee a reference to their cost bases.

Subsection 160ZZPA(9) details the circumstances in which a share issued by a company is to be taken to be a non-redeemable share. This subsection is relevant for the purposes of paragraph 160ZZPA(1)(b) (see notes on that paragraph).

A share issued by a company is to be taken to be a non-redeemable share unless:

•

the share is, or at the option of the company is to be, liable to be redeemed (paragraph (a)); or

•

the share was issued under, or as part of, an agreement or arrangement that had the purpose of enabling the company to pay, transfer or apply to the shareholder or another person any money or other property other than shares in the company by means of the redemption, purchase or cancellation, or a reduction in the paid-up value of any share (paragraph (b)).

Subsection 160ZZPA(10) modifies both the requirement of new subparagraph 160ZZPA(1)(e)(i) that the exchanging taxpayers own all the shares in the interposed company immediately after the completion time and the requirement of new paragraph 160ZZPA(1)(k) that immediately after the completion time, each exchanging taxpayer owned the replacement shares in the interposed company in the same proportion as the exchange units were held in the unit trust. The subsection applies where:

•

immediately after the completion time, the exchanging taxpayers are the owners of some, but not all, of the shares in the interposed company (paragraph (a));

•

there are no more than 5 other shares (paragraph b)); and

•

the Commissioner of Taxation is of the opinion that it would be unreasonable not to treat the exchanging taxpayers as being the owners of all the shares in the interposed company (paragraph (c)).

In forming this opinion, the Commissioner is to have regard to:

•

the ratio calculated in accordance with the formula:

(MV of remaining shares)/(MV of total shares)


where:

MV of remaining shares is the number of dollars in the market value of the remaining shares immediately after the completion time; and

MV of total shares is the number of dollars in the market value of the replacement shares immediately after the completion time (subparagraph (i)); and

•

such other matters as the Commissioner considers relevant (subparagraph (ii)).

Where the conditions in paragraphs 160ZZPA(10)(a) to (c) have been met, paragraph (d) provides the requirement of subparagraph 160ZZPA(1)(e)(i) that the exchanging taxpayers own all the shares in the interposed company immediately after the completion time will be taken to have been satisfied, while paragraph (e) provides that the remaining shares are to be disregarded for the purposes of the proportional holdings test in paragraph 160ZZPA(1)(k).

This means that arrangements where up to 5 shares are not owned by the former unitholders after the re-organisation are not necessarily ineligible for roll-over relief under this section. The cases in contemplation here are where a small number of the original shares were subscribed for on incorporation of the company. Arrangements of this kind may be necessary to facilitate the carrying out of the re-organisation. The requirement of subparagraph 160ZZPA(10)(c)(i) that the Commissioner have regard to the market value of the remaining shares compared with that of the other shares is intended to safeguard against arrangements where a disproportionately high value might be attached to the remaining shares

Subsection 160ZZPA(11) sets out a method for calculating the extent to which the liabilities of the unit trust not otherwise attributable to particular assets (referred to as the "general liabilities") are to be taken to be attributable to the assets. This calculation is required for new paragraph 160ZZPA(5)(c) to determine which units held by the interposed company are to be taken to have been acquired before 20 September 1985 and, for paragraphs 160ZZPA(7)(a) and (b), to calculate acquisition costs of units by the company for determining capital gains or capital losses on a later disposal. The general liabilities will be attributed to particular assets by the formula:

General liabilities * ((MV of particular assets)/(MV of total assets))


where:

General liabilities is the amount of the general liabilities as described above;

MV of particular assets is the market value at the completion time of the particular assets as described; and

MV of total assets is the market value at the completion time of all the assets of the unit trust.

New section 160ZZPB like proposed section 160ZZPA, allows roll-over relief to be granted in the case of a re-organisation under which a resident company (not being a company in the capacity of a trustee of a trust estate) is interposed between unitholders and a resident unit trust. The two sections operate in a virtually identical way except that section 160ZZPA applies where the units are disposed of to the company, whereas section 160ZZPB applies where there is a redemption or cancellation of the units with an issue of shares to the former unitholders and a new issue of units in the unit trust to the company.

The necessary conditions to be satisfied before roll-over relief is available in the latter situation are set out in paragraphs (a) to (p) of proposed subsection 160ZZPB(1).

Paragraph (a) specifies the situations in which section 160ZZPB will apply. This is where there is a scheme for the re-organisation of the affairs of a unit trust and:

•

the scheme was entered into, or commenced to be carried out, after the date on which this Bill was introduced into the Parliament - 9 December 1987 subparagraph (i));

•

a company (referred to as the "interposed company") acquires not more than 5 units (referred to as "formal units") in the unit trust. This company cannot be a company in the capacity of trustee of a trust estate (subparagraph (ii));

•

the interposed company did not hold any other units in the unit trust at any time before the acquisition of the formal units (subparagraph (iii));

•

the remaining units (referred to as the "exchange units") in the unit trust are held by 2 or more taxpayers (referred to as the "exchanging taxpayers") (subparagraph (iv));

•

all the exchange units are redeemed or cancelled (subparagraph (v));

•

the trustee of the unit trust issues to the interposed company 2 or more units (referred to in section 160ZZPB as the "scheme units") in the unit trust (subparagraph (vi)); and

•

the number of scheme units issued equals, or is a multiple of, the number of exchange units that were redeemed or cancelled (subparagraph (vii)).

