Senate

Explanatory Memorandum

(Circulated by authority of the Minister representing the Treasurer, Senator the Hon. Peter Walsh)

TABLE OF CONTENTS

GENERAL OUTLINE

TAXATION LAWS AMENDMENT BILL (NO.5) 1988

This Bill will amend:

•

the Income Tax Assessment Act 1936:

Gold mining (1988 May Economic Statement announcement)

•.

to repeal, with effect from 1 January 1991, the exemption from taxation of income from gold mining;

•.

to provide transitional arrangements to allow:

-

notional deductions for certain capital expenditure incurred by gold miners prior to 1 January 1991 in order to determine actual deductions for such expenditure after that date;

-

exploration or prospecting expenditure incurred after 25 May 1988 and before 1 January 1991 to be carried forward for deduction after that date, subject to a seven year limit;

•.

to ensure that, as from 1 January 1991, the exemption from tax on income derived from the sale of gold mining rights is subject to the same arm's length requirements currently applying to the sale of mining rights for other relevant minerals;

•.

to ensure that any capital gains tax liability on disposal of other relevant gold mining assets is entirely prospective;

Lump sum payments in arrears (1988-89 Budget announcement)

•.

to introduce a rebate of tax for taxpayers who receive, in arrears, a lump sum payment of certain kinds of income on or after 1 July 1986, to limit the tax payable on the arrears component of the lump sum to an amount comparable to the amount that would have been payable had the income been received in the year in which it accrued;

•.

to authorise regulations to prescribe a special rate for the deduction of tax instalments from such lump sums;

Employee share acquisition schemes (1988 May Economic Statement announcement)

•.

to exclude from assessability under section 26AAC up to $200 per year of discounts on shares or rights acquired by an employee under certain employee share acquisition schemes, with effect from 1 July 1988;

•.

to reduce the cost base of shares or rights, for the purpose of determining capital gains or losses, by the amount of discount that is excluded from assessability under section 26AAC;

Imputation credits (1988 May Economic Statement announcement)

•.

to reduce the amount of imputation credits that attach to certain dividends paid before 1 July 1989 by early balancing companies, and provide transitional franking credit rules for companies in receipt of such dividends;

Research and development: prepaid expenses (proposal announced on 20 November 1987 and 17 April 1988)

•.

to provide for certain research and development expenditure, incurred in advance for the provision of services, to be deductible over the period during which the services are provided;

Films (1988 May Economic Statement announcement)

•.

to reduce the rate of deduction for investment in Australian films from 120 per cent to 100 per cent;

Debt creation involving non-residents

•.

to remedy a technical deficiency in Division 16G, which deals with debt creation involving non-residents;

Gifts to the Australian National Gallery Foundation (1988-89 Budget announcement)

•.

to allow income tax deductions for gifts to the Australian National Gallery Foundation from 26 September 1988, the date of incorporation of the Foundation;

Cash grants under the Defence Service Homes Scheme (1987-88 Budget announcement and announcement of 9 December 1987)

•.

to exempt from tax certain cash grants made under the Defence Service Homes Scheme;

•

the Fringe Benefits Tax Assessment Act 1986:

Foreign source income fringe benefits

•.

so as not to reduce the taxable value, under the 'otherwise deductible' rule, of certain property fringe benefits and residual fringe benefits which are provided in relation to foreign source income liable to be quarantined under the foreign tax credit system;

Overseas travel fringe benefits

•.

to remove, with effect from 1 July 1986, the requirement for a crew member of an international flight to keep a travel diary and furnish it to his or her employer so that the employer may reduce the taxable value of a property or residual fringe benefit associated with overseas travel; and

•

the Sales Tax Assessment Act (No.1) 1930:

Refunds of sales tax

•.

to ensure that refunds of sales tax overpaid where the tax has been passed on to others are available only if all persons to whom the tax was passed on have been recompensed.

SALES TAX (EXEMPTIONS AND CLASSIFICATIONS) AMENDMENT BILL (NO.2) 1988

This Bill will amend the Sales Tax (Exemptions and Classifications) Act 1935:

•

to ensure that goods used by retailers to wrap or secure goods for marketing are subject to tax at the 20 per cent rate;

•

to ensure that thick shake mixes used in the manufacture of thick shakes and ice creams are subject to tax at the 10 per cent rate; and

•

to ensure that accessories to take-away food containers such as spoons and serviettes are taxable at the 10 per cent rate.

INCOME TAX RATES AMENDMENT BILL 1988

This Bill will amend the Income Tax Rates Act 1986:

•

to declare the rates of tax payable for the 1989-90 and subsequent financial years by companies and by trustees of prescribed unit trusts; and

•

to declare the rate of tax payable for the 1988-89 and subsequent financial years by trustees in respect of trust income of non-resident company beneficiaries of trust estates.

FINANCIAL IMPACT

TAXATION LAWS AMENDMENT BILL (NO.5) 1988

The removal of the income tax exemption for gold mining is estimated to raise $70m in 1991-92 and $300m per annum in subsequent years.

The cost to revenue of the rebate of tax in respect of lump sum payments in arrears is estimated to be $3m in 1988-89 and $1m in subsequent financial years.

The estimated revenue cost of the proposed amendments in respect of employee share acquisition schemes is $5m per annum for 1988-89, 1989-90 and 1990-91. The cost is expected to decline thereafter.

The transitional imputation arrangements are consequent on the reduction in the company tax rate, and their revenue implications form part of the estimated cost of that reduction, namely $110m in 1988-89 and $1,850m in 1989-90 (excluding life companies).

The new arrangements that are to apply to prepaid research and development expenditure will result in unquantifiable revenue gains.

The estimated cost of allowing investors in Australian films an immediate 100 per cent deduction for invested funds is $90m over a four year period, commencing with the 1989-90 financial year. This compares with $505m tax revenue forgone over the four income years ending 1986-87 under the present Division 10BA. There will also be an ongoing cost of $15m from existing investments under Division 10BA.

The amendment to Division 16G, which relates to debt creation involving non-residents, will have a negligible impact on revenue.

The revenue cost of extending the income tax gift provisions to admit the Australian National Gallery Foundation is estimated to be less than $0.5m for each of 1988-89 and 1989- 90.

The cost to the revenue of exempting from tax certain payments made under the Defence Service Homes Scheme is estimated to be $350,000 in 1988-89 and $50,000 in 1989-90.

The fringe benefits tax changes will have a negligible revenue effect.

The nature of the proposed amendment of the refund provisions of the sales tax law is such that a reliable estimate of the potential revenue effect cannot be made.

SALES TAX (EXEMPTIONS AND CLASSIFICATIONS) AMENDMENT BILL (NO.2) 1988

The amendments proposed by this Bill will ensure that measures contained in the Sales Tax (Exemptions and Classifications) Amendment Bill 1988 give full effect to sales tax changes announced in the 1988-89 Budget. The estimated revenue effect of the changes is set out in the explanatory notes on that Bill.

INCOME TAX RATES AMENDMENT BILL 1988

The estimated cost to revenue of the reduction in the company tax rate (and other associated rate reductions), not including any effect of proposed changes to life insurance taxation, is $110m in 1988-89 and $1,850m in 1989-90 and subsequent years.

MAIN FEATURES

The main features of these Bills are as follows:

TAXATION LAWS AMENDMENT BILL (No.5) 1988

Amendment of the Income Tax Assessment Act 1936

Termination of tax exemption for the gold mining industry (Clauses 9, 10, 16 and 17)

This Bill will give effect to proposals, announced in the 1988 May Economic Statement, to withdraw certain concessions currently available to the gold mining industry. In particular, the amendments proposed by the Bill will terminate from 1 January 1991:

•

the tax exemption of income from gold mining (paragraph 23(o) of the Income Tax Assessment Act 1936); and

•

the exemption for income derived from the sale of gold by an eligible marketing company (section 23C).

The Bill includes transitional measures to allow notional deductions for certain capital expenditure (including deductions transferred to the purchaser of a mining right) incurred by gold miners prior to 1 January 1991 in order to determine actual deductions for such expenditure from that date so long as they are engaged in mining operations in the year in which deductions are claimed. Notional deductions will be computed broadly on the lines of the mining provisions (Divisions 10 and 10AAA). Apart from the specific write-off rates prescribed in Division 10 (currently a write-off over ten years), gold miners will be able to elect to utilise the 5/3 accelerated depreciation provisions over the period those provisions applied. Notional deductions for mining expenditure will be fully available in the income year in which the expenditure was incurred notwithstanding the amount of income (if any) received by the person in that year.

A separate transitional arrangement will apply in the case of exploration expenditure whereby expenditure incurred after 25 May 1988 will be able to be carried forward and deducted against income from 1 January 1991 for up to seven years after the year in which it is incurred. Consistent with the existing law, the amount of exploration expenditure carried forward in this way will be reduced in the event of a tax exempt sale of a mining right before 1 January 1991.

The tax exemption under paragraph 23(pa) for income from the sale of mining rights for gold (and other relevant minerals) by bona fide prospectors will be retained, subject to an amendment to confine the exemption to arm's length transactions (as is the case for other minerals). Other gold mining assets acquired after 19 September 1985 will be subject to capital gains tax in accordance with Part IIIA, but only in respect of that part of any gain or loss on disposal that accrues after 31 December 1990.

Rebate for arrears of income received in a lump sum (Clause 27)

The Bill will give effect to the 1988-89 Budget proposal to introduce a rebate of tax for certain income received in a lump sum in arrears on or after 1 July 1986.

The kinds of income that will qualify for the rebate include workers' and accident compensation payments, social security and repatriation pensions and benefits, Commonwealth educational and training allowances and, in very limited circumstances, salary or wages. The rebate will be allowable in respect of salary or wages where payment is received of an amount that accrued more than 12 months from the date payment was made or where payment is made to a person who is reinstated to employment after a period of suspension of amounts that accrued during the period of the suspension.

The income tax law operates to treat income from sources such as those listed above as assessable income of the year of income in which it is received. The Bill will not alter the existing law under which income, received as a lump sum in arrears, is included in the assessable income of the year in which it is received. It will, however, allow a rebate of tax in the assessment of the year of income in which the lump sum is received, provided certain conditions are satisfied, to limit the amount of tax payable on the income that accrued in earlier years. The tax payable on the income that accrued during the two most recent years before the year of receipt will be limited to the amount of tax that would have been payable on that income if it had been received in the year of income in which it accrued. Where the income accrued over a longer period the tax payable on amounts accrued in a year earlier than the two most recent years will be limited to a notional amount.

The rebate will not be allowable where the total amount of the income that accrued in years earlier than the year of receipt is less than 10 per cent of the taxable income of that year excluding the income that accrued in the earlier years, certain payments on termination of employment, an abnormal income amount under section 158L of the Income Tax Assessment Act 1936 and capital gains.

The rebate will be the amount by which the tax payable on the lump sum in the year in which it is received exceeds the sum of:

•

the additional tax that would have been payable in the two most recent years before the year of receipt if amounts that accrued in those years had been included in the taxable incomes of those years; and

•

where income accrued in years earlier than the two most recent years before the year of receipt, the product of the amounts that accrued in those earlier years and the average of the rates of tax on the income that accrued in the two most recent years. In calculating the average rates of tax on the arrears of the two most recent years, the relevant taxable income will be reduced by any income received in those years that accrued in earlier years and was eligible for the rebate, certain payments on termination of employment, abnormal income and capital gains.

The rebate will be available for lump sums received on or after 1 July 1986 and will not extend to any income the tax on which was taken into account in the making of an ex gratia payment by the Minister for Finance under the Audit Act.

The Income Tax Assessment Act will also be amended to authorise an amendment of the Income Tax Regulations to allow tax instalment deductions to be retained from the lump sum payments in arrears at the rate of 25.25 per cent.

Employee share acquisition schemes (ESAS) (Clauses 11, 29, 30 and 31)

The Bill will give effect to the 1988 May Economic Statement proposal to exclude from assessability under section 26AAC up to $200 of discounts on shares or rights acquired by an employee under certain ESAS, and to reduce the cost base of the shares or rights, for capital gains tax purposes, by the amount of discount that is excluded.

The effect of the amendment will be that discounts that satisfy the relevant criteria will not be assessed to the employee in the year in which the shares or rights are acquired but may be dealt with under the capital gains tax provisions on disposal of the shares.

The main requirements for the exclusion to apply will be:

•

the shares are acquired or the rights are issued after 30 June 1988 (where shares are acquired as the result of the exercise of rights, the right must be acquired after 30 June 1988);

•

the shares or rights are acquired under an ESAS that is open on a non-discriminatory basis to all full-time and permanent part-time employees with at least 12 months' service;

•

any financial assistance provided in respect of the acquisition of shares or rights under an ESAS is available on a non-discriminatory basis;

•

the terms of issue require the shares or rights to be held for a minimum of three years, unless an employee ceases employment within the three years;

•

shares have the same voting rights as ordinary shares of the company; and

•

the employer has not claimed a deduction in respect of expenditure incurred by the employer in relation to the acquisition of shares or rights under the ESAS.

Where the required conditions have been satisfied, the employee will be entitled to reduce part or all of the assessable discount up to a maximum of $200 per year. Valuation of the reduction amount and assessment of the discount will occur in the year in which the shares or rights are actually acquired by the employee.

The amount to be reduced will be limited to a maximum discount rate of 10 per cent and a maximum aggregate share value of $2,000 per year. The total reduction is then determined by multiplying the discount rate by the aggregate share value. Where not all of the discount is reduced because these limits are exceeded, the reduction will continue to apply, but the excess will be assessed under section 26AAC.

An employee may elect that the exclusion provisions not apply and for the discount to be assessed in full under section 26AAC. The effect of the election will be that the discount will not be assessed in the year in which the shares or rights are acquired, but will be assessed in the year when any restrictions on disposal of the shares cease.

Transitional imputation arrangements (Clause 43)

The Bill will give effect to the proposal, announced in the 1988 May Economic Statement, to modify for early balancing companies the provisions dealing with the imputation of company tax. This modification is a consequence of the proposal, announced at the same time, to reduce the rate of company tax from 49 per cent to 39 per cent.

Under the existing law, imputation credits attached to franked dividends are determined by reference to the company tax rate for the financial year (the year of tax) in which the dividends are paid. For all practical purposes in this regard, the year of tax corresponds to the franking year of a company and, in turn, to the year of income of individual shareholders. Thus, franked dividends paid by a company in the 1988-89 year of tax when the company tax rate is 49 per cent will be franked by reference to that rate, that is, according to the formula

(49)/(51)


. In this way, a $51 fully franked dividend will have a $49 imputation credit attached. When received by another company the dividend will entitle that company to a franking credit of $51, and when received by a resident individual shareholder will entitle the shareholder to an imputation rebate of $49.

As part of this basic structure of the law, the situation is that a change in the company tax rate for a particular year of tax automatically adjusts the imputation credit attached to franked dividends paid in that year. This means that when the company tax rate is reduced to 39 per cent for the 1989-90 year of tax (payable on income of the 1988-89 income year), the imputation credit will be calculated according to the formula

(39)/(61)


giving a resident individual shareholder an imputation credit of $39 on a fully franked dividend of $61, and a company shareholder a franking credit of $61.

In the case of early balancing companies - those that, with leave of the Commissioner, have adopted an accounting period ending on a date before 30 June in lieu of the financial year ending on the following 30 June - tax at the 39 per cent rate will be payable from a date earlier than 1 July 1989. The franking year of early balancing companies whose accounting periods end before 1 January commence on 1 January. Reflecting this situation, dividends paid by such companies on and after 1 January 1989 will be franked on the basis of the 39 per cent tax rate, that is, according to the formula

(39)/(61)


. Where such a dividend is received by a company that is not an early balancing company, the franking credit will be $61. But as the company receiving the dividend is still in a franking year where its relevant tax rate is 49 per cent, it could effectively pay out that dividend of $61 to its shareholders with a franking credit of $58.60 attached (

61 * ((49)/(51))


).

To avoid that inappropriate outcome, but without complex tracing rules for what is a transitional situation, the Bill adopts a simple approach of deeming dividends paid before 1 July 1989 by early balancing companies to be received, for the purposes of crediting to a franking account, on 1 July 1989 or, if the receiving company is also an early balancing company on the first day of its 1989-90 franking year. By this means, the dividend of $61 in the above example when ultimately passed on by the recipient company will carry the correct imputation credit of $39.

In the same way the amendments will also provide that where franked dividends paid by an early balancing company before 1 July 1989 are derived by a company through a partnership or trust, the franking credits arising to the company, as a partner or beneficiary, which will have been calculated by reference to the

(39)/(61)


formula, will be deemed to arise at the beginning of the company's 1989-90 franking year.

A mechanism has been included to ensure that where the recipient company is actually reliant on the dividends to frank dividends it pays to its own shareholders and the above measure results in a franking deficit or an increase in a franking deficit at the end of the franking year, the incoming dividends are to be deemed to be received on the last day of the company's franking year. In such cases the amount credited to the franking account will not be $61 however, but $40 (

61 * (51)/(49) * (39)/(61)


). This will reflect the fact that the origin of the dividends was in fact dividends paid by an early balancing company already paying tax at the reduced company tax rate.

Research and development: prepaid expenses (Clauses 12 and 32)

The Bill will implement a proposal, first announced on 20 November 1987, to limit the immediate deductibility of expenditure incurred on research and development activities. Such expenditure is deductible under section 73B of the Income Tax Assessment Act 1936 at a maximum rate of 150 per cent in the year in which the expenditure is incurred.

Research and development expenditure incurred in advance of the provision of services will, subject to certain exceptions, be written-off on a straight line basis over the eligible service period applicable to the expenditure. The eligible service period is the period commencing on the day on which the expenditure is incurred or the first day on which the services are provided, whichever is the later, and ending on the last day on which the services are provided. Research and development expenditure will be taken to be incurred in advance if the eligible service period ends more than 13 months after the day on which the expenditure is incurred.

The new rules will not apply to expenditure that is less than $1,000 or is required to be incurred by law.

Certain classes of expenditure will, however, receive preferred treatment. These comprise:

•

expenditure incurred before 1 July 1988 to an approved research institute;

•

expenditure incurred after 19 November 1987 to a research agency that is registered under section 39F of the Industry Research and Development Act 1986; and

•

expenditure incurred by companies on projects of research and development in respect of which the companies are jointly registered under section 39P of that Act.

For expenditure of these kinds, if the eligible service period extends over two or more years, then the expenditure that would otherwise be taken by the new rules to be incurred throughout the second and any subsequent years will be advanced and spread uniformly over so much of the eligible service period as occurs in the preceding year of income.

The amendments will apply to expenditure incurred after 20 November 1987.