By Paragraph (b) the consideration for the redemptions or cancellations of the units must consist of nothing except newly issued non-redeemable shares (referred to as "replacement shares") in the interposed company. For these purposes, subsection 160ZZPB(9) defines those shares which are not to be taken to be non-redeemable shares (see later notes on this subsection).

Paragraph (c) requires that the total number of replacement shares in the interposed company received by the former unitholders as a result of the re-organisation, equals, or is a multiple of, the total number of exchange units. If there were, for example, 10,000 exchange units, the number of replacement shares needed would be 10,000 or a whole number multiple of 10,000.

By paragraph (d), it will be a requirement that all of the exchange units held by a particular exchanging taxpayer are redeemed or cancelled at the same time (referred to in section 160ZZPB as the "exchanging taxpayer's disposal time").

Paragraph (e) specifies two conditions that need to be satisfied immediately after the time (referred to as the "completion time") of the last of the redemptions or cancellations of the units. First, the exchanging taxpayers must own all the shares in the interposed company (subparagraph (i)). Secondly, the interposed company must hold all the units in the unit trust (subparagraph (ii)). In this regard subsection 160ZZPB(10) sets out situations in which the exchanging taxpayers will be taken to own all the shares in the interposed company so that subparagraph 160ZZPB(1)(e)(i) is satisfied, although a minimal number of shares are in fact held by others.

If an exchanging taxpayer's disposal time occurred before the completion time (i.e., the time of the last of the redemptions or cancellations), paragraph (f) requires that the taxpayer be the owner of the replacement shares for the entire period between these two points of time.

Paragraph (g) requires that the unit trust be a resident unit trust in the year of income of the trust in which the completion time occurred. Existing subsection 160H(3) of the Principal Act prescribes the tests that must be satisfied for a unit trust to be regarded as a resident unit trust in a year of income for the purposes of Part IIIA - Capital gains and Capital losses - of the Principal Act.

Correspondingly, paragraph (h) requires that the interposed company be a resident of Australia at the completion time (see paragraph (e)). If the redemptions or cancellations of units held by the unitholders occur at different times, the company must be a resident for the whole period between the first redemption or cancellation and the completion time.

Paragraph (j) deals with the case of an exchanging taxpayer in the capacity of a trustee of a trust estate and requires the taxpayer immediately after the disposal time (see paragraph (d)) to hold the replacement shares upon the same trust as the exchange units had been held. This means that the trust property must be held for the benefit of the same beneficiaries and upon the same terms and conditions as prior to the re-organisation.

Paragraph (k) stipulates that immediately after the completion time, each exchanging taxpayer must own the replacement shares in the interposed company in the same proportion as the exchange units were held in the unit trust. For example, a taxpayer who held 10 per cent of the issued units of the unit trust would be required to own 10 per cent of the shares in the interposed company. Subsection 160ZZPB(10) provides that in certain circumstances, a minimal number of shares not held by exchanging taxpayers are to be disregarded for the purposes of this test.

Paragraph (m), in effect, requires the interest of each shareholder in the interposed company after the re-organisation to be of the same value as the prior interest of the shareholder in the unit trust. The paragraph requires that the following equation be satisfied in relation to each exchanging taxpayer.

((MV of taxpayer's shares)/(MV of total shares)) = ((MV of taxpayer's units)/(MV of total units))


The meanings of the terms used in the equation are as follows:

MV of taxpayer's shares is so much of the market value of the replacement shares owned by the taxpayer immediately after the completion time (i.e., the time of the last of the redemptions or cancellations of the units) as is attributable to the scheme units held by the company;

MV of total shares is so much of the market value of all the replacement shares immediately after the completion time as is attributable to the scheme units held by the interposed company;

MV of taxpayer's units is the market value of the units held by the exchanging taxpayer immediately before the taxpayer's units were redeemed or cancelled; and

MV of total units is the market value of all the units in the trust immediately before the taxpayer's units were redeemed or cancelled.

Paragraph (n) makes roll-over relief conditional on the interposed company having elected that the subsection apply in respect of all the redemptions or cancellations. The election must be by notice in writing and given to the Commissioner within 2 months after the completion time, or within such further time as the Commissioner allows.

By paragraph (p) the notice referred to in paragraph (n) must be accompanied by a declaration, in a form approved by the Commissioner, with respect to the operation of this section. In this notice, the company's public officer will need to declare that to the best of his or her knowledge and belief all the conditions necessary for roll-over relief in subsection 160ZZPB(1) have been satisfied.

Subsection 160ZZPB(2) sets out the conditions for and declares the consequences of a valid election made by an exchanging taxpayer which is supported by an election by the interposed company.

Paragraph (a) of subsection 160ZZPB(2) requires that either of two conditions be satisfied:

•

the taxpayer is a resident of Australia (subparagraph (a)(i)); or

•

each redemption or cancellation of an exchange unit held by the taxpayer constitutes the disposal of a taxable Australian asset (subparagraph (a)(ii)) .

Taxable Australian assets are defined in section 160T of the Principal Act for the purposes of determining those assets which are subject to tax on capital gains when owned by non-residents of Australia.

Broadly, a unit in a resident unit trust will be a "taxable Australian asset" if a taxpayer and/or associates of the taxpayer beneficially owned, at any time during so much of the period of five years immediately prior to the disposal as occurred after 19 September 1985, at least 10 per cent of the issued units of the unit trust.

Paragraph (b) requires the exchanging taxpayer to elect that the subsection apply. The election must be made in respect of all the exchange units held by the taxpayer in the unit trust. Subsection 160ZZPB(4) sets out the requirements regarding the form, manner and timing of the election (see notes on that subsection).

Where the conditions in paragraphs (a) and (b have been met the taxpayer will not be deemed to have disposed of the exchange units for the purposes of Part IIIA of the Principal Act. Paragraph (c) allows the replacement shares to be taken to have been acquired before 20 September 1985 if all the exchange units were acquired by the taxpayer before 20 September 1985.

Where paragraph (d) applies, the taxpayer will be taken to have acquired some of the replacement shares before 20 September 1985. This is where some, but not all, of the exchange units held were acquired by the taxpayer before 20 September 1985 (subparagraph (i)). In the notice of election, the taxpayer will need to specify which replacement shares are those to be taken as shares acquired before 20 September 1985 (subparagraph (ii)).

Subparagraph (2)(d)(iii) requires that the number of replacement shares nominated by the taxpayer in the election does not exceed the number calculated in accordance with the formula:

Shares * ((Pre CGT units)/(Total units))


where:

•

Pre CGT units is the number of exchange units acquired by the taxpayer before 20 September 1985;

•

Shares is the number of replacement shares owned by the taxpayer immediately after the completion time (paragraph (1)(e)); and

•

Total units is the number of exchange units held by the taxpayer that were redeemed or cancelled.

If this requirement is met, the taxpayer will be deemed, for the purposes of Part IIIA of the Principal Act, to have acquired the nominated shares before 20 September 1985.

By paragraph (e), each replacement share that is not deemed by paragraph (c) or (d) to have been acquired by the taxpayer before 20 September 1985 is to be taken as acquired on or after 20 September 1985 (referred to as a "post-20 September 1985 replacement share"). This is relevant for the purposes of proposed paragraph 160ZZPB(2)(g) and subsection 160ZZPB(3).

By paragraph (f), each exchange unit that was acquired by the taxpayer on or after 20 September 1985 is to be taken to be a "post-20 September 1985 exchange unit" for the purposes of proposed paragraph (2)(g).

Paragraph (g) establishes the consideration that a taxpayer is to be deemed to have paid or given in respect of the acquisition of a replacement share taken as acquired on or after 20 September 1985 under paragraph (2)(e) (a post-20 September 1985 replacement share). This is relevant for the purpose of calculating capital gains or capital losses on a later disposal of the replacement shares.

Subparagraph (g)(i) applies for the purpose of ascertaining whether a capital gain has accrued to the taxpayer in the event of a subsequent disposal of a replacement share and deems consideration to have been paid or given as calculated in accordance with the formula:

(ICB of Post CGT units)/(Post CGT shares)


where:

ICB of post CGT units is the sum of the amounts that would have been the indexed cost bases to the taxpayer of post-20 September 1985 exchange units for the purposes of Part IIIA if the Part had applied in respect of the redemption or cancellation of the units; and

Post CGT shares is the number of post-20 September 1985 replacement shares (refer paragraph (2)(e)) owned by the taxpayer immediately after the time of the last of the redemptions or cancellations (the completion time - paragraph (1)(e)).

Subparagraph (g)(ii) applies for the purposes of ascertaining whether the taxpayer incurred a capital loss in the event of a subsequent disposal of the share by the taxpayer. It requires the deemed consideration on acquisition to be calculated in accordance with the formula:

(RCB of post CGT units)/(Post CGT shares)


where:

RCB of post CGT units is the sum of the amounts that would have been the reduced cost bases to the taxpayer of post-20 September 1985 exchange units for the purposes of Part IIIA if that Part had applied in respect of the redemption or cancellation of the units; and

Post CGT shares is the number of post-20 September 1985 replacement shares owned by the taxpayer immediately after the completion time.

Subsection 160ZZPB(3) denies the benefits of indexation where a post-20 September 1985 replacement share is disposed of by an exchanging taxpayer within 12 months of the earliest day (provided that it is a day after 19 September 1985) on which any exchange unit was acquired by the taxpayer. It does so by substituting for the reference in paragraph (2)(g) to the indexed cost bases to the taxpayer of units the cost bases of the units.