Investment in Australian films (Clauses 9, 14, 15, 18-24, 28, 35, 38, and 39-42)

The Bill will give effect to the proposal, announced by the Treasurer in the 1988 May Economic Statement, to modify the special concessions available in respect of eligible investment in qualifying Australian films. The effect of the amendments will be to reduce to 100 per cent the rate of the deduction allowable for eligible capital moneys that are expended:

•

in the case of moneys expended by way of contribution to the cost of producing a film - after 24 May 1988;

•

in the case of moneys expended directly in producing a film - after 25 May 1988.

In limited circumstances, certain capital expenditure after these dates will continue to qualify for the existing higher rates of deduction. These cases will be:

•

capital expenditure incurred in producing or contributing to the cost of producing a film, under a contract entered into at any time, where the film was underwritten before 25 May 1988 and:

(a)

a copy of the underwriting agreement was lodged with the Secretary to the Department of the Arts, Sport, the Environment, Tourism and Territories before 2 June 1988; and

(b)

the moneys were deposited in the Australian Film Industry Trust Fund before 1 July 1988;

•

capital expenditure incurred on a film, under a contract entered into before 25 May 1988, that was not underwritten before 25 May 1988, where the moneys were deposited in the Australian Film Industry Trust Fund before 9 June 1988;

•

capital expenditure incurred on a film, under a contract entered into on or after 25 May 1988, that was not underwritten before 25 May 1988, provided that:

(a)

the Secretary to the Department of the Arts, Sport, the Environment, Tourism and Territories certifies that the film was substantially in production before 25 May 1988; and

(b)

the moneys were deposited in the Australian Film Industry Trust Fund before 9 June 1988.

The amendments will also have the effect that where expenditure qualifies for the 100 per cent rate of deduction there will be no exemption from income tax of any of the net revenue from a film.

Debt creation involving non-residents (Clause 25)

The Bill will effect a minor amendment to the rules governing debt creation involving non-residents in Division 16G that is to be inserted in the Income Tax Assessment Act 1936 by clause 50 of the Taxation Laws Amendment Bill (No.4) 1988. It will remedy a technical deficiency that occurs because shares in a resident company held by a non-resident are not held 'for the purpose of producing assessable income'. Dividends paid to a non-resident are subject to withholding tax and are not technically assessable income of the non-resident although they bear tax by withholding. An acquisition of shares in a resident company, therefore, falls within the proposed subsection 159GZZF(4) exemption provided for assets not previously used to produce assessable income. This was not the intention of the exemption under that section.

This amendment will ensure that an exemption from Division 16G is not given to an acquisition from a non-resident of shares in a resident company. The amendment will apply to interest incurred after 3 November 1988 on an amount owing in connection with an acquisition of an asset after 3 November 1988. The provision will not apply to an acquisition under a contract entered into on or before that date.

Gifts (Clause 13)

The Bill will give effect to a proposal to extend those provisions of the Income Tax Assessment Act 1936 that authorise deductions for gifts of the value of $2 or more made to specified organisations to include the Australian National Gallery Foundation. Gifts made to the Australian National Gallery Foundation will qualify for deduction where they are made on or after 26 September 1988 - the date of incorporation of the Foundation.

Cash grants under the Defence Service Homes Scheme (Clause 37)

The Bill will exempt from income tax certain payments made under the Defence Services Homes Scheme. The scheme provides low-interest mortgage loans to help veterans, some serving members of the defence forces and certain other people to acquire homes. Under arrangements that applied between 15 September 1987 and 9 December 1987 inclusive, some applicants for housing assistance received cash grants instead of loans and it is proposed that these be free of tax.

Amendment of the Fringe Benefits Assessment Act 1986

Foreign source income fringe benefits (Clauses 4 and 5)

As a general rule, the taxation value of a loan fringe benefit or expense payment fringe benefit is reduced to the extent to which interest payable on the loan is, or would be, allowable as an income tax deduction of the employee. This rule is known as the 'otherwise deductible' rule.

The foreign tax credit system quarantines deductions against certain income from foreign sources (such as rent and interest), so that those deductions cannot be applied to reduce other income once the income from foreign sources has been fully offset. Amendments contained in the Taxation Laws Amendment Bill (No.3) 1988 to the fringe benefits tax law propose that the otherwise deductible rule will not apply to reduce the taxable value of an expense payment fringe benefit if that benefit relates to income from foreign sources that is governed by the quarantining rules of the foreign tax credit system.

This Bill will extend that constraint to situations where residual and property benefits are provided in relation to such income. For example, the constraint will apply, from the date of introduction of the Bill, where the employee charges the cost of services or goods - such as, labour and materials for repair to foreign rental property - direct to the employer's account.

Overseas travel fringe benefits (Clauses 4, 5 and 6)

Amendments contained in the Taxation Laws Amendment Bill (No. 3) 1988 to the FBT law propose the removal of the requirement for a crew member of an international flight to keep a travel diary and furnish it to his or her employer to support a reduction in the taxable value of an expense payment benefit. The amendments proposed by this Bill will extend this 'no diary' concession in relation to certain residual and property fringe benefits provided to crew members in connection with overseas travel. For example, it will apply to laundry services (residual fringe benefits) and meals (property fringe benefits) where the relevant expenditure is charged directly to the airline employer.

Amendment of the Sales Tax Assessment Act (No.1) 1930

Changes to sales tax refund provisions (Clauses 45, 46 and 47)

The Bill will amend the sales tax law to confirm that refunds of sales tax overpaid where the tax has been passed on to others are not available unless all persons to whom it was passed on have been recompensed.

Refund provisions in the Sales Tax Assessment Acts provide that, where a taxpayer has overpaid tax, the Commissioner may refund the overpaid tax as long as the taxpayer has not passed the tax on to another person or, if it has been passed on, it has been refunded by the taxpayer to that other person.

However, because tax is usually paid on the last wholesale sale, the benefit of the refund does not always accrue to the ultimate purchaser who bore the tax.

For example, a taxpayer might overpay sales tax in respect of sales to an associated company. The goods are then sold by the associated company to a third party for a price which includes the overpaid tax. Subsequently, the overpayment is discovered and the taxpayer applies for a refund. It is arguable that the taxpayer need do no more than refund the amount overpaid to its associated company, and that the benefit does not have to be passed on by the associated company to the third party who ultimately bore the tax.

The amendments proposed by these clauses will make clear that refunds in respect of sales tax overpaid are not available unless the benefit of the refund has been passed on to the ultimate purchaser who bore the tax.

SALES TAX (EXEMPTIONS AND CLASSIFICATIONS) AMENDMENT BILL (No.2) 1988

Amendment of the Sales Tax (Exemptions and Classifications Act) 1935

The present wholesale sales tax system operates to tax all goods at the general rate of 20 per cent unless they are specified to be taxed at that rate, at a different rate or are exempt. There are five schedules of goods in the Sales Tax (Exemptions and Classifications) Act 1935 referred to in these notes as the Exemptions and Classifications Act - for this purpose.

The system's multiple tax rate structure (exempt, 10 per cent, 20 per cent, 30 per cent) and the various detailed descriptions of goods in the five Schedules to the Exemptions and Classifications Act cause problems in its application and administration.

The Bill, in conjunction with the Sales Tax (Exemptions and Classifications) Amendment Bill 1988 and the Sales Tax Assessment (No.1) Amendment Bill 1988, is designed to remove certain classification anomalies and inconsistencies.

Exempt goods to become taxable

Bags and wrappings (Schedule, Part I - Amendment of First Schedule)

Item 92 in the First Schedule to the Exemptions and Classifications Act exempts bags and sacks used for fertilizer or chaff or for marketing exempt goods.

Paper and plastic bags are to be taxed at the general rate of 20 per cent and this Bill will ensure that bags of a kind used by retailers to market goods are subject to the general rate of sales tax by excluding them from item 92.

Thick shake mixes (Schedule, Part I - Amendment of First Schedule)

Item 113 in the First Schedule to the Exemptions and Classifications Act exempts materials used by an unregistered taxpayer to manufacture exempt goods. Biscuit and ice cream mixes which are taxable at the 10 per cent rate are excluded from item 113.

Thick shake mixes are used in place of taxable ice cream mixes by retailers in the manufacture of ice cream for sale from retail premises. To ensure that the sales tax treatment of thick shake mixes is brought into line with ice cream mixes this Bill will exclude thick shake mixes from item 113.

Accessories to take-away food containers (Clause 3 and Schedule, Part II - Amendment of Third Schedule)

In line with the sales tax treatment of pre-packaged biscuits and ice cream and eating utensils used by eat-in restaurants, all of which are taxable at the 10 per cent rate, containers and accessories used by retailers to market biscuits and ice cream manufactured on retail premises and other take-away food are also to be subject to sales tax at the 10 per cent rate.

The Bill will ensure that accessories to take-away food containers such as spoons, serviettes and refresher towels are taxable at the 10 per cent rate.

INCOME TAX RATES AMENDMENT BILL 1988

Amendment of the Income Tax Rates Act 1986

The Income Tax Rates Act 1986 is to be amended by this Bill to declare the rates of tax payable for the 1989-90 and subsequent financial years by companies and by trustees of corporate unit trusts and public trading trusts.

The Bill will give effect to the proposal announced in the 1988 May Economic Statement to reduce the company tax rate from 49 per cent to 39 per cent, to apply from the 1989-90 financial year.

The Bill will also declare the rate of tax payable for the 1988-89 and subsequent financial years by trustees assessed under subsection 98(3) of the Income Tax Assessment Act 1936 in respect of trust income of non-resident company beneficiaries of trust estates. Reflecting the company rate of tax to apply from the 1989-90 financial year (that is, in respect of company incomes for the 1988-89 and subsequent income years), the rate of tax payable by trustees to which subsection 98(3) applies is to be 39 per cent.

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) 1988

PART 1 - PRELIMINARY

Clause 1: Short title

This clause allows the amending Act to be cited as the Taxation Laws Amendment Act (No.5) 1988.

Clause 2: Commencement

By clause 2 the amending Act is to come into operation on the day on which it receives the Royal Assent. But for this clause, the 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.

PART II - AMENDMENT OF THE FRINGE BENEFITS TAX ASSESSMENT ACT 1986

Clause 3: Principal Act

This clause facilitates reference to the Fringe Benefits Tax Assessment Act 1986 which, in this Part, is referred to as the "Principal Act".

Clause 4: Reduction of taxable value - "otherwise deductible" rule

Introductory note

Consistent with amendments of the fringe benefits tax law proposed in the Taxation Laws Amendment Bill (No. 3) 1988, this clause will modify the usual operation of the 'otherwise deductible' rule.

Broadly, that rule permits the taxable value of a fringe benefit to be reduced by the extent to which an expense, if borne by the employee receiving the benefit, would have been deductible to the employee for income tax purposes. For example, an employee using an employer-provided interest-free loan wholly to buy income earning investments would be entitled to an income tax deduction for interest if any were paid. In those circumstances, the taxable value of the loan fringe benefit would be reduced to nil.

By the amendment the rule will not operate, after the date of introduction of this Bill, in respect of certain expenses otherwise deductible against income from foreign sources.

Under Australia's foreign tax credit system, expenses incurred in deriving foreign source income are 'quarantined', i.e., they can only be applied to reduce the particular class of foreign income to which they relate, with any 'excess' expenditure being carried forward for deduction in future years when there may be sufficient income of that class to absorb them. Consistent with that measure, the fringe benefits tax law is being amended by this clause to preclude a reduction in the taxable value of a property fringe benefit where expenditure, if incurred by an employee in deriving foreign source income, would have been deductible by the employee for income tax purposes but for the quarantining provisions of the foreign tax credit system; for example, the cost of materials for repairs to foreign rental property.

Clause note

Paragraph (a) achieves this by inserting the excluding words ', not being a foreign source deduction,' in subparagraph 44(1)(b)(i) of the Principal Act. Paragraph (b) amends sub-subparagraph 44(1)(ba)(ii)(A) to similar effect.

Paragraph (c) inserts excluding words in paragraph 44(1)(d) of the Principal Act to make it clear that the recipient of an "international aircrew property benefit" (a defined term: see the notes on clause 6) is not required to supply a travel diary to his or her employer as a precondition to the operation of the 'otherwise deductible' rule in determining the taxable value of an extended travel property benefit.

Clause 5: Reduction of taxable value - "otherwise deductible" rule

Clause 5 will amend section 52 of the Principal Act which applies, broadly, to reduce the taxable value of a residual fringe benefit to the extent to which the expenditure, if incurred by the employee, would have been deductible to the employee for income tax purposes had it had not been paid or reimbursed by the employer.

Paragraphs (a) and (b) amend section 52 of the Principal Act to preclude the application of the 'otherwise deductible' rule in much the same way as its application is affected by clause 4 of this Bill. The relevant expenditure is that which otherwise would reduce the taxable value of a residual fringe benefit; for example, the cost of labour for repair to foreign rental property.

Paragraph (c) of this clause will amend paragraph 52(1)(d) of the Principal Act along similar lines to the amendment proposed by paragraph (c) of clause 4.

The effect of the amendment proposed by this paragraph is that employees in receipt of an "international aircrew residual benefit" (see notes on the definition of that term in clause 6) will not be required to keep a travel diary to support an appropriate reduction by their employers in the taxable value of an extended travel residual benefit.

Clause 6: Interpretation

The interpretation section of the Principal Act, (section 136) is amended by this clause to insert new definitions to facilitate the drafting of the operative clauses of this Part of the Bill. The new terms and their meaning are:

"international aircrew property benefit" is a property fringe benefit in the nature of a payment of expenses that a person employed and travelling as a crew member of an international flight has charged to his or her employer, being expenses for food or drink or for accommodation, or being other expenditure incidental to travel by that person while travelling outside Australia in the course of performing duties as an employee.

This definition is relevant to the proposed amendment of paragraph 44(1)(d) of the Principal Act as outlined in the notes on clause 4(c).

"international aircrew residual benefit" is a residual fringe benefit in the nature of a payment of expenses that a person employed and travelling as a crew member of an international flight has charged to his or her employer, being expenses for accommodation or being other expenditure incidental to travel and which relates to travel outside Australia by that person in the course of performing duties as an employee.

This definition is relevant to the proposed amendment of paragraph 52(1)(d) of the Principal Act as outlined in the notes on clause 5(c).

Clause 7: Application of amendments

This clause, which will not amend the Principal Act, contains application provisions relating to the operation of the various amendments contained in Part II of the Bill. The general application rule expressed in subclause (1) is that the amendments apply:

•

to fringe benefits tax assessments for the transitional and later years of tax (subclause (1)(a)); and

•

to fringe benefits tax instalments of the transitional year of tax only (subclause (1)(b)).

As such, the concessional amendments being introduced by this Part of the amending Bill will apply from the date of the commencement of the fringe benefits tax law, 1 July 1986.

By subclause (2), the general application arrangements are varied for those proposed amendments of the fringe benefits tax law that modify the operation of the 'otherwise deductible' rule as it relates to the foreign tax credit system. In each case, so as not to disadvantage taxpayers, those amendments will only apply where the specified property or residual fringe benefits are provided after the date of introduction of the Bill.

PART III - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Division 1 - Principal Act

Clause 8: Principal Act

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

Division 2 - Amendment of the Principal Act

Introductory note to clauses 9, 10, 16 and 17

Clauses 9, 10, 16 and 17 propose technical amendments to various provisions of the Principal Act to ensure that all of the amendments relating to gold mining are collected in one place (i.e., in new Division 16H which is being inserted by clause 26 of this Bill) rather than being located in the operative provisions to which they generally relate such as section 23, Division 10 and 10AAA. While the amending provisions are largely of a transitional nature, it would also not be appropriate, in view of their length and the long period before they will cease to operate, to locate the provisions in the amending Act itself. The approach adopted is designed to facilitate ease of reference to the amending provisions.

Clause 9: Exemptions

Paragraph (a) of clause (9) will amend section 23 of the Principal Act so as to exempt the income of the Australian Film Finance Corporation Pty. Limited from income tax. The amendment will apply from 12 July 1988, the date on which the Corporation was incorporated under the Companies Act 1981.

Paragraph 23(o) of the Principal Act exempts from tax income from gold mining. Paragraph (b) of clause 9 amends paragraph 23(o) to limit the exemption from tax by reference to the application of proposed new Division 16H. Paragraph (c) similarly amends paragraph 23(pa) which at present exempts from tax income derived from the sale of certain mining rights for gold and prescribed minerals.

Clause 10: Exemption of certain income from sale of gold

Section 23C of the Principal Act exempts from tax income derived from the sale of gold purchased from the Reserve Bank by an eligible marketing company, i.e., the Gold Producers' Association Ltd. This clause amends section 23C to curtail the exemption by reference to new Division 16H.

Clause 11: Shares and rights acquired under schemes for the acquisition of shares by employees

This clause will amend section 26AAC of the Principal Act to exclude from assessability up to $200 per year of discounts on shares or rights acquired by an employee under certain employee share acquisition schemes. Section 26AAC provides a legislative basis for the taxation of discounts on shares or rights acquired under employee share acquisition schemes.

Paragraph (a) of clause 11 will insert new subsections (4A) to (4F).

The conditions that must be satisfied for the exclusion from assessability to be available are contained in subsections (4A) and (4B). Once these conditions are satisfied, the exclusion is automatically available to the taxpayer. Timing considerations, the method of calculating the amount of exclusion, and an election to opt out of the exclusion provisions are contained in subsections (4C) - (4F) The related amendments to the capital gains tax provisions are contained in clauses 29-31.

New subsection 26AAC(4A) will set out the circumstances under which a taxpayer is taken to have acquired an ESAS share or ESAS right so as to qualify for the proposed exclusion.

Paragraph (a) requires the share or right to be acquired under a scheme for the acquisition of shares by employees.

Under paragraphs (b) and (c), the share or right must be acquired:

•

on or after 1 July 1988; and

•

as the result of the employment of the taxpayer.

Where shares are acquired as the result of the exercise of a right, the right must also have been first acquired on or after 1 July 1988. In addition, subsection 26AAC(15) is expressly excluded from applying in respect of subsection 26AAC(4A) so that shares acquired before 1 July 1988 cannot be deemed to have been acquired on or after 1 July 1988.

The requirement that the shares and rights be acquired as the result of the employment of the taxpayer recognises that, although section 26AAC applies to employees, relatives of an employee, associates, contractors and consultants, the proposed exclusion will only be available for employees (see also the amendment to subsection 26AAC(6)). The term 'employee' does, however, include a director (see new subsection (18C)).