Subsection 160ZZPB(4) sets out the requirements for an election under paragraph 160ZZPB(2)(b). Such an election is to be made by notice in writing and given to the Commissioner on or before the date of lodgment of the return of income of the taxpayer for the year of income in which the redemption or cancellation of the exchange units took place, or within such further period as the Commissioner allows.

Subsection 160ZZPB(5) determines what proportion of scheme units acquired by the interposed company are to be deemed to have been acquired by the company before 20 September 1985 where the trustee of the unit trust acquired some of the trust assets before that date. The balance of the units will then be taken to have been acquired on or after 20 September 1985 so that a capital gain or capital loss may arise on a subsequent disposal. The deemed consideration in respect of the acquisition of that balance is to be calculated as set out in subsection (7). Under subsection (5), if:

•

at the completion time any of the assets of the unit trust were acquired by the trustee of the unit trust before 20 September 1985 (Paragraph (a));

•

the interposed company, by notice in writing accompanying the notice referred to in paragraph (1)(n), nominates certain scheme units (refer to subparagraph 160ZZPB(1)(a)(vi)) to be taken to have been acquired before 20 September 1985 (paragraph (b)); and

•

the number of units so nominated does not exceed the number calculated in accordance with the formula (paragraph (c)):

Units * ((Net value of pre CGT assets)/(Net value of total assets))


then the units so nominated will for the purposes of Part IIIA of the Principal Act be taken to have been acquired by the company before 20 September 1985.

The components of the formula are:

Net value of pre CGT assets is the number of dollars in the market value of the assets of the trust acquired before 20 September 1985 as at the completion time reduced by the number of dollars in the liabilities of the unit trust attributable to those assets;

Units is the number of scheme units held by the company immediately after the completion time; and

Net value of total assets is the number of dollars in the market value of the assets of the unit trust as at the completion time reduced by the number of dollars in the liabilities of the unit trust at that time.

Subsection 160ZZPB(6) is relevant to the operation of subsections 160ZZPB(7) and (8). It specifies that all scheme units not deemed by subsection 160ZZPB(5) to have been acquired by the interposed company before 20 September 1985 are to be taken to have been acquired on or after 20 September 1985 ("post-20 September 1985 scheme units").

Subsection 160ZZPB(7) sets out the consideration that the interposed company is taken to have paid or given in respect of the acquisition of a post-20 September 1985 scheme unit. The cost bases of such units are to be determined by aggregating the cost bases, indexed cost bases or reduced cost bases respectively of those assets of the trust as were acquired after 19 September 1985 less any liabilities of the trust that are attributable to those assets. The appropriate cost bases for each asset are those which would have applied in determining a capital gain or capital loss if the assets had been realised by the trustee of the unit trust at the completion time.

Paragraph (7)(a) applies for the purpose of ascertaining whether a capital gain has accrued to the company in the event of a subsequent disposal of the unit. It requires the consideration deemed to have been paid in respect of the acquisition of a post-20 September 1985 scheme unit to be calculated in accordance with the formula:

(Net ICB of post CGT assets)/(Post CGT units)


where:

Net ICB of post CGT assets is the sum of the amounts that would have been the indexed cost bases to the trustee of the unit trust, for the purposes of Part IIIA, of such of the assets of the unit trust as were acquired by the trustee on or after 20 September 1985 if those assets had been disposed of by the trustee at the time of the last of the redemptions or cancellations of units (the "completion time"), reduced by the liabilities of the unit trust to the extent that those liabilities are attributable to those assets; and

Post CGT units is the number of post-20 September 1985 scheme units held by the company immediately after the completion time.

Paragraph (7)(b) applies for the purposes of ascertaining whether the company has incurred a capital loss in the event of a subsequent disposal of a scheme unit by the company. In these circumstances, consideration will be deemed to have been paid in respect of the acquisition of a post-20 September 1985 scheme unit calculated in accordance with the formula:

(Net RCB of Post CGT assets)/(Post CGT units)


where:

Net RCB of post CGT assets is the sum of the amounts that would have been the reduced cost bases to the trustee of the unit trust, for the purposes of Part IIIA, of such of the assets of the unit trust as were acquired by the trustee on or after 20 September 1985 if those assets had been disposed of by the trustee at the completion time, reduced by the liabilities of the unit trust attributable to those assets; and

Post CGT units is the number of post-20 September 1985 scheme units held by the company immediately after the completion time.

Subsection 160ZZPB(8) operates to deny indexation where a post-20 September 1985 scheme unit is disposed of by the interposed company within 12 months of the unit being acquired by the company. It does so by substituting for the reference in paragraph (7)(a) to the indexed cost bases of assets to the trustee a reference to their cost bases.

Subsection 160ZZPB(9) details the circumstances in which a share issued by a company is to be taken to be a non-redeemable share. This subsection is relevant for the purposes of paragraph 160ZZPB(1)(b) (see notes on that paragraph).

A share issued by a company is to be taken to be a non-redeemable share unless:

•

the share is, or at the option of the company is to be, liable to be redeemed (paragraph (a)); or

•

the share was issued under, or as part of, an agreement or arrangement that had the purpose of enabling the company to pay, transfer or apply to the shareholder or another person any money or other property other than shares in the company by means of the redemption, purchase or cancellation, or a reduction in the paid-up value of any share (paragraph (b)).

Subsection 160ZZPB(10) modifies both the requirement of new subparagraph 160ZZPB(1)(e)(i) that the exchanging taxpayers own all the shares in the interposed company immediately after the completion time and the requirement of new paragraph 160ZZPB(1)(k) that immediately after the completion time, each exchanging taxpayer owned the replacement shares in the interposed company in the same proportion as the exchange units were held in the unit trust. The subsection applies where:

•

immediately after the completion time, the exchanging taxpayers are the owners of some, but not all, of the shares in the interposed company (paragraph (a));

•

there are no more than 5 other shares (paragraph b)); and

•

the Commissioner of Taxation is of the opinion that it would be unreasonable not to treat the exchanging taxpayers as being the owners of all the shares in the interposed company (paragraph(c)).

In forming this opinion, the Commissioner is to have regard to:

•

the ratio calculated in accordance with the formula:

(MV of remaining shares)/(MV of total shares)


where:

MV of remaining shares is the number of dollars in the market value of the remaining shares immediately after the completion time; and

MV of total shares is the number of dollars in the market value of the replacement shares immediately after the completion time (subparagraph (i)); and

•

such other matters as the Commissioner considers relevant (subparagraph (ii)).

Where the conditions in paragraphs 160ZZPB(10)(a) to (c) have been met, paragraph (d) provides the requirement of subparagraph 160ZZPB(1)(e)(i) that the exchanging taxpayers own all the shares in the interposed company immediately after the completion time will be taken to have been satisfied, while paragraph (e) provides that the remaining shares are to be disregarded for the purposes of the proportional holdings test in paragraph 160ZZPB(1)(k).

This means that arrangements where up to 5 shares are not owned by the former unitholders after the re-organisation are not necessarily ineligible for roll-over relief under this section. The cases in contemplation here are where a small number of the original shares were subscribed for on incorporation of the company. Arrangements of this kind may be necessary to facilitate the carrying out of the re-organisation. The requirement of subparagraph 160ZZPB(10)(c)(i) that the Commissioner have regard to the market value of the remaining shares compared with that of the other shares is intended to safeguard against arrangements where a disproportionately high value might be attached to the remaining shares.

Subsection 160ZZPB(11) sets out a method for calculating the extent to which the liabilities of the unit trust not otherwise attributable to particular assets (referred to as the "general liabilities") are to be taken to be attributable to the assets. This calculation is required for new paragraph 160ZZPB(5)(c) to determine which units held by the interposed company are to be taken to have been acquired before 20 September 1985, and for paragraphs 160ZZPB(7)(a) and (b), to calculate acquisition costs of units by the company for determining capital gains or capital losses on a later disposal. The general liabilities will be attributed to particular assets by the formula:

General liabilities * ((MV of particular assets)/(MV of total assets))


where:

General liabilities is the amount of the general liabilities as described above;

MV of particular assets is the market value at the completion time of the particular assets as described; and

MV of total assets is the market value at the completion time of the assets of the unit trust.

Clause 37: Notification of instalments of provisional tax

This clause will amend section 221YDAA, which sets out specifications for notices requiring payment of instalments of provisional tax. The amendments made by paragraphs (a) and (b) of the clause will remove a restriction placed by subsection (1) on serving an instalment notice after the end of the year of income for which the instalment is payable. The earliest permissible payment dates set out in subsection 221YDA(3) will continue to apply.

Paragraph (b) of the clause will insert new subsection 221YDAA(3A) to ensure that where a provisional tax instalment notice is served (paragraph (3A)(a)) and either the notice does not specify a due date for payment (because, for example, other amounts owing to the taxpayer have fully offset the instalment amount leaving no amount payable) (subparagraph (b)(i)) or the notice specifies a due date that is not in accordance with the requirements of subsection (3) (because, for example, the due date specified in the notice is less than 30 days after the date of service) (subparagraph (b)(ii)), the notice will, in effect, be treated as if it had complied with subsection (3). Accordingly, the notice will be treated as having specified as the due date the later of the thirtieth day after service (paragraph (c)) and the date specified in subsection (3) as the earliest permissible one for that instalment (paragraph (d)) - for example the final provisional tax instalment for a year of income cannot be made due and payable before 1 June of that year.

Clause 38: Application of amendments

This clause, which will not amend the Principal Act, contains provisions that specify the date on which, or the year of income for which, certain of the amendments proposed in Part IV of the Bill will apply.

In terms of subclause 38(1) the term "amended Act", as used in the clause, means the Income Tax Assessment Act 1936 as proposed to be amended by the Bill.

By subclause 38(2) the amendment of section 24B of the Income Tax Assessment Act 1936 proposed by clause 10 of this Bill (i.e., the amendment extending the exemption available to residents of Norfolk Island and Cocos (Keeling) Islands) will be deemed to have come into operation on 15 October 1987.

The application provisions in subclauses 38(3) to (10) and subclause 38(19) are explained in the notes on the various clauses and paragraphs thereof to which these respective subclauses apply.