Paragraph (d) contains a number of conditions that the Commissioner must be satisfied are met by the scheme at the time when the share or right is acquired. The conditions are that:

•

both the scheme and any related financial assistance are operated on a non-discriminatory basis - see subsection (4B) for elaboration on what constitutes a non-discriminatory basis (sub-subparagraphs (4A)(d)(i)(A) and (B));

•

all the shares, including shares that may be acquired under a right, are ordinary shares - this requirement will ensure that the shares offered under a scheme are not disadvantaged in respect of voting rights in comparison with similar shares offered by the employer companies (subparagraphs (4A)(d)(ii) and (iii));

•

the scheme was operated so that shares or rights could not be disposed of within three years after acquisition, except where the employee has ceased employment. However, where employment ceases in the same year as the exclusion would otherwise be allowed, the exclusion will not be available - see new paragraph (4C)(d). The three year restriction on disposal will not prevent the exercise of a right within three years of its acquisition. However, shares acquired by exercising a right cannot be disposed of until the balance of the three year period, which started when the rights were acquired, has elapsed. Where rights have been held for at least three years, shares acquired through the exercise of those rights will not, themselves, be subject to a further holding period requirement (subparagraph (4A)(d)(iv));

•

only permanent employees are entitled to acquire shares or rights under the scheme. Shares or rights offered to casual employees would need to be offered under a separate scheme (subparagraph (4A)(d)(v)).

If a scheme satisfies the conditions contained in paragraph (4A)(d) at the time of the employees' acquisition of shares or rights, but those conditions are not later enforced, the scheme would not be considered to have satisfied the conditions, and the exclusion from assessability may be denied or withdrawn.

Under paragraph (e), the exclusion will not be available to an employee if the issuing company or a related company can claim a deduction in respect of expenditure relating to the acquisition of shares or rights under the scheme. This provision will ensure that the employer and the employee do not both obtain a tax concession for the same amount. The provision is not intended to cover expenditure that is not directly or indirectly related to the discount.

New subsection 26AAC(4B) sets out the circumstances under which a scheme would be considered to be operated on a non-discriminatory basis.

Paragraph (a) requires the scheme to be open to all permanent employees of the issuing company and related companies. In accordance with the definition of permanent employees contained at subsection (18C), the scheme must be open to all full-time or permanent part-time employees with 12 months' or more service. Under the definition of related companies contained in proposed subsection (18B), the scheme will need to be open to permanent employees of all companies in a grouping arrangement involving 50 per cent or more common ownership. This will ensure that related companies in a company group cannot be used to restrict the exclusion to select employees.

Under paragraph (b), an acquisition scheme will be non-discriminatory if the following conditions are satisfied in relation to all offers under the scheme:

•

the time for acceptance of each offer is reasonable - an example of an unreasonable offer would be one that is required to be accepted in such a short time that financially disadvantaged employees are unable to accept it ((subparagraph (4B)(b)(i));

•

the consideration for the acquisition is the same for all. This condition would be satisfied by an offer made to all permanent employees in a scheme based on the same acquisition price per share, or the same percentage of market value. Subsequent differences in the consideration paid by one employee as against that paid by another would not contravene this provision if the difference results from changes in the market value of shares as the result of different acceptance times (sub-subparagraph (4B)(b)(ii)(A));

•

the same number, minimum number, and/or maximum number of shares or rights are offered to each employee (sub-subparagraph (4B)(b)(ii)(B));

•

there is a common time for acceptance of the offer (sub-subparagraph (4B)(b)(ii)(C)); and

•

information about the offer is circulated to all employees (sub-subparagraph (4B)(b)(ii)(D)).

Under paragraph (c), a scheme would be non-discriminatory if the loan arrangements that accompany the scheme satisfy the following conditions:

•

the time for taking up each loan is reasonable the purpose of this provision is to prevent loans being required to be taken up in such a short time that financially disadvantaged employees are unable to accept the loan (subparagraph (4B)(c)(i));

•

the terms and conditions of the loan, including the repayment rules, are the same for all employees (sub-subparagraphs (4B)(c)(ii)(A) and (B)); and

•

the amount, minimum amount and/or maximum amount of the loan offered to each employee are the same (sub-subparagraph (4B)(c)(ii)(C)).

Under subsection 26AAC(4C), the amount to be excluded as calculated in accordance with subsection (4F) will only be available for ESAS rights and shares, and will apply in respect of all ESAS rights and shares acquired during a year of income (paragraphs (a) and (b)).

The subsection will also allow a taxpayer to elect that the exclusion provisions not apply in that income year (paragraph (c)). An election would have the following effects -

•

the discount would be assessed in full under section 26AAC, and the cost base of the shares or rights for capital gains tax purposes would not be reduced; and

•

as a consequence, the discount will not be assessed in the year in which the shares or rights are actually acquired but would be assessed in the year in which restrictions on disposal of the shares cease.

The latter effect results from the operation of subsection 26AAC(15) and proposed subsection (4F). Under subsection 26AAC(15), shares that are subject to restrictions on disposal are deemed to be acquired when the restrictions cease. A taxpayer may, however, elect under subsection (15A) for shares (or under subsection (8A) for rights) to be assessed when the shares (or rights) are actually acquired, and thus take advantage of cost base indexing for capital gains tax purposes. Proposed subsection (4F) deems the elections under subsections (5A) and (8A) to be made for the purposes of the exclusion provisions. A taxpayer entitled to the exclusion will be assessed when the shares are actually acquired, unless an election under subsection (4C) is made and the operation of subsection (15) is thereby reinstated.

Circumstances under which a subsection (4C) election would be made would be uncommon, and would usually only arise where a taxpayer receives a discount in excess of the statutory limits (see the notes on new paragraph (4F)(c)) such that an amount will remain to be assessed under section 26AAC. A taxpayer who is disadvantaged by being assessed when the shares or rights are acquired can, by making the subsection (4C) election, defer assessability until the shares or rights are capable of being disposed of.

Paragraph (4C)(d) will ensure that a taxpayer ceasing employment in the same year as the exclusion would otherwise be allowed will not be entitled to the exclusion. With this exception, cessation of employment within three years of acquisition of shares would not void the exclusion provisions.

Subsection 26AAC(4D) will require a taxpayer entitled to more than one exclusion as the result of discounts being provided by two or more issuing companies to elect that the exclusion apply to only one of those companies. Failure to so elect would deny the exclusion in respect of discounts provided by all the companies.

This subsection will ensure that a taxpayer who is a permanent employee of more than one company is only entitled to one exclusion per year of income.

Subsection 26AAC(4E) requires an election under subsections (4C) and (4D) to be made by notice in writing to the Commissioner and lodged in the tax return for the year to which the election relates. This will usually be the year in which the shares or rights are acquired by the employee. The Commissioner may allow lodgment at a later date.

Subsection 26AAC(4F) contains the rules for calculating the amount to be excluded and determining when it is to be excluded.

Under paragraphs (a) and (b) respectively a taxpayer is taken to have made an election under subsection 26AAC(8A) in respect of all ESAS rights, or under subsection 26AAC(15A) in respect of all ESAS shares.

The effect of this deemed election is that the taxpayer is assessed on the discount in the year in which the shares or rights are acquired. without the election, subsection 26AAC(15) would have applied to deem the shares to have been acquired when restrictions on the disposal of shares are lifted. Under this arrangement, whenever the exclusion is available, the employee is assessed under section 26AAC in the year in which the shares or rights are actually acquired. A taxpayer may, however, elect for the exclusion provisions not to apply, so as to fall within the provisions of subsection 26AAC(15) (see notes on subsection (4C)).

Paragraph (c) provides for the calculation of the amount to be excluded, referred to as the reducing amount. The provision applies by calculating the aggregate amount of discount to be assessed under 26AAC, and reducing this by a statutorily limited amount.

The statutory limits that apply to the exclusion are a maximum rate of discount of 10 per cent, and a maximum aggregate share value of $2,000. Where either of these limitations is exceeded, the excess will remain assessable under 26AAC, even if the other parameter is below the limit. Subject to the statutory limits, the exclusion is calculated by multiplying the discount rate by the share value.

The rate of discount is calculated by dividing the aggregate discount amount by the aggregate value of the shares, as in the following example.

The $2,000 limit refers to the value of the shares acquired, and not to the acquisition price of the shares. Where rights are acquired, the $2,000 limit refers to the value of the shares at the time the rights to acquire those shares were acquired.

Where the reducing amount exceeds or equals the aggregate amount assessable under section 26AAC, no amount is included in assessable income. Where the reducing amount is less than the aggregate amount assessable under section 26AAC, the reduction is allowed and the excess remains assessable under section 26AAC. This amount will be assessed at the time of acquisition and not, as would have applied under section 26AAC(15), when restrictions on the disposal of the shares are lifted.

The following examples show how the limitations contained in paragraph 26AAC(4F)(c) will operate.

Example 1

This example illustrates the calculation of the reducing amount where both the limits of $2,000 aggregate share value and 10 per cent discount rate are exceeded.

The discount assessable under 26AAC(5) is:

$3,000 - $2,400 = $600


The reducing amount will be:

= (lesser of the aggregate of value of shares and $2,000) multiplied by (lesser of the discount rate and 10%)


= $2,000 * 10%


= $200


The balance of $400 ($600 - $200) will be included in assessable income.

Example 2

In this example, only the aggregate value of the shares exceeds the limit. If the rate of discount was the only limitation exceeded, an amount would similarly remain to be included in assessable income.

The discount assessable under 26AAC(5) is:

$3,000 - $2,850 = $150


The reducing amount will be:

(lesser of the aggregate value of the shares and $2,000) multiplied by (lesser of the discount rate and 10%)


= $2,000 * 5%


= $100


The balance of $50 ($150 - $100) would be included in assessable income.

Example 3

In this illustration, both the aggregate value of the shares and the discount rate are below the limitations.

The discount assessable under 26AAC(5) is:

$1,000 - $950


= $50


The reducing amount will be:

= $1,000 * 5%


= $50


No amount will be included in assessable income.

Paragraph (b) of clause 11 will make a consequential amendment to subsection 26AAC(6) to ensure that the subsection does not apply to the proposed exclusion provisions.

Subsection 26AAC(6) brings the acquisition of shares or rights by an associate of a taxpayer within the application of section 26AAC. The amendment proposed by paragraph (b) will ensure that an associate does not receive the benefit of the proposed exclusion.

Paragraph (c) of clause 11 will make a consequential amendment to subsection 26AAC(15) to ensure that the subsection does not apply to the proposed exclusion provisions.

Subsection 26AAC(15) provides that, where the disposal of shares by the taxpayer is subject to restrictions, the shares are deemed to have been acquired when the restrictions cease. The amendment proposed by paragraph (c) will ensure that, when the exclusion applies, assessment under section 26AAC is determined in the year in which the shares or rights are actually acquired by the taxpayer.

Paragraph (d) of clause 11 will insert new subsections 26AAC(18A) to (18E).

Under new subsection 26AAC(18A) financial assistance will include the provision of financial assistance by way of a loan, guarantee, security, release of an obligation or the forgiving of a debt or by some other means.

The expression 'financial assistance' is referred to in new paragraphs (4A)(d) and (4B)(c) which provide that a scheme to provide financial assistance in respect of the acquisition of employee shares or rights must be operated on a non-discriminatory basis.

New subsection 26AAC(18B) adopts the manner of determining related companies contained in the Companies Act 1981 for determining whether companies are related companies for the purposes of section 26AAC.

Under this approach, two corporations will be related to each other where one corporation:

•

controls the composition of the board of directors of the other corporation;

•

is in the position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the other corporation; or

•

holds more than one-half of the issued share capital of the other corporation (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital).

New subsection 26AAC(18C) contains definitions of terms which have specific meanings for the purposes of the proposed exclusion of amounts from assessable income.

"employee" is defined to include a director of a company. As the proposed exclusion will apply only to employees, the definition ensures that a director will be eligible for the exclusion.

"permanent employee" is defined as meaning a full-time employee, or a permanent part-time employee of a company with at least 12 months' service.

The proposed exclusion will require that the scheme for acquisition be open to all permanent employees, and only to permanent employees. Schemes which only apply to a particular group of permanent employees or that are open to casual employees will not qualify for the exclusion.

The 12 months' service may be continuous or non-continuous. Employees who work on an iterative basis can accumulate the service until the 12 months is satisfied. For example, an employee who works for the first six months of each financial year would satisfy the requirement 18 months after he or she commenced work.

However, when determining the period of service for subsection (18C), new subsection 18D will operate to exclude periods of long service leave, furlough, extended leave and leave without pay or on reduced pay.

New subsection (18E) will give the Commissioner of Taxation authority to re-open an income tax assessment should this be necessary for the purpose of giving effect to paragraph (4A)(e).

This provision would be used to withdraw an exclusion granted to the employee where the employer has claimed a deduction in respect of expenditure incurred in relation to the acquisition of the shares or rights.

Clause 12: Expenditure on research and development activities

Introductory note

Section 73B of the Principal Act provides a special concessional deduction, at a maximum rate of 150 per cent, for expenditure incurred on research and development activities. Except in the case of expenditure incurred on the acquisition of plant, expenditure on research and development activities is immediately deductible in the year in which it is incurred, provided that the activities are completed before 1 July 1991. However, if a taxpayer's aggregate expenditure on research and development in a year is less than $50,000, the rate of the allowable deduction is reduced according to a formula. If the aggregate research and development expenditure is $20,000 or less, no deduction is allowable under section 73B.

A deduction may be obtained under section 73B for prepayments of research and development expenditure well in advance of the carrying on of the research and development activities, or other services, to which the prepayment relates. Two results flow from this:

•

first, there is a deferral of tax;

•

secondly, the intended operation of the $20,000 - $50,000 threshhold can be frustrated in circumstances where, if the expenditure had been incurred as the contracted services were carried out, the rate of the allowable deduction under section 73B would have been smaller or there would have been no entitlement to a deduction at all.

Clause note

This clause will amend section 73B of the Principal Act to prevent certain expenditure, incurred in advance for the provision of services directly related to the carrying on of research and development activities, from being immediately deductible in the year in which the expenditure is incurred. In broad terms, where:

•

research and development expenditure is incurred after 20 November 1987 under an agreement;

•

the expenditure is incurred in return for the doing of a thing that is not wholly done within 13 months of the date on which the expenditure is incurred;

•

a deduction in respect of the expenditure would otherwise be allowable under section 73B in the year in which the expenditure is incurred; and

•

the expenditure is not less than $1,000 or is not expenditure that is required to be paid by law;

then the expenditure will be taken to be incurred over the period commencing on the day on which the expenditure is actually incurred or the day on which the service commenced to be provided, whichever is the later, and ending on the last day on which the service is provided. This period is defined as the "eligible service period".

Paragraph (a) of this clause will insert the following four new definitions in subsection 73B(1):

"accelerated expenditure" will identify that class of "advance R and D expenditure" (see notes on that definition below) which, while subject to the proposed new rules apportioning that expenditure during the "eligible service period" (see notes below), will receive special concessional treatment allowing deductibility over a shorter period than for ordinary advance R and D expenditure. The rules apportioning advance R and D expenditure are set out in proposed new subsection 73B(11). Accelerated expenditure will comprise:

•

contracted expenditure, a term already defined in subsection 73B(1) to include expenditure incurred before 1 July 1988 to an approved research institute or after 19 November 1987 to a research agency registered under section 39F of the Industry Research and Development Act 1986 ('IR & D Act'). Expenditure incurred to the Coal Research Trust Account also comes within the definition of contracted expenditure, but is not to be subject to the proposed new rules by virtue of the exclusion in paragraph (d) of the definition of "advance R and D expenditure"; and

•

expenditure that is incurred by a company on a project of research and development in respect of which the company is jointly registered with one or more other companies under section 39P of the IR & D Act. It is to be noted that if a company is also registered solely in its own right under section 39J of the IR & D Act, then expenditure on projects to which that sole registration relates will not fall within this definition.

"advance R and D expenditure" will identify the expenditure to which the new prepayment rules will apply. The definition encompasses certain kinds of research and development expenditure", a term defined in subsection 73B(1). To constitute advance R and D expenditure, four conditions must be satisfied:

•

first, the expenditure must be incurred after 20 November 1987, under an agreement (whether entered into before or after that date) "agreement" will also be defined in subsection 73B(1)(see notes below);

•

secondly, the "eligible service period" (see notes below) applicable to the expenditure must end more than 13 months after the day on which the expenditure is incurred. The purpose of the 13 month period is to avoid applying the rules to expenditure that is in normal commercial undertakings required to be paid 12 months in advance (e.g., annual insurance premiums);

•

thirdly, the amount of the expenditure must be $1,000 or more; and

•

fourthly, the expenditure must not be expenditure that is required by law to be paid.

"agreement" is defined very broadly to mean any formal or informal agreement, arrangement, understanding or scheme whether or not enforceable or intended to be enforceable by legal proceedings, and will include any express or implied agreement, arrangement, understanding or scheme. The definition will enable the Commissioner to look beyond the express terms of a contract under which a prepayment has been incurred to discover the true nature of the agreement between the parties. Examples of situations at which this definition is directed are:

•

a service fee, purportedly for the first year of service, which has been inflated on the understanding that service fees for subsequent years will be reduced; and

•

a series of contracts for similar or related services to be provided by the same or related taxpayers, where the service fee under each contract is less than $1,000.

"eligible service period" is so much of the "service period" (see notes below) as occurs after the advance R and D expenditure is incurred. For expenditure that is not to receive concessional treatment under proposed new subsection 73B(11) (see notes on paragraph (b) of this clause) it will also be the period over which the expenditure is to be deductible.

"service period" is simply the period during which the service contracted to be done, is done. It is important to note that the period is defined with reference to the actual period over which the service is provided. Strictly speaking, it would be necessary to wait until completion of the period over which the services are provided in order to quantify the deductions attributable to that period. However, the proposed new rules will permit deductions to be calculated and allowed in advance of completion of the services, on the basis that the service period:

•

is taken to commence on the day, or the first day, on which the thing to be done under the agreement in return for the expenditure is required or permitted to commence being done; and

•

is taken to cease on the last day on which the thing to be done under the agreement is required or permitted to cease being done.

Where it turns out that the actual service period differs from that on which deductions have been claimed, authority is provided for the assessments to be re-opened and adjusted.

Paragraph (b) of this clause will insert new subsection 73B(11), which will set out the rules for apportioning advance R and D expenditure across the eligible service period. There are two separate sets of apportionment rules: those for non-concessional cases (set out in new paragraph (11)(a)) and those for concessional cases (new paragraph (11)(b)).

For non-concessional cases, the expenditure is to be taken to be incurred in equal proportions throughout its eligible service period. By 'equal proportions', it is meant that the expenditure is to be spread uniformly over the eligible service period - essentially, this will mean that it will be apportioned on a pro-rata basis in each of the years in which occurs the whole or a part of the eligible service period. Broadly, the proportion of the deduction to be allowed in each year is calculated by reference to the number of days in the eligible service period that occur in the year of income relative to the number of days in the eligible service period.

Example: An eligible company incurs research and development expenditure of $1,000,000 on 1 May 1990 in respect of services that will be provided from 1 June 1990 to 31 May 1993.