By subclause 38(11) the pay-as-you-earn (PAYE) system of deducting tax instalments from salary or wages - which applies to eligible termination payments - will only apply to payments that are made eligible termination payments by clause 11 if the payment is made on or after the first day of the second month after the month in which this Act receives the Royal Assent.

Subclause 38(12) specifies that the amendments of section 73B of the Principal Act proposed by paragraphs 13(a) to (e) of the Bill will apply to expenditure incurred by an eligible company after 20 November 1987. Paragraphs 13(a) to (e) have the effect of excluding from the ambit of qualifying research and development activities the development of certain computer software.

Subclause 38(13) specifies that the amendments to section 128B of the Principal Act proposed by paragraphs (a) and (c) of clause 21 - to exempt from withholding tax the unfranked portion of dividend income derived by certain non-resident life assurance companies that is attributable to superannuation policies and certain specified life assurance policies - are to apply in relation to dividends paid on or after 1 July 1987. This is the date from which such dividends became subject to withholding tax under changes introduced as part of the move to the imputation system of company tax.

By subclause 38(14), the interest withholding tax exemption provided by new section 128GB of the Principal Act in respect of offshore borrowings by offshore banking units (see notes on clause 23) is to apply to offshore borrowings contracted for after 1 July 1986. The exemption will only be available in respect of interest payments on such borrowings where the payments are made after the relevant entity has become an offshore banking unit (see the notes on clause 39).

By subclause 38(15), the amendment effected by clause 25 to correct a typographical error in subsection 159GZ(4) of Division 16E of the Principal Act is deemed to have come into effect on 17 December 1984, the date from which Division 16E had effect.

The operation of subclause 38(16) is explained in the notes on clause 26 of the Bill.

Subclause 38(17) provides that the amendment proposed to be made by clause 27 of the Bill to section 160ACA of the Principal Act (regarding, broadly, call moneys paid on petroleum mining shares) applies as if it had come into operation on 14 February 1983.

By subclause 38(18), the amendments made by clause 34 to the capital gains and capital losses provisions apply to assessments in respect of the year of income in which 20 September 1985 occurred, and all subsequent years of income.

Clause 39: Transitional - offshore banking units

This clause, which will not amend the Principal Act, contains transitional provisions concerning the proposed "offshore banking units" ("OBU") legislation contained in clauses 20 to 24, and 28 to 32 of the Bill. Those provisions will confer an interest withholding tax exemption on certain interest payments made by OBUs.

The OBUs to be affected by this transitional measure are those which, under proposed subsections 128AE(2) and (3) (see notes on clause 20), by publication of a relevant notice in the Gazette, become an OBU within 6 months after the day on which this clause comes into operation (i.e., on Royal Assent - see clause 2). The point in time during the 6 months period during which a transitional OBU may be declared is referred to in the clause as the "OBU commencing time".

As background to the transitional provisions of clause 39, under the operative provisions of the Bill the benefits and burdens of being an OBU apply prospectively from the time an OBU becomes an OBU by publication of an appropriate notice in the Gazette (see notes on clause 20). For those OBUs that have made borrowings between 2 July 1986 and the Gazette date, it will be necessary to identify the extent to which funds held by the OBU at the Gazette date represent tax exempt loan money.

Paragraph (a) of clause 39 makes it clear that the withholding tax exemption to be provided by proposed new section 128GB will apply in respect of interest payments, made by a "transitional OBU" after its "OBU commencing time", as if the transitional OBU had been an OBU at all times during the period commencing on 2 July 1986 and ending immediately before its commencing time. The paragraph is necessary because the proposed interest withholding tax exemption will have effect in relation to borrowings contracted for after 1 July 1986 but will not apply to relevant interest payments made by an OBU before the day on which it becomes an OBU.

Paragraph (b) clarifies the status of three types of transactions which may be entered into by a "transitional OBU" after its "OBU commencing time", i.e., after it has become an OBU under proposed subsections 128AE(2) and (3) of the Principal Act. The paragraph requires that, in considering those three types of transactions, a person or entity which becomes an OBU within 6 months of enactment of the Bill is to be treated as having been an OBU on and from 2 July 1986 to when it actually becomes an OBU.

The first contemplated transaction to be tested is a transfer by an OBU when it is a transitional OBU (subparagraph (b)(i)). The question is whether the amount transferred is "tax exempt loan money". Because an OBU can be liable, after it becomes an OBU under proposed new sections 128AE(2) and (3), for the special withholding tax recoupment referred to in proposed new section 128NB in the event of the misapplication of tax exempt loan money, it is necessary to be able to dissect the OBU's "offshore borrowings", as at the time it becomes an OBU, between tax exempt loan money and other borrowings.

The next test concerns the extent to which income derived by an OBU after its commencing time was derived from "offshore banking transfers" during the transitional period (subparagraph (b)(ii)). This is relevant in determining the amount of "offshore banking income" for the foreign tax credits quarantining provisions of paragraph 160AE(4)(a)) (see the notes on clause 28).

Similarly, under subparagraph (b)(iii), it is necessary to have regard to the extent to which dividends paid by a transitional OBU originated from offshore banking profits. This is also a relevant factor in determining the amount of "offshore banking income" for foreign tax credit quarantining purposes (see the notes on proposed new paragraph 160AE(4)(b)).

Those tests will apply in relation to declared OBUs as if new or amended sections 128AE, 128B and 128GB -

•

had been operating since 2 July 1986 (subparagraph (b)(iv)); and

•

each transitional OBU had been an OBU continuously from 2 July 1986 until it in fact becomes an OBU (subparagraph (b)(v)).

Clause 40: Amendment of assessments

Clause 40 will give the Commissioner of Taxation authority to re-open an income tax assessment made before Part IV of the Bill becomes law should this be necessary for the purpose of giving effect to the amendments proposed by the Part. Part IV of the Bill is concerned with amendments of the Income Tax Assessment Act 1936.

PART V - AMENDMENT OF THE INCOME TAX RATES ACT 1986

Clause 41: Principal Act

This clause facilitates references to the Income Tax Rates Act 1986 which, in Part V of the Bill, is known as the Principal Act.

Clause 42: Interpretation

The Principal Act declares rates of tax payable by various categories of taxpayers under the Income Tax Assessment Act 1936 ("the Assessment Act").

Subsection 3(1) excludes from the scope of the Principal Act, taxes that are payable in accordance with various sections of the Assessment Act, the rates for which are generally declared by separate Acts.

Clause 42 will amend the definition of "tax" in subsection 3(1) to add a reference to proposed new section 128NB (see notes on clause 24) of the Assessment Act. The rate of tax under that section is proposed to be declared by the Income Tax (Offshore Banking Units)(Withholding Tax Recoupment) Bill 1987.

PART VI - AMENDMENT OF THE JURISDICTION OF COURTS (MISCELLANEOUS AMENDMENTS) ACT 1987

Clause 43: Principal Act

Clause 43 formally provides that references to the "Principal Act" in Part IV of this Bill relate to the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987.

Clause 44: Amendment of Schedule to Principal Act

This clause will amend the Schedule to the Principal Act by including in that Schedule a reference to the repeal of section 44A of the Sales Tax Assessment Act (No.1) 1930.

Broadly, the Schedule to the Principal Act amended various taxation laws to give effect to the transfer of original jurisdiction, from Supreme Courts to the Federal Court, to review decisions on objections against assessments and other decisions made by the Commissioner of Taxation. The Schedule also repealed a number of provisions that became redundant following the transfer of jurisdiction.

Section 44A of the Sales Tax Assessment Act (No.1) 1930 enabled High Court Rules to apply to certain proceedings before a Supreme Court. The section became redundant on the transfer of tax jurisdiction to the Federal Court but, due to an oversight, it was not included in the Schedule to the Principal Act which repealed similar provisions in other taxation laws.

The amendment proposed by this Part will be deemed to have applied, by the operation of subclause 2(3) of this Bill, on and from 1 September 1987.

PART VII - AMENDMENT OF THE SEA INSTALLATIONS ACT 1987

Clause 45: Principal Act

This clause facilitates reference to the Sea Installations Act 1987 which, in Part VII, is referred to as 'the Principal Act'.

Clause 46: Schedule

This clause proposes that the reference to the Income Tax Assessment Act 1936 in the Schedule to the Principal Act be omitted. This clause will come into operation on 6 November 1987, being the date on which the Principal Act received the Royal Assent and the Schedule came into operation (see notes on subclause 2(4) of this Bill). As a result, the reference to the Income Tax Assessment Act 1936 in the Schedule to the Principal Act will be deleted with effect from when the Schedule came into operation.

The reason for this amendment is that the Schedule to the Principal Act contains a list of Acts which, by that Act, will apply to sea installations in adjacent areas. Inclusion of the Income Tax Assessment Act 1936 in the Schedule was a temporary measure pending amendment of that Act to extend its coverage to sea installations. This reference is no longer necessary following amendments of the Income Tax Assessment Act 1936 that are to be made by Part IV of this Bill.

PART VIII - AMENDMENT OF THE TAXATION LAWS AMENDMENT ACT (NO. 4) 1987

Clause 47: Principal Act

This clause facilitates references to the Taxation Laws Amendment Act (No. 4) 1987 which, in Part VIII, is referred to as the "Principal Act".

Clause 48: Transitional - Division 16F of Part III

This clause will amend the Principal Act to extend the transitional provisions contained in section 51 of that Act which relate to the thin capitalisation rules being inserted in the Income Tax Assessment Act 1936 by other provisions of that Act. This clause will amend the transitional provisions as they apply to a limited number of entities which have been given approval to adopt substituted accounting periods and are designed to allow such taxpayers with accounting periods ending after 30 November 1987 and before 31 January 1988, in lieu of 30 June 1988, further time in which to adjust their debt/equity ratios so as to satisfy the thin capitalisation rules.