For concessional cases, the expenditure is first to be notionally apportioned over the eligible service period according to the rules for non-concessional cases. After applying the rules, the expenditure for concessional cases that would be taken to be incurred in the second and subsequent years of income will be taken to have been incurred, on a uniform basis, throughout so much of the eligible service period as occurs in the preceding year of income. As with non-concessional cases, the proportion of the deduction to be allowed in each year is calculated by reference to the number of days in the eligible service period that occur in the year of income relative to the total number of days in the eligible service period.

Example: Assume same facts from previous example

It is important to note that, when the application of new subsection 73B(11) apportions expenditure over a period that extends beyond 30 June 1991, so much of that expenditure as is taken to be incurred after that date will be deductible only at a rate of 100 per cent. Separate legislation is to be introduced to establish the 100 per cent regime of deductibility announced by the Treasurer in the May 1988 Economic Statement.

Paragraph (c) of this clause will amend subsection 73B(33B), which denies a deduction under section 73B for any expenditure incurred by a company which is jointly registered with one or more companies in relation to a project of research and development under section 39P of the Industry Research and Development Act 1986. A deduction is not allowable in respect of any expenditure incurred by such a company after the date on which the Industry Research and Development Board has given to the Commissioner of Taxation a certificate under subsection 39P(4) of that Act. Strictly speaking, subsection 73B(33B) would apply to deny the eligible company a deduction for any expenditure incurred by it after that date on any research and development activities, including those which are unrelated to the certificate given by the Board. The amendment proposed by this paragraph will make it clear that subsection (33B) applies only in respect of expenditure incurred on research and development activities identified by the Board in its certificate.

Clause 13: Gifts, pensions etc

This clause will amend the provisions of the Principal Act that authorise income tax deductions for gifts of the value of $2 and upwards of money - or certain property other than money - made to the funds, authorities and institutions that are listed in the provisions.

The amendment proposed by clause 13 will insert new subparagraph 78(1)(a)(xcii) in the Principal Act to authorise deductions for gifts to the Australian National Gallery Foundation.

By subclause 36(3) of the Bill, gifts made to the Australian National Gallery Foundation on or after 26 September 1988 will qualify for deduction.

Clause 14: Interpretation

Clause 14 will amend the definition of "exempt entity" in section 102M of the Principal Act, to include a reference to proposed paragraph 23(k) of the Principal Act (see notes on clause 9). Paragraph 23(k) will exempt the income of the Australian Film Finance Corporation Pty. Limited from income tax. The effect of the amendment made by this clause will be that the Corporation will be an exempt body for the purposes of determining whether a unit trust in which the Corporation holds shares is a public unit trust for the purposes of Division 6C of the Act.

Clause 15: Interpretation

Clause 15 will amend section 121F of the Principal Act, to include in the definition of "relevant exempting provisions" a reference to the exemption from income tax to be provided to the Australian Film Finance Corporation Pty Limited (see notes on clause 9). This is a technical amendment that brings the Corporation within the scope of the anti-tax avoidance provisions of Division 9C of the Principal Act.

Clause 16:

Division 10 of the Principal Act authorises deductions for certain capital expenditure where the taxpayers are engaged in mining operations. This clause proposes the insertion of new section 122A into Division 10 so that such deductions will also be subject to Division 16H.

Clause 17:

Division 10AAA of the Principal Act authorises deductions for certain capital expenditure on facilities for transporting minerals from a mine site. This clause proposes the insertion of new section 123AA into Division 10AAA which will make those deductions subject to Division 16H.

Clause 18: Interpretation

This clause will amend section 124K of the Principal Act, which contains the interpretation provisions of Division 10B (deductions for expenditure on industrial property). Division 10B provides a concessional write-off for certain Australian films and section 124K adopts certain concepts and definitions which are similar to those used in the more generous film concession provided in Division 10BA.

Paragraph (a) of this clause will omit outdated references, in subsections 124K(1) and (1A), to the 'Minister for Arts, Heritage and Environment'. Paragraph (b) will insert a definition of "Minister" so that references to the "Minister" will be references to the Minister for the Arts, Sport, the Environment, Tourism and Territories.

Paragraph (b) will also insert a definition of "Senior Executive Service office" in subsection 124K(1). The definition is required for the purposes of new subsection 124K(1B). The definition gives the term the same meaning as in the Public Service Act 1922. That Act defines the term as an office that has a classification declared by the Public Service Commissioner to be a Senior Executive classification.

Paragraph (c) will insert new subsection 124K(1B), which will permit the Minister for the Arts, Sport, the Environment, Tourism and Territories, to delegate to the Secretary of the Minister's Department or a person who holds a Senior Executive office in that Department, the Minister's power to certify that a film is an Australian film for the purposes of Division 10B of the Principal Act.

Paragraph (c) will also insert new subsection 124K(1C) which will allow applications to be made to the Administrative Appeals Tribunal for a review of decisions to refuse or revoke a certificate to the effect that a film is an Australian film for the purposes of Division 10B.

New subsection 124K(1D), which is included by paragraph (c), applies where a decision is made to refuse or revoke a certificate for the purposes of subsection 124K(1) and a person whose interests are affected by the decision is notified of the decision in writing. The written notice shall, under subsection 124K(1D) advise that person that an application for a review of that decision may be made to the Administrative Appeals Tribunal. The notice shall also advise the person that, unless the information has already been supplied in writing, a request may be made for a statement setting out the reasons for the decision, the findings on material questions of fact and referring to the evidence or other material on which those findings were based.

Failure to comply with subsection 124K(1D) will not affect the validity of a decision to refuse or revoke a certificate (subsection 124K(1E)) inserted by paragraph (c)).

Clause 19: Interpretation

Clause 19 will amend section 124ZAA, which contains the majority of the interpretative provisions for Division 10BA of the Principal Act (deductions for expenditure in eligible Australian films). The clause will amend the definition of "Minister" to reflect the Minister's present title of 'Minister for the Arts, Sport, the Environment, Tourism and Territories'.

Clause 20: Provisional certificates

This clause will amend section 124ZAB of the Principal Act, which empowers the Minister to certify that a proposed film will, when completed, be a qualifying Australian film for the purposes of Division 10BA. The Minister will be able to delegate this power to the Secretary of the Minister's Department or a Senior Executive Service Officer in his or her Department (see notes to clause 18).

Clause 20 will insert a new subsection (3A) in section 124ZAB which will require the Minister (or delegate) in those cases where he or she refuses to issue a certificate under subsection 124ZAB, to notify, in writing, that refusal to the applicant for the certificate as soon as practicable.

Clause 21: Final certificates

This clause will amend section 124ZAC of the Principal Act, which empowers the Minister to certify that a film that has been completed is a qualifying Australian film for the purposes of Division 10BA.

Clause 21 will insert new subsection 124ZAC(5), which will require the Minister (or his or her delegate) in those cases where he or she refuses to issue a certificate under subsection 124ZAC, to notify, in writing, that refusal to the applicant for the certificate as soon as practicable.

Clause 22:

Section 124ZADAA: Delegation by Minister

Clause 22 will insert new section 124ZADAA in Division 10BA of the Principal Act. The new section will permit the Minister for the Arts, Sport, the Environment, Tourism and Territories to delegate his or her powers under Division 10BA to the Secretary of the Minister's Department or to officers of that Department who hold a Senior Executive Service office (see notes to clause 18). The Minister's power under this section is to issue and revoke provisional and final certificates stating that a film will be or is a qualifying Australian film for the purposes of Division 10BA.

Section 124ZADAB: Review of decisions of Minister

Clause 22 will also insert a new section 124ZADAB in the Principal Act. Subsection (1) allows for a review by the Administrative Appeals Tribunal of decisions (excluding decisions under proposed section 124ZADAA) of the Minister under Division 10BA (including decisions made by the Secretary or Senior Executive Officer to whom the Minister's powers have been delegated - see notes to section 124ZADAA).

Under subsection (2) where such a decision is made and a person whose interests are affected by the decision is given notice of it in writing, the notice shall advise the person that an application for a review of that decision may be made to the Administrative Appeals Tribunal. The notice shall also advise the person that, unless the information has already been supplied in writing, a request may be made for a statement setting out the reasons for the decision, and the findings on material question of fact and referring to the evidence or other material on which those findings were based.

Failure to comply with subsection 124ZADAB(2) does not affect the validity of the decision under Division 10BA (subsection (3)).

Clause 23: Deductions for capital expenditure under post-12 January 1983 contracts

Clause 23 will reduce the rate of the deduction available under Division 10BA of the Principal Act in respect of capital moneys expended in, or as a contribution to the cost of, the production of qualifying Australian films.

When introduced in 1981, Division 10BA of the Principal Act authorised a deduction equal to 150 per cent of capital expenditure on the production of a qualifying Australian film, where that expenditure resulted in the acquisition of an interest in the initial copyright in the film by the person incurring the expenditure. At the same time, section 23H of the Principal Act applied to exempt from tax an investor's net earnings from the film of an amount up to 50 per cent of the eligible investment. These rates of deduction and exemption were reduced in 1984, in respect of investments under contracts entered into after 23 August 1983, to 133 per cent and 33 per cent respectively and further reduced in 1985, in respect of investments under contracts entered into after 19 September 1985, to 120 per cent and 20 per cent respectively.

Subsection 124ZAFA(1) sets out the circumstances in which investments in qualifying Australian films will qualify for the special rates of deduction of 150 per cent, 133 per cent and 120 per cent. Under the amendments proposed by paragraphs (a) and (b) of this clause, expenditure incurred under contracts entered into on or after 25 May 1988 will be eligible for a deduction at the rate of 100 per cent. In addition, there will be no exemption under section 23H of the Principal Act for any part of an investor's net earnings from such expenditure.

The amendments proposed by this clause are to be subject to special transitional arrangements set out in clause 39. While these arrangements will not be included in Division 10BA, they have the effect of altering entitlements to the various deduction rates in certain circumstances. The broad effect of the arrangements in clause 39 will be:

•

to preclude the higher rates for moneys expended after 24 May 1988, unless certain conditions are satisfied; and

•

to apply the 120 per cent rate of deduction to certain expenditure incurred under contracts entered into after 24 May 1988 where certain conditions are satisfied.

Paragraph (a) of clause 23 is a drafting measure to provide for the insertion by paragraph (b) of a new paragraph 124ZAFA(1)(h). The new paragraph will reduce to 100 per cent the deductions available for moneys expended in producing a film or by way of contribution to the cost of producing a film under a contract entered into on or after 25 May 1988.

Paragraph (c) omits subsections (1A), (1AA) and (1B) from the Principal Act. In certain circumstances these subsections provide for investors to obtain higher rates of deduction than those generally applicable at the time when they incur their contribution to a film. The subsections apply where the investors take up an interest in a film that was underwritten at the time when the higher deductions were generally available. The deductions available under subsections (1A) and (1AA) will continue to be available (with some modifications to take account of the new transitional arrangements) under subclauses 39(1) and (2).

Clause 24: Interpretation

Clause 24 will amend subsection 124ZA, which is the interpretation section for Division 10C of the Principal Act (deductions for capital expenditure on traveller accommodation). The definition of "exempt body" in subsection 124ZA(1) will be amended to include a reference to the Australian Film Finance Corporation Pty. Limited, the income of which is to be exempt from income tax by virtue of proposed new paragraph 23K of the Principal Act (see notes on clause 9). The amendment would allow the Commissioner of Taxation under subsection 124ZC(6) to disallow deductions under Division 10C of the Act were he to become satisfied of the existence of an agreement indirectly transferring the benefit of deductions under Division 10C to the Corporation.

Clause 25: Section 159GZZE not to apply in certain cases

Introductory note

In specified circumstances, Division 16G (which is to be inserted in the Principal Act by clause 50 of the Taxation Laws Amendment Bill (No.4) 1988) reduces a deduction which would otherwise be allowable under that Act for interest incurred. The interest affected is that incurred after 30 June 1987 on amounts owing in connection with the acquisition of assets from "foreign controllers" of Australian companies or from foreign controlled Australian companies. Restructuring of foreign controlled investments in companies is not permitted to be financed by interest-bearing debt to the extent that there is no change in the ultimate beneficial ownership of any assets transferred under the restructure.

Generally, a 50 per cent capital entitlement test determines whether a company has the requisite degree of 'foreign control' to attract the operation of the Division.

Clause note

Clause 25 will effect a minor amendment to rectify a technical deficiency in section 159GZZF which provides a range of exemptions from the legislation.

Subsection 159GZZF(4) exempts acquisitions of assets that have not previously been used or held for the production of assessable income.

This exemption enables a company to finance an acquisition from a related non-resident seller provided the assets have not previously been used for the production of assessable income.

Proposed subsection 159GZZF(4A) will limit the exemption provided by the previous subsection to ensure that it is not extended to an acquisition from a 'foreign controller' of shares in a resident company. Because the shares in question are shares in a resident company the underlying company assets are already Australian based and are therefore outside the scope of the exemption that is intended by subsection 159GZZF(4).

Clause 26:

Clause 26 proposes the insertion of a new Division into Part III of the Principal Act. The effect of the Division, in conjunction with the other amendments proposed by this Bill, is to remove the tax exemption for gold mining income, subject to transitional arrangements for certain mining and exploration expenditure incurred by gold miners.

Division 16H - Termination of Gold Mining Exemptions

Subdivision A - Paragraph 23(o), subparagraph 23(pa)(iv) and section 23C

Section 159GZZG - Termination of paragraph 23(o) exemption

By inserting new section 159GZZG in Part III of the Principal Act, clause 26 will amend paragraph 23(o) which exempts from tax income derived from the working of a mining property in Australia principally for the purpose of obtaining gold or, in certain circumstances, gold and copper. The general effect of the amendment will be to remove this exemption from 1 January 1991 except in the case of income received in the form of dividends paid out of income exempt from tax by subsection 23C(1) of the Principal Act. The latter broadly provides an exemption for income derived from the sale of gold by an eligible marketing company, while subsection 23C(2) operates to deem a dividend paid out of such income to be income to which the paragraph 23(o) exemption applies.

Subsection 159GZZG(1) has the effect that the exemption accorded income from gold mining by paragraph 23(o) will cease for income derived after 31 December 1990. Income from gold mining derived after this date will be subject to tax on the same basis as other kinds of mining income.

The subsection will not withdraw the exemption for income derived after 31 December 1990 in the form of a dividend paid out of income exempt from tax by subsection 23C(1). Dividends paid out of income derived by an eligible marketing company on or before 31 December 1990, which is exempt from tax by virtue of section 23C(1), will remain exempt when distributed as dividends even if this occurs after that date.

Subsection 159GZZG(2) modifies the application of paragraph 23(o). Before income derived from the working of a mining property is exempt from tax by paragraph 23(o), the working of the mining property by the taxpayer from the start of mining operations to the end of the financial year must principally be for the purpose of obtaining gold, or where gold and copper is obtained, the value of the gold must not be less than 40 per cent of the total value of output of the mine, excluding pyrites, in that period. In relation to a year of income in which 31 December 1990 occurs, the relevant period for purposes of the foregoing test will be from the commencement of the mining operations until 31 December 1990.

Section 159GZZH - Removal of exclusion of gold from subparagraph 23(pa)(iv)

Paragraph 23(pa) of the Principal Act exempts from tax income derived by bona fide prospectors from the sale of mining rights relating to gold or other prescribed minerals. By virtue of subparagraph 23(pa)(iv), this exemption does not apply in the case of minerals other than gold where the relevant taxpayers are not dealing on an arm's length basis. New section 159GZZH will amend paragraph 23(pa) to allow subparagraph 23(pa)(iv) to apply to gold, and thus ensure that the sale of gold mining rights remains tax free only in the case of arm's length transactions as is the case for other relevant minerals. This amendment is essentially an anti-avoidance one to prevent related parties manipulating transactions to maximise deductions under the Act.

Section 159GZZI: Termination of exemption under section 23C

New subsection 159GZZI(1) will amend subsection 23C(1) of the Principal Act which exempts from tax income derived from the sale of gold purchased from the Reserve Bank by a company approved by the Treasurer (i.e., the Gold Producers' Association Ltd) whose shareholders carry on gold mining operations in Australia. The effect of the amendment will be to terminate the exemption for such income derived after 31 December 1990.

For a company to qualify as an eligible marketing company under subsection 23C(1), it must be a company approved by the Treasurer on the last day of the year of income. New subsection 159ZZI(2) amends subsection 23C(1) by specifying that in the year of income in which 31 December 1990 occurs, the last day of that year of income is to be taken to be 31 December 1990.

Subdivision B - Division 10 and related provisions

Section 159GZZJ: Interpretation

Section 159GZZJ ascribes particular meanings to a number of terms and expressions that are used in this Division, unless otherwise indicated.

"actual deduction" is defined to mean deductions actually allowable from 1 January 1991 for residual amounts of certain capital expenditure incurred in gold mining before that date, but does not include amounts allowable as balancing adjustments under section 122K which is discussed later.

"changeover year" is the financial year from 1 July 1990 to 30 June 1991 for most taxpayers except those with substituted accounting periods, in which case it will be the year which includes 1 January 1991.

"deduction limiting provision" is defined to include subsections 122D(3), 122DB(3), 122DD(3), 122DF(3) and 122DG(6). These subsections limit the amount of the deduction available under the relevant sections to the amount of assessable income remaining after deducting all other allowable deductions, except those allowable under Division 10. This ensures that a loss is not created for the year of income by deductions under those subsections and enables deductions to be carried forward indefinitely.

"deemed gold exploration or prospecting expenditure" is defined to mean eligible gold exploration or prospecting expenditure which is deemed to be incurred by new section 159GZZQ on 1 January 1991 by the taxpayer.

"eligible gold exploration or prospecting expenditure" is defined to mean expenditure:

•

incurred by the taxpayer after 25 May 1988 and before 1 January 1991; and

•

does not qualify as exploration or prospecting expenditure under section 122J, but would have qualified except for the fact that the taxpayer's income was or is exempt by paragraph 23(o), or would be exempt by an application of new section 159GZZV.

Section 122J allows a deduction for expenditure incurred on exploration or prospecting for minerals which can be obtained by prescribed mining operations.

"eligible gold mining expenditure" is defined to mean expenditure:

•

that was incurred prior to 1 January 1991;

•

that would have qualified as allowable capital expenditure as defined in subsection 122A(1) (excluding paragraph (d) which refers to expenditure on acquiring a mining or prospecting right or information) but for the exemption from tax for income from gold mining. It will also include allowable capital expenditure that was incurred before 1 January 1991 which will produce assessable income after 31 December 1990;

•

that was incurred on eligible exploration or prospecting expenditure that was transferred to the purchaser of a mining or prospecting right by an application of this Division.

Subsection 122A(1) defines allowable capital expenditure as expenditure of a capital nature incurred in carrying on prescribed mining operations. Such expenditure covers that on plant as well as on a range of non-plant items including on clearing a mining site, on buildings, water, light, power, housing and welfare, etc.

"notional deduction" is defined to mean the deduction that would be allowable to a person in respect of allowable capital expenditure incurred on gold mining operations prior to 1 January 1991 if income from gold mining had not been exempt. Deductions for such expenditure - referred to as eligible gold mining expenditure - will be determined in accordance with Division 10, subject to the notional writing-down assumptions discussed below. In the case of the year of income in which 1 January 1991 occurs (i.e., the changeover year), notional deductions for such capital expenditure incurred during that part of the year of income before 1 January 1991 will be determined on a pro rata basis in accordance with the following formula:

(Pre-1 January part)/(Post-expenditure part)


Pre 1 January part: where eligible gold mining expenditure was or is incurred prior to the changeover year - the number of days in the part of the changeover year before 1 January 1991. Where the eligible gold mining expenditure is incurred in the changeover year - the number of days from when the taxpayer incurred the expenditure up to and including 31 December 1990.

Post-expenditure part: where the expenditure is incurred before the changeover year - the number of days in the changeover year. Where the expenditure is incurred in the changeover year the number of days remaining in the taxpayer's changeover year from when the expenditure was incurred.

Expenditure incurred after 31 December 1990 does not constitute eligible gold mining expenditure and is therefore excluded from the definition.

"notional writing-down assumptions" are the assumptions which have been made regarding the operation of Division 10 for the purposes of determining notional deductions under the transitional arrangements. In particular, it is assumed that Division 10 will apply as if:

•

income from gold mining had not been exempt;

•

deductions for allowable capital expenditure were fully allowed notwithstanding that there was insufficient (or no) income received by the taxpayer in a particular year against which the deduction could be allowed;

•

eligible gold mining expenditure was not available for transfer to the purchaser of a mining right under section 122B of the Principal Act (this is necessary because the treatment of such transfers during the transitional period is governed by new section 159GZZU);

•

certain write-off options in Division 10 were not available in respect of eligible gold mining expenditure. This is designed to ensure greater uniformity and simplicity in the operation of the transitional arrangements by excluding write-off options that gold miners would be unlikely to utilise for purposes of determining notional deductions (e.g., sections 122E and 122F) or could not now elect to use because the relevant provisions have been terminated (sections 122G and 122Q). The disregarding of section 122H will have the effect of ensuring that for transitional purposes gold miners cannot elect to have the general depreciation provisions of the Principal Act apply notionally rather than Division 10, except as provided by new section 159GZZN;

•

section 122K of the Principal Act does not apply to eligible gold mining expenditure. This section provides for a balancing adjustment to be included in, or be deductible from, assessable income where deductions have been allowed or were availab le under Division 10 in respect of property which has been disposed of, lost, destroyed, or the use of which for prescribed purposes has been terminated. Such adjustments will not arise in respect of gold mining assets sold, etc., before 1 January 1991 because such assets will not be relevant to the determination of the taxpayer's assessable income from gold mining from that date.

Section 159GZZK: Eligible gold mining expenditure - Division 10 applies as if notional writing-down assumptions made

Section 159GZZK specifies that eligible gold mining expenditure is to be deductible under Division 10 in the changeover year and later years of income. When calculating entitlements to deductions under Division 10 it will be assumed that the eligible gold mining expenditure was written down through an application of the notional writing down assumptions from when the expenditure was incurred until the end of the year of income before the changeover year.

Section 159GZZL: Eligible gold mining expenditure - proportionate deduction for changeover year

This section determines the amount of eligible gold mining expenditure that the taxpayer is entitled to deduct in accordance with Division 10 (taking account of the deduction limiting provisions) for that part of the changeover year of income which occurs after 31 December 1990. The amount deductible for the changeover year is calculated on a pro rata basis in accordance with the following formula:

(Post-31 December part)/(Post-expenditure part)


The "post-31 December part" is the number of days that occur from 1 January 1991 until the end of the taxpayer's changeover year. The "post-expenditure part" is either:

•

where the eligible gold mining expenditure was incurred before the changeover year - the number of days in the changeover year; or

•

in any other case, the number of days in the changeover year, commencing on the day on which the eligible gold mining expenditure was incurred and finishing on the last day of income of the changeover year.

Example: A taxpayer incurred eligible gold mining expenditure of $20 million in the 1987-88 income year and will write-off the expenditure over the fixed statutory period of ten years specified in Division 10. In this situation, notional deductions would be calculated at $2 million in 1987-88, 1988-89 and 1989-90, and $1 million in the first half of 1990-91. The remaining residual value of that capital expenditure ($13 million) will be written off by way of actual deductions against assessable income to the extent of $1 million in the second half of 1990-91 (i.e., the changeover year for this taxpayer) and $2 million per annum in subsequent income years.

Section 159GZZM: Eligible gold mining expenditure - modified references to changeover year

Proposed section 159GZZM will make technical adjustments in the application of Division 16H for the years of income after the changeover year to ensure that actual deductions from 1 January 1991 for eligible gold mining expenditure are obtained in accordance with Division 10.

Section 122DG of the Principal Act authorises a deduction for allowable capital expenditure incurred after 19 July 1982, in equal instalments over the lesser of ten years or the life of the mine. The deduction available for a year of income, regardless of whether the deduction limiting provision has applied, is subtracted from the total amount of unrecouped capital expenditure as at the end of the previous year of income.

However, section 159GZZL specifies a proportion of the full year's deduction in the changeover year as an amount that is available as a deduction for that year. If an adjustment were not made, the proportion of the deduction for that year would be used for the purposes of subparagraph 122DG(4)(a)(i) in arriving at the unrecouped amount of allowable capital expenditure, but it is necessary to take into account a full year's deduction to ensure that in subsequent income years the deductions are correctly determined.

Paragraph 159GZZM(a) ignores the application of section 159GZZL after the changeover year. For the purposes of calculating the unrecouped amount of eligible gold mining expenditure in the year of income after the changeover year, it is assumed that section 159GZZK applied before and during the changeover year, and consequently it is assumed that a full year notional amount was available as a deduction.

Paragraph 159GZZM(b) specifies in other cases that, for the changeover year of income, it is the total of the actual and notional deductions that are used in references to amounts being or not being allowed or allowable in Division 10. For example, this would apply in sub-subparagraph 122B(2)(a)(ii)(A) which determines the maximum amount of deductions available to a vendor of a mining right in respect of allowable capital expenditure.

Section 159GZZN: Eligible gold mining expenditure - election that property be depreciated under section 57AL

This section will enable taxpayers to elect to write-off eligible gold mining expenditure on plant in accordance with the 5/3 accelerated depreciation provisions in section 57AL of the Principal Act, in lieu of the deductions available under Division 10.

Section 57AL allows plant to be depreciated over three or five years. The depreciation write off is over five years if the effective life, after allowing for the 18 per cent loading in section 57AG, is five years or longer, otherwise the write-off is over three years. The accelerated rates apply to property depreciable under section 54 of the Act with certain exceptions including most motor vehicles and structural improvements.

Subsection 159GZZN(1) outlines the circumstances where this section has an application. A taxpayer can elect that this section will apply where eligible gold mining expenditure on an item of plant has been incurred, and would have qualified for depreciation under section 57AL but for the exemption of gold mining income. For the application of this section, it is assumed that subsection 57AL(7) did not apply, since that subsection permits a taxpayer to elect to utilise effective life rates under the general depreciation provisions of the Principal Act. The effect of this will be to limit deductions in respect of eligible gold mining expenditure on plant to the mining provisions or section 57AL.

Paragraph 159GZZN(1)(a) provides taxpayers with the choice of having this section apply to all their expenditure in respect of a particular item of plant.

Paragraph 159GZZN(1)(b) outlines the application of this section if such a choice is made.

Subparagraph 159GZZN(1)(b)(i) specifies that actual deductions for the expenditure are to be allowed from 1 January 1991 in accordance with the application of section 57AL as if gold mining income had not been exempt from tax. The expenditure on plant is notionally written down up to and including 31 December 1990, while actual deductions are allowable after that date. In accordance with section 57AL, for the taxpayer's changeover year of income that proportion of a full year's deduction which relates to the period after 31 December 1990 is to be actually deductible.

Subparagraph 159GZZN(1)(b)(ii) specifies that where this section applies, it is assumed that the expenditure to which it relates is not and has not been eligible gold mining expenditure for purposes of the application of this Division.

Subsection 159GZZN(2) specifies how an election under this section should be made.

Paragraph 159GZZN(2)(a) requires the election to be in writing and signed by or on behalf of the taxpayer.

Paragraph 159GZZN(2)(b) requires the statement to be received by the Commissioner no later than on the last day of income for furnishing the return of income for the taxpayer's changeover year. It also permits the Commissioner to accept statements received after this date.

Section 159GZZO: Eligible gold mining expenditure - modified application of section 122K

The purpose of the section is to provide for a balancing adjustment in respect of eligible gold mining expenditure similar to that authorised by section 122K of the Principal Act.

Section 122K requires a balancing adjustment to be made where property for which a deduction under Division 10 has been allowed or is allowable is disposed of, lost, destroyed or has ceased to be used for specified purposes. In particular, a balancing adjustment applies if the consideration receivable on sale, etc., of the property exceeds the unrecouped balance of the expenditure. The excess, up to the amount of the capital expenditure incurred by the taxpayer, is taxed as ordinary income with any additional amount being taxed under the capital gains tax provisions. Conversely, where the sale price is less than the unrecouped balance of the expenditure on the property, the difference is allowable as a deduction.

A special provision is required to determine balancing adjustments in respect of eligible gold mining expenditure since the total deductions allowed to the taxpayer for such expenditure comprise both actual and notional deductions. Only the proportion of the balancing adjustment which relates to the actual deductions will be allowed as a deduction or included in the assessable income of the taxpayer.

Section 159GZZO establishes that only a proportion of the balancing adjustment relating to the actual deductions available to the taxpayer for the relevant property will be included in, or deductible from, assessable income, in the year of sale, etc. This proportion is ascertained by multiplying the balancing adjustment by the following formula:

(Actual deductions)/(Actual deductions + Notional deductions)


•

actual deductions are defined to mean the total deductions allowed or allowable to the taxpayer in respect of eligible gold mining expenditure for the period after 31 December 1990;

•

notional deductions are defined to mean the total deductions which are notionally assumed to have been allowed to the taxpayer in respect of eligible gold mining expenditure for the period before 1 January 1991.

Example: A taxpayer incurs eligible gold mining expenditure of $1000 in the 1987-88 income year and will write-off that expenditure under this Division and Division 10 over ten years. The notional and actual deductions for such expenditure over the seven years to 1993-94 will be as follows:

If the property was destroyed on 1 July 1994, the balancing adjustment would be the section 122K balancing adjustment multiplied by the prescribed formula -

-300 (i.e. 0 - 300) * (350)/(700)


= -150


Allowable deduction is $150

If property was sold for a consideration of $600 on the same date, then the balancing adjustment would be -

300 (i.e. 600 - 300) * (350)/(700)


= 150


Amount included in assessable income is $150.

Section 159GZZP: Eligible gold mining expenditure - modified application of Part IIIA

The purpose of new section 159GZZP is to provide for the application of capital gains tax to certain gold mining assets acquired by a taxpayer after 19 September 1985 and disposed of after 31 December 1990. It will ensure that only gains which accrued on the relevant asset from 1 January 1991 are subject to capital gains tax.

The cost base for a relevant gold mining asset for capital gains tax purposes will be its indexed original cost or market value, whichever yields the lower gain. Where such an asset is held for at least 12 months since the date of acquisition, indexation will apply for the purpose of calculating the cost base (for gain, but not loss, calculations).

In relation to losses, notional deductions will be fully taken into account in the determination of the reduced cost base of relevant gold mining assets for capital gains tax purposes.

Subsection 159GZZP(1) specifies that the gold mining assets to be subject to this treatment are those which meet the following conditions:

•

the asset is owned by the taxpayer at the end of 31 December 1990;

•

before that time, the taxpayer incurred eligible gold mining expenditure (a defined term in this Division) in relation to the asset;

•

the only use of the asset by the taxpayer before the end of 31 December 1990 was solely for the purpose of producing exempt income; and

•

the market value of the asset at the end of 31 December 1990 is greater than the indexed cost base of the asset to the taxpayer.

Where these tests are met, the subsection ensures that it is only the gain that accrues after 31 December 1990 on assets to which the subsection applies that will be subject to capital gains tax. This is achieved by substituting market value for the cost.

The effect of subsection 159GZZP(2) is to deny indexation in accordance with Part IIIA of the Principal Act to relevant gold mining assets only if the particular asset has not been held for at least 12 months from the date of acquisition.

Subsection 159GZZP(3) is a drafting measure to ensure that expressions used in subsections (1) and (2) and which are also used in Part IIIA have the same meaning as in that Part.

Subsection 159GZZP(4) modifies the application of section 160ZK of Part IIIA of the Principal Act for the purpose of determining the reduced cost base of gold mining assets in respect of which a taxpayer has been allowed notional deductions for eligible gold mining expenditure under this Division.

Section 160ZK in conjunction with subsection 160ZH(3) effectively provides for the cost base of an asset for capital gains tax purposes to be reduced by any part of the consideration for the asset which has been allowed or is allowable or would but for section 61 (where an asset on which depreciation is allowable is used only partly for the purpose of producing assessable income) be allowable as a deduction in any year. This reduction is offset by any amount which by virtue of another section of the Principal Act is to be added back into the assessable income of the taxpayer upon disposal of the asset.

In the event of the sale of a gold mining asset referred to above, section 160ZK could operate to reduce the cost base of the asset only by the amount of post 31 December 1990 actual deductions and not notional deductions for the pre 1 January 1991 period, notwithstanding the reference in that section to section 61. This would produce a greater loss than for similar non-gold mining Division 10 assets. The effect of the proposed modification of section 160ZK will be to ensure that notional deductions are fully taken into account in determining the reduced cost base of such assets.

Paragraph 159GZZP(4)(a) states that, for the purposes of the application of subsection 160ZK(1), notional deductions are to be considered to be those which have been allowed in respect of eligible gold mining expenditure.

Paragraph 159GZZP(4)(b) stipulates that, for the purposes of the application of subsection 160ZK(1), the balancing adjustments that are required to be made by section 122K of the Principal Act on the sale, etc., of property to which Division 10 applies should be determined as if section 122K had not been modified by new section 159GZZO. This will ensure that notional deductions are fully taken into account in the determination of the reduced cost base of relevant gold mining assets for capital gains tax purposes.

Section 159GZZQ: Eligible gold exploration or prospecting expenditure - Division 10 applies as if incurred on 1 January 1991 etc.

As noted previously, a separate transitional arrangement will apply in the case of exploration or prospecting expenditure whereby expenditure incurred after 25 May 1988 but before 1 January 1991 will be able to be carried forward in full and deducted against income from any source after 1 January 1991 for up to seven years from the year in which the expenditure was incurred. The amendments to the Principal Act proposed by this Bill designate such expenditure as eligible gold exploration or prospecting expenditure and section 159GZZQ will treat the entire amount of eligible gold exploration or prospecting expenditure as though it was incurred on 1 January 1991.

Paragraph 159GZZQ(a) deems the eligible gold exploration or prospecting expenditure to have been incurred on 1 January 1991. This will subject such expenditure to the application of section 122J.

Paragraph 159GZZQ(b) will ensure the requirements of subsection 122J(1) are satisfied. That subsection requires the exploration or prospecting expenditure to be in respect of minerals which will produce assessable income. This paragraph will allow subsection 122J(1) to apply as if income from gold mining had been assessable when the relevant expenditure was incurred.

Paragraph 159GZZQ(c) will have the effect that eligible gold mining or prospecting expenditure on plant will only be deductible under the mining provisions, and not under the general depreciation provisions.

Section 159GZZR: Eligible gold exploration or prospecting expenditure - 7 year limit on deductibility

This section proposes to limit the period over which eligible gold exploration or prospecting expenditure can be carried forward for deduction. The deductibility of this expenditure is limited to seven years after the year of income in which the expenditure was incurred.

Section 122J of the Principal Act limits deductions for exploration or prospecting expenditure to so much of the taxpayer's assessable income as remains after deducting all other allowable deductions, but any excess exploration or prospecting expenditure is deductible against assessable income of subsequent years without limit.

Subsection 159GZZR(1) specifies that where such excess comprises eligible gold exploration or prospecting expenditure it is deemed not to have been incurred in the year of income by subsection 122J(4C) when more than seven years have elapsed from the end of the year in which the expenditure was incurred.

Paragraph 159GZZR(1)(a) refers to excess amounts that would, apart from this subsection, be deemed to have been incurred by a taxpayer in a year of income.

Paragraph 159GZZR(1)(b) specifies that the excess amounts in paragraph (a) comprise deemed gold exploration or prospecting expenditure.

Paragraph 159GZZR(1)(c) specifies that the seven year limit is calculated from the end of the year of income in which the expenditure is incurred.

The purpose of subsection 159GZZR(2) is to ensure that deemed gold exploration or prospecting expenditure which is transferred by a vendor to the purchaser of a mining or prospecting right under section 122B of the Principal Act is not transferable to a purchaser in a year of income where more than seven years after the end of the year of income in which the expenditure was incurred have elapsed.

Paragraph 159GZZR(2)(a) identifies the amount of exploration or prospecting expenditure that the vendor would have been entitled to deduct under section 122J if the vendor had not elected to transfer the right to deductions in relation to that expenditure to a purchaser of a mining or prospecting right under section 122B.

Paragraphs 159GZZR(2)(b) and (c) mirror the application as paragraphs 159GZZ(1)(b) and (c).

Where an excess amount of a taxpayer under section 160GZZR consists partly of an amount of deemed gold exploration or prospecting expenditure and partly of an amount of (non-gold) exploration or prospecting expenditure, the order of deduction is to be on the basis which is most advantageous to the taxpayer, i.e., deemed gold exploration or prospecting expenditure is to be deducted first in the order in which it was incurred.

Section 159GZZS: Eligible gold exploration or prospecting expenditure - effect of application of paragraph 23(pa) before the changeover year

This section is designed to ensure that eligible gold exploration or prospecting expenditure incurred during the specified transitional period, and deemed by new section 159GZZQ to be incurred on 1 January 1991, is appropriately reduced where a tax exempt sale of a mining right (under paragraph 23(pa) of the Principal Act) occurs before 1 January 1991.

The exemption of income for a bona fide prospector from the sale, transfer or assignment of rights to mine under paragraph 23(pa) is reduced by the total exploration or prospecting expenditure previously allowed as a deduction, and any excess which is carried forward to be deducted against income of future years. In the case of excess exploration expenditure (i.e., that which is carried forward for deduction in later years), subsection 122J(4E) of the Principal Act reduces any part of such excess by the amount of income exempt under paragraph 23(pa) which has not previously been applied to reduce such exempt income.