The new thin capitalisation measures first became public when they were introduced into the Parliament on 29 October 1987. The relevant transitional provisions of section 51 of the Principal Act would presently operate so that a taxpayer with a substituted accounting period ending in December 1987, in lieu of 30 June 1988, would only have until the end of the December period to comply with the prescribed debt/equity ratio by, for example, arranging for a further injection of equity from a foreign shareholder.

In recognition that this may not provide sufficient time for such arrangements to be made without significant inconvenience to affected taxpayers, the amendments being made by this clause will extend the transitional period for taxpayers with approved substituted accounting periods ending in December 1987, in lieu of 30 June 1988. For thin capitalisation purposes only, the substituted periods will be taken to end on 31 January 1988 giving that much additional time to comply with the new rules. The end of the transitional period for all taxpayers with January 1988 substituted accounting periods, in lieu of 30 June 1988, will also become 31 January 1988.

In applying the thin capitalisation rules, the first accounting period for these taxpayers will thus be taken to run from 1 July 1987 to 31 January 1988. Their subsequent accounting period will commence on 1 February 1988 and terminate at the end of their normal approved substituted accounting period.

That result will be achieved by paragraph (a) of the substituted words being inserted in subsection 51(7) of the Principal Act. By paragraph (b) of those substituted words, for all other affected taxpayers with substituted accounting periods in lieu of the year of income commencing on 1 July 1987, the transitional year is to be treated as if it commenced on 1 July 1987 and ended at the time when that substituted accounting period income year would normally have ended. For example, a taxpayer with an approved substituted accounting period ending on 31 March 1988, in lieu of 30 June 1988, will have a transitional year running from 1 July 1987 to 31 March 1988.

PART IX - AMENDMENT OF THE TAXATION LAWS AMENDMENT (FRINGE BENEFITS AND SUBSTANTIATION) ACT 1987

Clause 49: Principal Act

This clause facilitates references to the Taxation Laws Amendment (Fringe Benefits and Substantiation) Act 1987 which in this Part is referred to as the 'Principal Act'.

Clause 50: Reduction of taxable value - remote area residential fuel

Clause 50 will amend section 35 of the Principal Act to make a minor drafting correction.

INCOME TAX (OFFSHORE BANKING UNITS)(WITHHOLDING TAX RECOUPMENT) BILL 1987

This Bill will formally declare and impose an income tax in respect of certain dealings by current and former offshore banking units involving funds that are freed from interest withholding tax by provisions proposed to be inserted in the Income Tax Assessment Act 1936 ("the Assessment Act") by the Taxation Laws Amendment Bill (No.5) 1987. The liability for the income tax is to be established by proposed section 128NB, to be inserted in the Assessment Act by clause 24 of the Taxation Laws Amendment Bill (No.5) 1987 and is to be based on "the lost withholding tax amount" as determined in accordance with a formula contained in the proposed section 128NB.

The need for a separate Act to impose this tax arises because section 55 of the Australian Constitution permits an Act imposing tax to deal with one subject of taxation only. The enactment of this "taxing Act" will ensure that the constitutional requirements are satisfied.

Clause 1: Short title

This clause provides for the Act imposing income tax on the "lost withholding tax amount" to be known as the Income Tax (Offshore Banking Units)(Withholding Tax Recoupment) Act 1987.

Clause 2: Commencement

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

Clause 3: Interpretation

This clause facilitates references to the Income Tax Assessment Act 1936 which, in this Act, is referred to as the "Assessment Act".

Clause 4: Incorporation

As is usual in tax matters, this clause specifies that legislation contained in this Bill that is associated with the "Assessment Act" is to be read as one with that Act.

Clause 5: Act to bind Crown

The effect of this clause is that the provisions of the Bill will apply to the Commonwealth, the States, the Northern Territory and the Territory of Norfolk Island. This clause is designed to make it clear, in particular, that Banks constituted under a law of the Commonwealth, the States or the specified Territories (and to which the associated provisions of the Taxation Laws Amendment Bill (No.5) 1987 may apply) can be liable for the income tax imposed by this Bill.

Clause 6: Imposition of tax

This clause has the effect of formally imposing an income tax on "the lost withholding tax amount" referred to in, and determined in accordance with, proposed section 128NB of the Assessment Act. The income tax liability will typically arise when an offshore banking unit makes a loan to a resident of Australia from funds obtained offshore and freed from interest withholding tax under the associated provisions of the Assessment Act. The circumstances under which the tax will be payable are explained in more detail in the notes on clause 24 of the Taxation Laws Amendment Bill (No.5) 1987.

Clause 7: Rate of tax

This clause declares the rate of tax imposed by clause 6 to be 300% of "the lost withholding tax amount", as determined under proposed subsection 128NB(2) of the Assessment Act. The amount of tax to be recouped is broadly designed to represent three times the withholding tax that, but for the withholding tax exemption in proposed new section 128GB of the Assessment Act, would have been paid in respect of funds obtained by an offshore banking unit from the relevant offshore borrowing. A penal rate of tax is declared in order to encourage offshore banking units to conduct their operations in a manner that will ensure that the section 128GB withholding tax exemption will apply.