Subsection 159GZZS(1) proposes to achieve a similar result in respect of eligible gold exploration or prospecting expenditure for sales, transfers or assignments of rights to mine before the changeover year of income.

Where such a sale has occurred, and the amount of income exempt by paragraph 23(pa) has not entirely been offset against exploration or prospecting expenditure by an application of subsection 122J(4E), the remaining exempt income is offset against any eligible exploration or prospecting expenditure incurred by the taxpayer in relation to the tenement.

This is achieved by the following paragraphs.

Paragraph 159GZZS(1)(a) refers to the proceeds from a sale, transfer or assignment of rights to mine incurred before the taxpayer's changeover year of income, that are exempt from income tax by the application of paragraph 23(pa).

Paragraph 159GZZS(1)(b) refers to the whole or part of the amount of income exempt by paragraph 23(pa), which remains after an application of subsection 122J(4E). This is the amount of exempt income which has not been used to reduce the taxpayer's entitlement to deductions for exploration or prospecting expenditure and is referred to in this subsection as unapplied exempt income.

Paragraph 159GZZS(1)(c) refers to the amount of eligible gold exploration or prospecting expenditure incurred on the mining or prospecting right being sold, etc., and which would be deemed by an application of section 159GZZQ to be incurred on 1 January 1991. This will exclude any amounts of eligible gold exploration or prospecting expenditure which are transferred by the taxpayer to the purchaser of the mining right, since this aspect is covered by subsection 159GZZS(2).

Paragraph 159GZZS(1)(d) specifies that section 159GZZQ will not deem those amounts of eligible gold exploration or prospecting expenditure to have been incurred on 1 January 1991 which do not exceed the unapplied exempt income amount. This will ensure that the taxpayer's eligible gold exploration or prospecting expenditure is fully offset by this amount.

Paragraph 159GZZS(1)(e) prevents subsection 122J(4E) from applying to deemed gold exploration or prospecting expenditure.

Paragraph 159GZZS(1)(f) requires the eligible gold exploration or prospecting expenditure that is offset by unapplied exempt income under paragraph (d) of this subsection to be reduced proportionately for purposes of subsection (2).

The effect of subsection 159GZZS(2) is that any amounts of eligible gold exploration or prospecting expenditure which are transferred to the purchaser of the mining or prospecting right will be reduced proportionately by the unapplied exempt income relating to the right in the same way as similar expenditure is reduced in the hands of the vendor. This is consistent with the general application of section 122B of the Principal Act which provides that, in the case of the sale, etc., of a mining right, the purchaser's entitlement to deductions for any unrecouped expenditure of the vendor is no greater than that available to the latter.

Paragraph 159GZZS(2)(a) refers to a situation where the whole or part of eligible gold exploration or prospecting expenditure incurred by a taxpayer is transferred to the purchaser of a mining right as specified in a notice(s) under proposed new section 159GZZU.

Paragraph 159GZZS(2)(b) refers to a situation where no amounts of eligible gold exploration or prospecting expenditure are transferred and the vendor's entitlement to deductions would have been reduced by paragraph (f).

Paragraph 159GZZS(2)(c) states that, for the purposes of section 159GZZQ, the amount of eligible gold exploration or prospecting expenditure not specified in a notice(s) associated with the transfer of a mining right shall be taken to be reduced proportionately as specified in paragraph (1)(f) above.

Paragraph 159GZZS(2)(d) states that, for the purposes of section 159GZZU, the amount of eligible gold exploration or prospecting expenditure specified in a notice(s) associated with the transfer of a mining right is to be taken to be reduced proportionately as specified in paragraph (1)(f).

The amendments proposed by this Bill do not directly specify an order of priority for eligible gold exploration or prospecting expenditure vis-a-vis any other amounts of post-21 August 1984 (non-gold) exploration or prospecting expenditure incurred in relation to the particular mining right that is sold, etc., by the taxpayer and thus available for transfer under a section 122B notice. It should be noted, however, that subsections 122J(3A), (4E), (4A) and section 122C(3A) of the Principal Act already establish an order of priority for offsetting the unapplied exempt income against exploration expenditure deductions incurred under different section 122J regimes, including post-21 August 1984 exploration expenditure.

The order provided for is that which is most advantageous to the taxpayer. Consistent with this approach, therefore, it is envisaged that in the circumstances referred to above, the taxpayer would usually deduct the eligible gold exploration or prospecting expenditure before any post-21 August 1984 (non-gold) exploration or prospecting expenditure because of the operation of the seven year limit on the carry forward of such deductions. As regards the various amounts of gold exploration expenditure incurred at different times during the transitional period, the order of deduction would be that in which it was incurred.

Section 159GZZT: Eligible gold exploration or prospecting expenditure - modified application of sections 80 and 80G

The purpose of this section is to ensure that an election by a gold miner to make an election in its first return of income after the changeover year to have the full amount of any deemed gold exploration or prospecting expenditure treated as a loss under section 80 of the Principal Act and thus transferable under the group loss transfer provisions of that Act, can only be made so long as continuity of group ownership has existed since the date on which the expenditure was or is incurred. In addition, the section imposes a restriction on the treatment of deemed gold exploration or prospecting expenditure in determining the net exempt income of a gold miner to 1 January 1991 for the purposes of sections 80 and 80G of the Principal Act.

A taxpayer can elect in accordance with subsection 122J(4BA) that the deduction limiting provision in that section will not apply so that a loss arises for the year of income under section 80 of the Principal Act.

Section 80G of the Principal Act allows a company to transfer the right to claim deductions for losses to another company in the same group subject to certain requirements being met, including that there be 100 per cent common ownership of both companies at all times during the relevant income years. Losses of prior years can be transferred to another company in the same group only if in the loss year, in the year of income in which the loss is to be claimed and any intervening years, the 100 per cent common ownership test is satisfied.

Subsection 159GZZT(1) seeks to extend the application of the requirements in section 80G to deemed gold exploration or prospecting expenditure. It states that if a loss, which has been created by an election under subsection 122J(4BA), is made up entirely of, or includes an amount of, deemed gold exploration or prospecting expenditure, the loss will not be deductible by an application of section 80G unless the companies shared a 100 per cent common ownership for the period from, and including, the income year in which the expenditure was incurred, the year in which the loss is claimed and any intervening years as specified in paragraphs (a) and (b).

Paragraph 159GZZT(1)(a) specifies the year of income in which the eligible gold exploration and prospecting expenditure was actually incurred.

Paragraph 159GZZT(1)(b) specifies each year after the year of income up to and including the year in which the loss is to be claimed.

Subsection 159GZZT(2) will ensure that eligible gold exploration or prospecting expenditure is excluded from the calculation of net exempt income in subsection 80(3). When determining whether or not a loss exists for the purposes of section 80, a taxpayer's deductions must exceed assessable income and any net exempt income that the taxpayer derived in the particular income year. Net exempt income is determined in such cases as though it were assessable income and deductions (including deductions for exploration expenditure where appropriate) are allowed on a notional basis in accordance with the relevant provisions of the Principal Act.

In the case of a gold miner prior to 1 January 1991, a loss may be incurred in respect of its investment or other non-gold mining activities, or another company in the group may seek to transfer a loss to be offset against the taxable income of the miner from such activities. However, in determining the net exempt income of a gold miner in such cases during the transitional period, no notional deduction for eligible gold exploration or prospecting expenditure will be allowed. This restriction is designed to prevent possible 'double counting' of such expenditure, i.e., firstly in relation to determination of net exempt income of the gold miner during the transitional period, and secondly in determination of its assessable income after 31 December 1990.

It is necessary for the purpose of the proposed new test in modified section 80G - as contained in new subsection 159GZZT(1) - to know how much of a particular amount of eligible gold exploration or prospecting expenditure has found its way into a particular loss, in order to apply the new 'continuity of group membership' test. This requires an order of priority for gold exploration deductions incurred at different times as well as for gold exploration deductions vis-a-vis deductions for any amounts of non-gold exploration expenditure incurred under different section 122J regimes. As for the order of priority for exploration expenditure deductions incurred under different deduction regimes (see discussion under previous section) in applying subsection 80(1) of the Principal Act for the purpose of determining the relevant loss to be transferred, any deemed gold exploration expenditure should be offset first against assessable income. That is, deemed gold exploration expenditure should be deducted first in the order in which it was incurred since this is the order which is most advantageous to the taxpayer.

Section 159GZZU: Eligible gold mining and eligible gold exploration or prospecting expenditure - effect of certain transfers of mining rights etc.

This section will enable taxpayers to transfer entitlements to eligible gold mining and eligible gold exploration or prospecting expenditure when a mining or prospecting right is sold. It proposes to achieve a result similar to that obtained by the application of section 122B of the Principal Act.

Section 122B allows the vendor to transfer his or her entitlement to deductions, in respect of allowable capital expenditure and exploration or prospecting expenditure, to a purchaser of a mining or prospecting right or information. This transfer is achieved by the vendor and purchaser agreeing to an amount to be transferred and both parties notifying the Commissioner in writing of the amount so agreed. The amount which may be transferred is limited mainly to the following:

•

the consideration paid by the purchaser for the right or information;

•

any amount of unrecouped exploration or prospecting expenditure which the vendor would have been entitled to deduct in future years;

•

any amount of unrecouped allowable capital expenditure which the vendor would have been entitled to deduct in future years but for the sale of the right or information; and

•

any balancing amount included in the vendor's assessable income by section 122K in relation to property sold as part of the mining right, etc.

It should be noted that it is not possible to transfer entitlements to deductions for plant under section 122B. These are specifically excluded by paragraphs 122B(2)(a) and 2(b).

Subsection 159GZZU(1) specifies that the section will apply when a mining or prospecting right is sold and the purchaser has acquired the right for the purpose of exploring or prospecting for gold and other minerals. It will not apply to transfers of information because it is not practicable to replicate the provisions of section 122B for this purpose.

Subsection 159GZZU(2) outlines how eligible gold mining expenditure is to be treated when a mining or prospecting right to which that expenditure relates has been transferred before the end of the 1990-91 income year. The subsection effectively deems the eligible gold mining expenditure of the vendor to have been incurred by the purchaser on the day on which it was incurred by the vendor. It will also ensure that the vendor's entitlement to deductions for such expenditure are forgone.

Paragraph 159GZZU(2)(a) makes clear that the section is applied to the purchaser of a mining or prospecting right where that right is sold for consideration.

Paragraph 159GZZU(2)(b) requires the purchase of the mining or prospecting right to have occurred in the changeover year, or a prior year of income.

Paragraph 159GZZU(2)(c) specifies the type of expenditure which the vendor must have incurred for the section to apply. Such expenditure comprises eligible gold mining expenditure (excluding any expenditure on plant that was incurred on the mining or prospecting right. Where a right has been transferred more than once this section will deem successive holders of the right to have incurred the expenditure and for successive vendors to have forgone the entitlements to deductions for such expenditure.

Subsection 159GZZU(3) contains a mechanism for transferring eligible gold exploration or prospecting expenditure to a purchaser of a mining or prospecting right. This section is very similar in application to section 122B.

Paragraph 159GZZU(3)(a) is identical to paragraph 159GZZU(2)(a) (see note on this paragraph).

Paragraph 159GZZU(3)(b) requires the transaction to have occurred before 1 January 1991 for this section to apply.

Paragraph 159GZZU(3)(c) specifies that before the sale occurred the vendor must have incurred eligible gold exploration or prospecting expenditure (excluding expenditure on plant).

Where these requirements are satisfied, the vendor may transfer to the purchaser either all, or a proportion, of his or her entitlement to deductions for eligible gold exploration or prospecting expenditure.

Paragraph 159GZZU(3)(d) requires the vendor and the purchaser of the mining right to advise the Commissioner by way of a notice of the amount of the vendor's eligible gold exploration or prospecting expenditure which is to be transferred to the purchaser.

Subparagraph 159GZZU(3)(e)(i) has the effect that where an amount of eligible gold exploration or prospecting expenditure is to be transferred to the purchaser of the mining right, the amount specified in a notice to the Commissioner under this subsection is to be deemed to have been expenditure incurred by the purchaser to acquire the right, and to be treated in the same way as if the amount had been stated in a notice to the Commissioner under section 122B. This will ensure that, for the purposes of the transaction, the requirements of Division 10 are satisfied, namely, that the relevant expenditure is treated as allowable capital expenditure in subparagraph 122A(1)(d) so that section 122K will apply to it after 31 December 1990. However, the expenditure does not become allowable capital expenditure since it remains eligible gold mining expenditure by virtue of paragraph (b) of the definition of such expenditure in the proposed interpretation provisions.

Subparagraph 159GZZU(3)(e)(ii) will ensure that the vendor's entitlement to deductions for eligible gold exploration or prospecting expenditure under new section 159GZZO is reduced by the amount notified to the Commissioner and transferred to the purchaser of the right. This provision will also prevent the taxpayer from transferring the same, or a proportion of the same, entitlement to deductions in connection with any subsequent sale of a mining right.

Subsection 159GZZU(4) specifies how the Commissioner is to be advised when an amount of eligible gold exploration or prospecting expenditure is transferred.

Paragraph 159GZZU(4)(a) requires the advice to be in writing and signed by or on behalf of both the vendor and purchaser.

Paragraph 159GZZO(4)(b) specifies when the statement should be given to the Commissioner:

•

where the mining or prospecting right was sold before this legislation is enacted - the advice must be received by the Commissioner within one year from the date of enactment;

•

where the mining or prospecting right was sold on or after the date of enactment of this legislation - the advice is to be provided within two months from the end of the purchaser's year of income in which the sale occurred.

The Commissioner is authorised to allow further time for notification.

Section 159GZZV: Removal of paragraph 23(o) exemption not to create actual pre-1991 Division 10 deductions

Section 159GZZV will ensure that expenditure incurred prior to 1 January 1991 that could otherwise qualify for deduction under Division 10 on the basis that it would produce assessable income in the future is not deductible except in accordance with the application of this Division.

Subdivision C - Division 10AAA and related provisions

Section 159GZZW: Interpretation

Section 159GZZW ascribes meanings to a number of terms and expressions that are used in this Division, unless otherwise indicated.

"actual deduction" has the same meaning as in Subdivision B of this Division, in relation to eligible gold transport expenditure.

"changeover year" has the same meaning as in Subdivision B.

"eligible gold transport expenditure" is defined to mean expenditure that:

•

was incurred by the taxpayer before 1 January 1991; and

•

did not qualify as capital expenditure on a railway, road, pipeline or other facility prescribed in Division 10AAA of the Principal Act, but would have qualified as such capital expenditure if the taxpayer's income had not been exempt by paragraph 23(o), or would be exempt by paragraph 23(o) by an application of section 159GZZZB.

"notional deduction" is defined to mean:

•

in relation to a year prior to the changeover year of income - the proportion of eligible gold transport expenditure that the taxpayer would have been entitled to as a deduction for a year of income under Division 10AAA in respect of expenditure on railways, roads, pipelines, etc., if income from gold mining had not been exempt;

•

in relation to the changeover year - the proportion of the deduction to which the taxpayer would be entitled to for the full year of income determined on a pro rata basis in accordance with the formula:

(Pre-1 January part)/(Post-expenditure part)


Pre-1 January part

•

where eligible gold transport expenditure was or is incurred prior to the changeover year - the number of days in the part of the changeover year before 1 January 1991;

•

where the expenditure is incurred in the changeover year - the number of days from when the taxpayer incurred the expenditure until 31 December 1990.

Post-expenditure part

•

where the expenditure is incurred before the changeover year - the number of days in the changeover year;

•

where the expenditure is incurred in the changeover year - the number of days remaining in the taxpayer's changeover year from when the expenditure was incurred.

Deductions under Division 10AAA for expenditure on railways, etc., are allowed on a straight line basis over either ten or twenty years. For the purpose of this Division, the operation of sections 123BA and 123BB is ignored since these sections effectively allow certain taxpayers to elect to write-off expenditure on prescribed transport facilities over twenty years instead of ten. This will ensure that notional deductions for such expenditure under this Division are uniformly spread over ten years.

Section 159GZZX: Division 10AAA applies as if eligible gold transport expenditure notionally written down

Section 159GZZX provides that eligible gold transport expenditure is deductible under Division 10AAA in the changeover year and later years of income. Entitlements to deductions under Division 10AAA for the changeover and later years of income will be determined as though Division 10AAA had always applied to the expenditure, and taxpayers will be assumed to have used a ten year write off for eligible gold transport expenditure.

Section 159GZZY: Proportionate deduction for changeover year

Section 159GZZY has, in respect of eligible gold transport expenditure, the same application as new section 159GZZL.

Section 159GZZZ: Modified application of section 23C

Section 159GZZZ has, in respect of eligible gold transport expenditure, the same application as section 159GZZO.

Section 159GZZZA: Eligible gold transport expenditure - modified application of Part IIIA

Section 159GZZZA has, in respect of eligible gold transport expenditure, the same application as section 159GZZP as described above.

Section 159GZZZB: Removal of paragraph 23(o) exemption not to create actual pre-1991 Division 10AAA deductions

Section 159GZZZB will ensure that expenditure incurred prior to 1 January 1991, which could qualify for deduction under Division 10AAA on the basis that it would produce assessable income in the future is not deductible except in accordance with this Division.

Clause 27: Subdivision AB - Lump Sum Payments in Arrears

Clause 27 will insert new Subdivision AB in Division 17 of Part III of the Principal Act. Subdivision AB will make a rebate of tax available to individual taxpayers who receive certain income in a lump sum payment which contains an amount that accrued in an earlier year or years of income.

The income that will qualify for the rebate includes workers' and accident compensation payments, social security and repatriation pensions and benefits, Commonwealth educational and training allowances and, in very limited circumstances, salary or wages. The rebate will be allowable in respect of salary or wages where payment is received of an amount that accrued more than 12 months before the date payment was made or, where payment is made to a person who is reinstated to duty after a period of suspension, of amounts that accrued during the period of the suspension.

The rebate will be available where a taxpayer receives an amount of specified income that accrued in a year of income prior to the year in which it was received and where the amount that accrued in prior years is not less than 10 per cent of the taxable income of the year in which payment was received, after deducting those amounts that accrued in other years, certain payments on termination of employment, capital gains and abnormal income.

The rebate will be calculated by reference to the income of the year in which the income was received and the income of the two most recent years over which the income accrued before the year of receipt. The rebate will be calculated as the difference between the additional amount of tax payable in the year of receipt because of the accrued payment - after taking into account the averaging rebate and the rebate allowable for certain payments on termination of employment - and a notional amount calculated to be the tax that the arrears would have borne if taxed as income of the year or years in which it accrued.

The notional tax calculation will comprise two parts The first will be the notional tax on arrears accrued in the two most recent years before the year in which the lump sum was received This will be the additional amount of tax that would have been payable if the income that accrued in those years had been taxed as income of those years. The notional tax on the income that accrued prior to the two most recent previous years will be calculated by reference to the average of the rates of tax that would have applied had the income borne tax as it accrued in those two years.

Section 159ZR: Interpretation

New section 159ZR contains definitions of terms used in Subdivision AB and interpretative provisions to clarify the meaning of the terms "associate" and "salary or wages" as used in the Subdivision. Subsection 159ZR(1) defines the following terms, each of which is to have the given meaning unless the contrary intention appears:

"accrual year" is defined in relation to a total arrears amount: see later notes in this subclause on that expression. It means a year of income, other than the year in which a lump sum in arrears is received, in which any part of the lump sum accrued.

"annual arrears amount" in relation to an income year, means the amount of the lump sum payment in arrears that accrued in a year of income prior to the year in which it was received.

"associate" is defined in the same way as in section 26AAB of the Principal Act. The term is defined in a wide manner to include relatives, partners, trustees and companies. The meaning of this term for the purposes of Subdivision AB is further clarified in subsection 159ZR(2) - see later notes.

"current year" is the year of income in which the lump sum in arrears is received and for which the rebate is being calculated.

"distant accrual year" is a year of income in which a lump sum payment in arrears accrued and which is earlier than the two most recent years of the accrual period (refer to the term "recent accrual year") prior to the year of receipt.

"eligible income" is the income, included in the taxpayer's assessable income, that will qualify for the rebate when received in a year of income later than the year of income in which it accrued. Income that will otherwise be eligible income will not qualify for the rebate if the tax payable on that income has been taken into account in the making of an ex gratia payment under section 34A of the Audit Act 1901. Income that will qualify for the rebate is:

•

salary or wages (see later notes in this subclause for the meaning of this term) to the extent that they accrued during a period more than 12 months before the date on which they are paid (paragraph (a));

•

salary or wages paid to a person on reinstatement to duty following a period of suspension, to the extent that such payments relate to income that accrued during the period of suspension (paragraph (b));

•

payments that are included in the definition of salary or wages in subsection 221A(1) of the Principal Act by virtue of paragraph (c) or (f) of that definition. Such payments are those made by way of superannuation, pension, retiring allowance or annuity and payments made for compensation or sickness or accident payments because of a person's incapacity for work that are calculated at a weekly or other periodical rate. Amounts received under an insurance policy by the owner of that policy are not included (paragraph (c));

•

Commonwealth educational and training allowances (paragraph (d));

•

social security and repatriation pensions, benefits and allowances paid under the Social Security Act, the Veterans' Entitlements Act or Repatriation Acts or similar payments made under the "law of a foreign country" (refer to notes on the definition) (paragraph (e)).

"eligible lump sum", in relation to a year of income, is a payment of eligible income (refer to notes on the previous definition) received by the taxpayer on or after 1 July 1986, included in the assessable income of the year of income and which accrued in whole or in part in an earlier year of income.

"gross tax" is the tax payable on the taxable income of a year of income before the allowance of any rebates or credits. It is relevant in calculating the notional tax amount for distant accrual years in proposed section 159ZRD. Medicare levy is excluded by the operation of the definition of "tax" in section 251R.

"law of a foreign country", is relevant for the interpretation of the term "eligible income", and includes the law of any part of a foreign country or any place within a foreign country. It therefore includes the laws of any state, province or other political subdivision within a country.

"normal taxable income" is the amount that would be the taxable income if certain specified items of income, generally non-recurrent in nature, were excised. It is used in the calculation of the notional tax amount for distant accrual years in proposed new section 159ZRD. The items to be excluded are:

•

amounts received on retirement or termination of employment in lieu of annual leave or long service leave (sections 26AC and 26AD) and eligible termination payments (section 27B) (paragraph (a));

•

abnormal income included in assessable income under section 158L (paragraph (b)); and

•

net capital gains (section 160ZO) (paragraph (c)).

"notional tax amount" is the amount calculated under proposed sections 159ZRC and 159ZRD and represents the maximum amount of tax payable on the part of the lump sum in arrears that accrued in the recent and distant accrual years, that is, the years before the year of receipt of the lump sum (see the notes on those sections).

"rebated tax" is the tax payable for a year of income, excluding Medicare levy, after allowing the averaging rebate (section 156) and the rebate for annual leave, long service leave and eligible termination payments (section 160AA), but before any other rebates or credits are allowed. The term applies to amounts taken into account in making calculations under proposed sections 159ZRB and 159ZRC.

"rebate year" is a year of income in which a taxpayer's assessable income includes one or more eligible lump sums (see earlier note) and where the total of the amounts received in a lump sum that accrued in earlier years is not less than 10 per cent of the amount remaining after deducting those amounts that accrued in prior years from the normal taxable income (see earlier note). It is a year of income in which the conditions of eligibility are met even though a rebate may not have actually been allowed because the notional tax on the arrears exceeded the tax on the arrear s.

"recent accrual year" is defined in relation to the total arrears amount (see later note) and means:

•

where the lump sum in arrears accrued over three or more accrual years (excluding the year of receipt), the most recent two of those years (paragraph (a)); or

•

where the lump sum accrued over less than three accrual years (excluding the year of receipt), the accrual year or both accrual years (as the case may be) (paragraph (b)).

"salary or wages" is defined as having the same meaning as the term is given for the purposes of the tax instalment (PAYE) provisions of the Principal Act. The income to which this term is to refer for the purposes of Subdivision AB is further clarified in subsection 159ZR(3). The term is used in the definition of "eligible income". Certain payments included in salary or wages for the PAYE provisions will not qualify for the rebate. These are:

•

certain amounts paid to persons for resuming work (section 26(eb)) or on cessation of employment in lieu of annual leave (section 26AC) (paragraph (a));

•

amounts received in lieu of long service leave on cessation of employment that are included in assessable income under section 26AD of the Principal Act (paragraph (b));

•

an amount received by a person that is an eligible termination payment for the purposes of determining the extent to which superannuation, retirement, termination of employment and kindred payments are included in assessable income (paragraph (c);

•

a payment made to a person under a contract that is wholly or principally for the labour of that person where the payment would not be salary or wages for the purposes of section 221A(1) if paragraph (a) did not cover the payment (paragraph (d));

•

commission received by an insurance or time payment canvasser or collector (paragraph (e)); or

•

amounts paid to a director of a company for services rendered where the director is associated with the company. A director will be associated with a company where the company or its directors are required to carry out the instructions of the director, an associate of the director or a company of which the director is an associate (see earlier note) (paragraph (f)).

"total arrears amount" in relation to a year of income means the total of the amounts received in a lump sum that accrued in an earlier year or years of income.

Proposed subsection 159ZR(2) will extend the operation of the definition "associate" in subsection (1). By subsection (2) the terms "relative" in subsection 6(1) and "associate" in subsection 26AAB(14) of the Principal Act are to apply for the purpose of the definition of "associate" as if a reference to the spouse of a person included a reference to a person who, although not legally married to the person, lives with the person on a bona fide domestic basis as husband and wife.

Proposed subsection 159ZR(3) is a drafting measure to ensure that the term "salary or wages" for the purposes of Subdivision AB will include payments made to members of State Parliaments and persons employed by State authorities.

Section 159ZRA: Eligibility for rebate

Proposed section 159ZRA specifies the conditions which must be met for a taxpayer to be entitled to the rebate of tax under proposed Subdivision AB of Division 17 of Part III of the Principal Act.

By subsection (1) a taxpayer will be entitled to the proposed rebate in a year of income (referred to as the "current year") where:

•

the assessable income of the taxpayer for the current year includes at least one eligible lump sum (a defined term - see notes on section 159ZR (paragraph (a)); and

•

the amount of the eligible lump sum or sums that accrued in years earlier than the current year is not less than 10 per cent of the amount remaining after deducting from taxable income the amount of the eligible lump sum(s) that accrued in earlier years, and certain other amounts. The other amounts of income to be deducted from taxable income to determine eligibility are those that constitute abnormal income under section 158L of the Principal Act, certain payments on termination of employment and net capital gains (paragraph (b)).

Subsection (2) will limit the rebate to individuals other than those acting in the capacity of trustee.

Section 159ZRB: Calculation of rebate

Proposed section 159ZRB contains the formula which will be used to calculate the amount of the rebate of tax attributable to a lump sum payment in arrears. The formula is:

Tax on arrears - Notional tax on arrears


.

Tax on arrears is the amount by which the tax that is payable on the taxable income of the year in which the lump sum was received, after taking into account any averaging rebate and any rebate in respect of certain payments on termination of employment, exceeds the tax that would be payable if the amount of the lump sum that accrued in earlier years (the arrears) had not been received.

Notional tax on arrears is the total of the amounts calculated under proposed sections 159ZRC and 159ZRD for recent accrual years and distant accrual years, respectively.

Section 159ZRC: Notional tax amount for recent accrual years

The formula for the calculation of the notional tax amount for recent accrual years, contained in proposed section 159ZRC, is:

Tax on increased income - Tax on actual income


.

Tax on increased income for a recent accrual year is the tax that would have been payable, after allowing rebates for averaging (section 156) and certain payments received on termination of employment (section 160AA), if the following adjustments are made to the taxable income of the relevant year of income:

•

the amount of the lump sum (or lump sums) in respect of which the rebate is being calculated, that accrued during the year, is added (paragraph (a));

•

if an eligible lump sum which qualified for a rebate under proposed section 159ZRA was received in that year, the amount of that eligible lump sum that related to years prior to the year in which payment was received (i.e., the total arrears amount of that earlier lump sum payment) is deducted (paragraph (b)); and

•

if income was received in an eligible lump sum in a year of income prior to the current year for which the rebate is being calculated, being income which qualified for a rebate under proposed section 159ZRA, the amount of that eligible lump sum that accrued during the year is added (paragraph (c)).

Tax on actual income is the tax that would have been payable, after allowing rebates for averaging and certain payments received on termination of employment, if the following adjustments are made to the taxable income of the relevant year of income:

•

if an eligible lump sum which qualified for a rebate under proposed section 159ZRA was received in that year, the amount of the eligible lump sum that related to years prior to the year in which that payment was received (i.e., the total arrears amount of that earlier lump sum payment) is deducted (paragraph (d)); and

•

if income was received in an eligible lump sum in a year of income prior to the current year, being income which qualified for a rebate under proposed section 159ZRA, the amount of the lump sum that accrued during the year is added (paragraph (e)).

Section 159ZRD: Notional tax amount for distant accrual years

The formula for calculating the notional tax amount for a distant accrual year, contained in proposed subsection 159ZRD(1), is:

Arrears amount * Average tax rate on recent arrears


Arrears amount is the part of the lump sum payment that accrued in that year.

Average tax rate on recent arrears is the average of the average rates of tax on the amounts of the lump sum in arrears that accrued in the two most recent years of the accrual period (the two years covered by section 159ZRC). It is calculated by averaging the tax rate calculated under the following formula for each recent accrual year:

(Increased normal tax - Normal tax)/(Arrears amount)


Increased normal tax is the tax that would have been payable, before the allowance of any rebates or credits, on the normal taxable income (defined in proposed section 159ZR - see earlier notes) if the following adjustments are made to the normal taxable income of the relevant recent accrual year:

•

the amount of the lump sum in respect of which the rebate is being calculated, that accrued during that year, is added (paragraph (a));

•

if an eligible lump sum which qualified for a rebate under proposed section 159ZRA was received in that year, the amount of that eligible lump sum that related to years prior to the year in which payment was received (i.e., the total arrears amount of that earlier lump sum payment) is deducted (paragraph (b)); and

•

if income was received in an eligible lump sum in a year of income prior to the current year (the year for which the rebate is being calculated), being income which qualified for a rebate under proposed section 159ZRA, the amount of that eligible lump sum that accrued during the year is added (paragraph (c)).

Normal tax is the tax that would have been payable, before the allowance of any rebates or credits, on the normal taxable income (defined in proposed section 159ZR - see earlier notes) if the following adjustments are made to the normal taxable income of the relevant year of income:

•

if an eligible lump sum which qualified for a rebate under proposed section 159ZRA was received in that year, the amount of that eligible lump sum that related to years prior to the year in which payment was received (i.e., the total arrears amount of that earlier lump sum payment) is deducted (paragraph (d));

•

if income was received an eligible lump sum in a year of income prior to the current year, being income which qualified for a rebate under proposed section 159ZRA, the amount of that eligible lump sum that accrued during the year is added (paragraph (e)).

Arrears amount is the amount of the lump sum that accrued in the particular year.

By proposed subsection 159ZRD(2) the average tax rate of a recent accrual year calculated for the purposes of applying the formula in subsection (1) is to be calculated to three decimal places.

Proposed subsection 159ZRD(3) provides for the rounding off of the average tax rate calculated for a recent accrual year to the nearest third decimal place.

Example: During the year ended 30 June 1988 the taxable income of a 56 year old taxpayer consisted of -

The lump sum payment in arrears accrued as follows:

The taxable income for each of the 1985-86 and 1986-87 years of income was $12,000 and $15,000, respectively.

Calculation of tax on arrears (section 159ZRA)

Calculation of notional tax on arrears

The notional tax on arrears is the sum of:

•

notional tax amount for recent accrual years (section 159ZRC); and

•

notional tax amount for distant accrual years (section 159ZRD).

(1)

The increased income is $18,000 for 1985-86 and $23,000 for 1986-87.

(2)

The actual income, in this example, is the same as the taxable income for each year as no other lump sum payments in arrears have been received by the taxpayer.

Distant accrual years: Average tax rate on recent accrual years is calculated as follows:

(3)

In this example, the tax on increased income and the tax on actual income are the same as increased normal tax and the tax on actual income is the same as normal tax respectively because the taxpayer did not receive any termination of employment payments, abnormal income or capital gains in either of the recent accrual years.

NOTIONAL TAX AMOUNTS (A+B+C) = $6,285.15


Rebate is -

Clause 28: Other interpretative provisions

Under this clause, the definition of "relevant exempting provision" in subsection 160K(1) of the Principal Act is to be amended to include a reference to proposed paragraph 23(k), which will exempt the income of the Australian Film Finance Corporation Pty Limited from income tax (see notes on clause 9). The effect of the amendment will be to ensure that capital gains are not taken to have accrued to the Australian Film Finance Corporation for the purposes of Part IIIA of the Principal Act.

Clause 29:

Under the existing capital gains tax provisions, the cost base of shares will be reduced to reflect the exclusion of all the discount that would have been assessed under section 26AAC. However, amendments to the capital gains tax provisions relating to employee shares are necessary to ensure that the cost base is reduced where only a partial exclusion from 26AAC assessability is provided. These amendments will be inserted by clauses 29-31.

Clause 29 will insert new section 160ZYHD in Division 9 of Part IIIA of the Principal Act.

Section 160ZYHD: Meaning of "reducing amount"

This section enables the amount of discount excluded in accordance with paragraph 26AAC(4F)(c) to be referred to as the "reducing amount".

Clause 30: Consideration for acquisition of shares by employees

Clause 30 will amend section 160ZYI of the Principal Act to reduce the cost base of shares for capital gains tax purposes by reducing the market value of those shares by the amount of exclusion allowed in respect of those shares (the 'reducing amount").

Under section 160ZYI the cost base, where a section 26AAC assessment is involved, includes the market value of shares at the time when they are acquired, or deemed by subsection 26AAC(15) to be acquired.

Clause 31: Consideration for acquisition of share rights by employees

This clause will amend section 160ZYJ of the Principal Act to reduce the cost base of rights for capital gains tax purposes, by reducing the market value of those rights by the amount of exclusion allowed on those rights (referred to as the "reducing amount").

Under section 160ZYJ the cost base, where a section 26AAC assessment is involved, includes the market value of rights at the time they are acquired.

The following example shows how the amendments to the capital gains tax provisions will operate:

Example

In this example, both the assessable discount of $150 and the aggregate market value of the shares of $1,000 are reduced by a reducing amount of $100.

Details of acquisition:

Calculation of assessable discount under subsection 26AAC(5):

Calculation of reducing amount under paragraph 26AAC(4F)(c):

Reducing amount = (lesser of value of shares and $2,000) multiplied by (lesser of discount rate and 10%)


= $1,000 * 10%


= $100


Cost base for CGT purposes:

Clause 32: Amendment of assessments

This clause will amend subsection 170(10) of the Principal Act which allows the Commissioner of Taxation to re-open assessments at any time, without the limitations usually applying to the making of amended assessments, where this is necessary to give effect to specified provisions of the Principal Act. The amendment will allow the Commissioner to re-open assessments to give effect to the pre-paid expenses provisions for research and development expenditure, as proposed in clause 12 of this Bill.

Clause 33: Deductions by employer from salary or wages

This clause proposes the insertion of a new subsection - subsection (1AE) - in section 221C of the Principal Act. This subsection will provide for the prescription, by regulation, of the rates at which tax instalment (PAYE) deductions are to be made from certain lump sum payments in arrears. The relevant lump sum payments are those considered for a rebate of tax under proposed Subdivision AB in Division 17 of Part III of the Principal Act (refer clause 27).

Existing subsection 221C(1) permits the regulations to prescribe rates of deductions to be made by employers from payments of salary or wages that employees receive in respect of a week or part of a week. Those rates of deductions are inappropriate for lump sum payments in arrears because the maximum period such a payment can be taken to relate to is 52 weeks. Where the lump sum payment relates to a longer period PAYE deductions are likely to be excessive.

Accordingly, this clause will authorise the prescription of PAYE deductions at a special rate. The rate proposed is 25.25 per cent which represents the lowest marginal tax rate of 24 per cent plus the Medicare levy of 1.25 per cent.

Clause 34: Provisional tax on estimated income

This clause proposes amendments to section 221YDA of the Principal Act relating to the ascertainment of provisional tax to insert a reference to proposed Subdivision AB in Division 17 of Part III of the Principal Act (refer clause 27), which will allow a rebate of tax for arrears of income received in a lump sum.

Under section 221YDA a taxpayer may apply for a variation of the provisional tax that he or she has been called upon to pay. In an application for this purpose, the taxpayer is required to provide an estimate of taxable income for the year in question, the composition of that taxable income, and details of the rebates or credits to which he or she will be entitled for the year concerned. Provisional tax is then recalculated on the basis of those estimates.

The amendment to section 221YDA proposed by this clause will enable a taxpayer to estimate the rebate for arrears of income received in a lump sum so as to reduce the provisional tax that might otherwise be payable.

Clause 35: Deductions from certain withdrawals from film accounts

The amendments of section 221ZN of the Principal Act being proposed by this clause are consequential upon the general reduction from 120 per cent to 100 per cent in the rate of deductions for investment in qualifying Australian films that is proposed by clause 23.

Section 221ZN is part of a system of withholding tax that applies in relation to the arrangements that govern deductions for investments in Australian films made under contracts entered into after 12 January 1983. It imposes on a person who withdraws an amount from an account opened in relation to a film in the Australian Film Industry Trust Fund a requirement to make a deduction from that amount if it is not, upon withdrawal, dealt with in the prescribed manner. Generally an amount will be taken to be dealt with in the prescribed manner if it is expended directly in producing the film (subsection 124ZAA(7)). The amount deducted is then remitted to the Commissioner. Amounts withheld under these arrangements are applied against tax due on the amended assessment withdrawing the deduction previously claimed in respect of the excess contribution.

Paragraphs 221ZN(1)(a) and (b) specify the rate at which such deductions are to be made. Under subparagraph (1)(a), the rate of deduction in respect of a withdrawal from a film account that is to be paid to a company, otherwise than in the capacity of a trustee, is set at 55 per cent. The rate of deduction for any other withdrawals that are not to be dealt with in the prescribed manner is set by subparagraph (1)(a)(ii) and paragraph (1)(b) as 72 per cent of the amount of the withdrawal.

Paragraph (a) of clause 35 will reduce the rate of deduction under subparagraph 221ZN(1)(a)(i) from 55 per cent to 39 per cent, the corporate tax rate.

Paragraph (b) of clause 35 will reduce the rate of deduction under subparagraph (1)(a)(ii) and paragraph (1)(b) from 72 per cent to 49 per cent, the maximum personal tax rate.

Subclause 36(8), means that those reduced rates will apply to amounts withdrawn from a film account more than 28 days after these amendments come into operation (see notes on that subclause).

Division 3 - Application of Amendments

Clause 36: Application of amendments

Subclause (1) provides that for the purposes of section 36 of the proposed Taxation Laws Amendment Act (No.5) 1988, a reference to the "amended Act" is a reference to the Income Tax Assessment Act 1936 as amended by the first-mentioned Act.

Subclause (2) governs the application of proposed paragraph 23(k) (see notes on clause 9) which will exempt from tax the income of the Australian Film Finance Corporation Pty Limited. The company was incorporated on 12 July 1988 and the effect of subclause 36(2) and proposed paragraph 23(k) is to apply the exemption from that date.

Subclause (3) is the application provision which relates to the amendment being made to the gift provisions of the income tax law, the operation of which is explained in the notes on clause 13.

Subclause (4) will set out the application of amendments proposed by clauses 14, 15, 24 and 28, which are consequential upon the commencement of proposed paragraph 23(k). The application of these provisions is consistent with that proposed for paragraph 23(k) - i.e., to the year of income in which 12 July 1988 occurs and all subsequent years.

Subclause (5) will set out the application of the amendments proposed by clause 18, which provide for review by the Administrative Appeals Tribunal of decisions to refuse or revoke certificates for the purposes of subsection 124K(1). Subclause (5) also sets out the application of the amendment proposed by clause 18 which provides for review of decisions by a Minister (or delegate) under Division 10BA. The amendments will apply to decisions made after the commencement of subclause (5), that is on or after the day on which the proposed Taxation Laws Amendment Act (No.5) 1988 receives the Royal Assent.

By subclause (6), the amendment made by clause 25 - to correct a technical deficiency in the debt creation rules - will apply to interest incurred after 3 November 1988 on an amount owing in connection with an asset acquired after 3 November 1988. The provision will not apply to an acquisition under a contract entered into on or before that date.

Subclause (7) is the application provision that relates to the amendment made by clause 34 in respect of the calculation of the provisional tax liability of taxpayers to whom the rebate for arrears of certain income received in a lump sum, proposed by clause 27, will be allowable.

Subclause (8) provides that the amendments proposed by clause 35 to section 221ZN apply to amounts withdrawn from a film account more than 28 days after subclause (4) comes into operation, that is 28 days after the day on which the proposed Taxation Laws Amendment Act (No.5) 1988 receives the Royal Assent.

Division 4 - Exemption of Cash Grants under the Defence Service Homes Scheme

Clause 37: Exemption of cash grants under the Defence Service Homes Scheme

Introductory note

This clause proposes to exempt from income tax certain cash grants paid under the Defence Service Homes Scheme. The scheme was established in 1918 under the Defence Service Homes Act 1918. Among other things the scheme provides low-interest mortgage loans to help veterans, some serving members of the defence forces and certain other people to acquire their own homes.

On 15 September 1987 the Treasurer announced as part of the 1987-88 Budget that future housing assistance under the scheme would be provided in the form of non-taxable cash grants instead of mortgage loans. Those applicants who had applied on or before 15 September 1987 for a mortgage loan were to be given the option of either accepting a cash grant or a loan. Applicants after 15 September 1987 were to be eligible only for the cash grant.

On 9 December 1987 the Minister for Veterans' Affairs and the Minister for Defence Science and Personnel announced that the Budget proposal to provide assistance in the form of cash grants would not proceed. The announcement followed the Government's acceptance of recommendations made by a review group chaired by Mr John Uhrig, AO.

Transitional arrangements were to apply and applicants who applied for their loans on or before 15 September 1987, and who following the Budget announcement elected to take a cash grant, were given a further option of taking either the non-taxable cash grant, a non-portable mortgage loan under the old rules or a portable mortgage loan under the modified rules. Applicants for cash grants between 16 September 1987 and 9 December 1987 inclusive were to receive a portable mortgage loan under the modified rules; those applicants in this category, however, who suffered severe financial hardship through either the necessity or the inability to change home financing arrangements were still eligible to receive cash grants.

Clause note

Clause 37 will exempt from income tax a cash payment received by a taxpayer if the requirements set out in both paragraphs (a) and (b) are satisfied. Paragraph (a) requires that the payment was made instead of an advance (that is, a mortgage loan) under the Defence Service Homes Act 1918, while paragraph (b) requires that after 15 September 1987 and before 10 December 1987 the taxpayer either applied for (subparagraph (i)) or elected to receive (subparagraph (ii)) the payment.

Division 5 - Transitional Provisions relating to Tax Concessions for Film Investments

Clause 38: Interpretation

In Division 5 of the proposed Taxation Laws Amendment Act (No.5) 1988, a reference to the "amended Act" is a reference to the Income Tax Assessment Act 1936 as amended by the first-mentioned Act.

Clause 39: Transitional provisions relating to deductions under subsection 124ZAFA(1) of the amended Act

Introductory note

Division 2 of this Bill contains amendments of Division 10BA of the Principal Act which are designed to reduce to 100 per cent the rate of deduction allowable under Division 10BA for qualifying Australian film expenditure.

Essentially, the amendments to section 124ZAFA proposed by clause 23 mean that:

(a)

the 100 per cent rate is to apply to expenditure incurred under a contract entered into on or after 25 May 1988; and

(b)

the higher rates (i.e., 150 per cent, 133 per cent and 120 per cent) are to apply to expenditure incurred under a contract entered into before 25 May 1988 and during the relevant period in which those rates applied.

However, the transitional arrangements contained in this clause will modify those general rules so that, broadly, certain expenditure incurred under pre 25 May 1988 contracts will qualify only for the 100 per cent rate and, conversely, certain expenditure incurred under post 24 May 1988 contracts will continue to qualify, for a limited period, for the higher rates.

This clause should be read together with subsection 124ZAFA(1) as proposed to be amended by clause 23 of this Bill. By virtue of section 15 of the Acts Interpretation Act 1901, expressions used in this clause have the same meaning as they have in section 124ZAFA.

Clause note

Subclause 39(1) will replace subsection 124ZAFA(1A) of the Principal Act which preserves the 150 per cent rate of deduction allowable under Division 10BA in the case of a taxpayer who invests in the production of an underwritten film after the date (23 August 1983) on which that rate ceased to be generally available. Subsection (1A) applies where the investment is in lieu of that which the underwriter would otherwise have had to make.

Subclause (1) will enable rates in excess of 100 per cent to be available, for a limited period, to taxpayers who have expended moneys by way of contribution to the cost of producing a film if the following conditions are satisfied:

(a)

the moneys were expended under a contract entered into after 23 August 1983;

(b)

the taxpayer would qualify for a deduction under subsection 124ZAFA(1), but at a lower rate than that sought by the taxpayer;

(c)

the production contract or underwriting contract required under subparagraph 124ZAFA(1)(d)(iv) was entered into on or before 23 August 1983 so that the film was underwritten on or before that date;

(d)

if there was no separate underwriting contract in respect of the film, a party to the production contract agreed to underwrite some or all of the cost of production;

(e)

the estimated cost of production exceeded the committed capital (as this phrase is defined in subsection 124ZAFA(1B)) when the taxpayer contracted to invest in the film;

(f)

before 1 July 1988 some or all of the moneys were deposited in a film account; and

(g)

in the case of moneys contributed on or after 25 May 1988, a copy of the underwriting contract, or if there is no separate underwriting contract, a copy of the production contract, was lodged with the Secretary to the Department of the Arts, Sport, the Environment, Tourism and Territories before 2 June 1988 (this requirement is defined in subclause 39(16) as the "statutory lodgment condition'').

Paragraphs (a) to (e) contain the same requirements as are contained in paragraphs 124ZAFA(1A)(a) to (e) and are required by virtue of paragraph 39(1)(a). Paragraph (f) contains a special transitional requirement (paragraph 39(1)(b)) as does paragraph (g). This statutory lodgment condition is an additional precondition for obtaining rates of deduction greater than 100 per cent for moneys expended after 24 May 1988 (sub-subparagraphs 39(1)(c)(i)(B), (d)(i)(B), (d)(ii)(B), (e)(i)(B) and (e)(ii)(B)).

Where these requirements are satisfied, the taxpayer will be entitled to the following deductions:

•

as a result of paragraph 39(1)(c), where the moneys do not exceed the difference between the estimated cost of production as specified in the production contract required by subparagraph 124ZAFA(1)(d)(iv) of the Principal Act and the committed capital at the time the taxpayer entered the contract ("the excess"):

•.

150 per cent of so much of the moneys as were deposited before 1 July 1988 in a film account opened in relation to the film;

•.

100 per cent for the remainder of the moneys;

•

as a result of paragraph 39(1)(d), where the taxpayer's moneys exceed the excess, and the taxpayer's contract was entered into after 23 August 1983 and on or before 19 September 1985:

•.

150 per cent for so much of the moneys as is less than or equal to the excess and was deposited in a film account before 1 July 1988;

•.

133 per cent for so much of the remainder of the moneys as was deposited in a film account before 1 July 1988;

•.

100 per cent for the remainder of the moneys;

•

as a result of paragraph 39(1)(e), where the taxpayer's moneys exceed the excess and the taxpayer's contract was entered into after 19 September 1985:

•.

150 per cent for so much of the moneys as is less than or equal to the excess and was deposited in a film account before 1 July 1988;

•.

120 per cent for so much of the remainder of the moneys as was deposited in a film account before 1 July 1988;

•.

100 per cent for the remainder of the contribution.

It should be noted that if the underwriting agreement, whether contained in the production contract or in a separate contract, is not lodged before 2 June 1988, any moneys contributed after 24 May 1988 will attract a deduction of 100 per cent only.

Subclause 39(2) will replace subsection 124ZAFA(1AA) of the Principal Act, which preserves the 133 per cent rate of deduction allowable under Division 10BA in the case of a taxpayer who invests in the production of an underwritten film after the date (19 September 1985) on which that rate generally ceased to be available. Subsection (1AA) applies where the investment is in lieu of that which the underwriter would otherwise have had to make.

Subsection (2) will enable rates in excess of 100 per cent to be available, for a limited period, to taxpayers who have expended moneys by way of contribution to the cost of producing a film if the following conditions are satisfied:

(a)

the moneys were expended under a contract entered into after 19 September 1985;

(b)

the taxpayer would qualify for a deduction under subsection 124ZAFA(1), but at a lower rate than that sought by the taxpayer;

(c)

the production contract or underwriting contract required under subparagraph 124ZAFA(1)(d)(iv) was entered into on or before 19 September 1985, so that the film was underwritten on or before that date;

(d)

if there was no separate underwriting contract in respect of the film, a party to the production contract agreed to underwrite some or all of the cost of production;

(e)

the estimated cost of production exceeded the committed capital (as this term is defined in subsection 124ZAFA(1B)) when the taxpayer contracted to invest in the film;

(f)

before 1 July 1988 some or all of the moneys were deposited in a film account; and

(g)

in the case of moneys contributed on or after 25 May 1988, a copy of the underwriting contract, or if there is no separate underwriting contract a copy of the production contract, was lodged with the Secretary to the Department of the Arts, Sport, the Environment, Tourism and Territories before 2 June 1988. (This requirement is defined in subclause 39(16) as the "statutory lodgment condition").

Paragraphs (a) to (e) contain the same requirements as are contained in paragraphs 124ZAFA(1AA)(a) to (e), and are required by virtue of paragraph 39(2)(a). Paragraph (f) contains a special transitional requirement (paragraph 39(2)(b)) as does paragraph (g). This statutory lodgment condition is an additional precondition for obtaining rates of deduction greater than 100 per cent for moneys expended after 24 May 1988 (sub-subparagraphs 39(2)(c)(i)(B), and 39(2)(d)(i)(B)).

Where these conditions are satisfied the taxpayer will receive the following deductions:

•

as a result of paragraph 39(2)(c), where the moneys do not exceed the difference between the estimated cost of production as specified in the production contract required by subparagraph 124ZAFA(d)(iv) and the committed capital at the time the taxpayer entered the contract ("the excess"):

•.

133 per cent of so much of the moneys as were deposited before 1 July 1988 in a film account opened in relation to the film;

•.

100 per cent of the remainder of the moneys.

•

as a result of paragraph 39(2)(d), where the taxpayer's moneys exceed the excess:

•.

133 per cent of so much of the moneys as is less than or equal to the excess and was deposited in a film account before 1 July 1988;

•.

120 per cent of so much of the remainder of the moneys as was deposited in a film account before 1 July 1988;

•.

100 per cent of the remainder of the moneys.

Again it should be noted that if the underwriting agreement, whether contained in the production contract or a separate contract, is not lodged before 2 June 1988, any moneys contributed after 24 May 1988 will attract a deduction of 100 per cent.

Subclause 39(3) deals with expenditure, under contracts entered into before 25 May 1988, in producing or in contributing to the cost of producing a film where the film was not underwritten prior to 25 May 1988.

Subclause 39(3) will reduce to 100 per cent the special rates of deduction of 150 per cent, 133 per cent and 120 per cent of relevant expenditure available under paragraphs 124ZAFA(1)(e), (f) and (g) unless the following conditions are satisfied:

•

in the case of moneys expended in producing the film:

•.

the moneys were expended before 26 May 1988; or

•.

the moneys would be taken by virtue of subclause 40(1) to have been expended in producing the film after 25 May 1988 and before 9 June 1988 (sub-subparagraph 39 (d)(i)(B)). The practical effect of this provision is that the higher rates of deduction will continue to apply to moneys expended on or after 26 May 1988 in producing a film if the moneys were, prior to their expenditure in producing the film, deposited in a film account opened in relation to the film and the deposit was made after 25 May and before 9 June 1988;

•

in the case of moneys expended by way of contribution to the cost of producing the film:

•.

the moneys were deposited before 9 June 1988 in a film account opened in relation to the film.

Subclause 39(4) deals with expenditure under contracts entered into on or after 25 May 1988, in producing or by way of contribution to the cost of producing a film where the film was not underwritten prior to 25 May 1988. In these circumstances, the rate of deduction allowable in respect of any of those moneys will be increased to 120 per cent if the following conditions are satisfied:

•

in the case of moneys expended in producing the film:

•.

the moneys were expended in producing the film on 25 May 1988; or

•.

the moneys would be taken by virtue of subclause 40(1) to have been expended after 25 May 1988 and before 9 June 1988. The practical effect of subclause 40(1) is that the 120 per cent rate will apply to expenditure on or after 26 May 1988 in producing a film if the moneys were, prior to their expenditure in producing the film, deposited in a film account opened in relation to the film and the deposit was made after 25 May 1988 and before 9 June 1988 (subparagraph 40(4)(e)(i));

•

in the case of moneys expended by way of contribution to the cost of producing the film, the moneys were deposited before 9 June 1988 in a film account opened in relation to the film (subparagraph 40(4)(e)(ii));

•

in either case, the Secretary to the Department of the Arts, Sport, the Environment, Tourism and Territories certifies that the film was substantially in production before 25 May 1988 (paragraph 39(4)(d)).

Subclause 39(5) applies to moneys expended in producing or by way of contribution to the cost of producing a film under a contract entered into after 13 January 1983 where:

•

neither subclause 39(1) nor 39(2) applies to the moneys;

•

the moneys would qualify for a deduction under subsection 124ZAFA(1) as proposed to be amended by clause 23;

•

the film was underwritten before 25 May 1988; and

•

in the case of moneys expended after 24 May 1988 by way of contribution to the cost of producing a film, or in the case of moneys expended after 25 May 1988 in producing a film, a copy of an underwriting contract or if there was no separate underwriting contract a copy of the production contract which included an agreement to underwrite the film, was lodged before 2 June 1988 with the Secretary to the Department of the Arts, Sport, the Environment, Tourism and Territories.

The effect of subclause (5) is that where the above conditions are satisfied, a minimum deduction of 120 per cent (or such higher rate for which the moneys would otherwise be eligible under subsection 124ZAFA(1)) shall apply to:

•

in the case of moneys expended in producing a film, so much of the moneys as:

•.

were expended before 26 May 1988 (sub-subparagraph 39(5)(e)(i)(A));

•.

would be taken by virtue of subclause 40(1) to have been expended after 25 May 1988 and before 1 July 1988 (sub-subparagraph 39(5)(e)(i)(B)). The practical effect of this provision is that the higher rates of deduction will apply to moneys expended in producing a film on or after 26 May 1988, if the moneys were, prior to their being expended in producing the film, deposited in a film account opened in relation to the film, and the deposit was made after 25 May 1988 and before 1 July 1988;

•

in the case of moneys expended by way of contribution to the cost of producing a film, so much of the moneys as were deposited in a film account before 1 July 1988.

In both cases, if these conditions are not satisfied the moneys will attract a deduction of 100 per cent.

Subclause 39(6) enables subsection 124ZAFA(1) of the Principal Act to take effect subject to the transitional provisions in clause 39. As observed in the notes to clause 23, the transitional provisions contained in clause 39 impose further conditions which must be satisfied in respect of expenditure after 24 May 1988 (where the moneys are contributed to the cost of producing a film) or after 25 May 1988 (where the moneys are expended directly in producing the film) before the deduction under subsection 124ZAFA(1) is available.

Subclause 39(7) applies to a film which is underwritten before 25 May 1988 but a copy of the underwriting contract, or if there was no separate underwriting contract a copy of the production contract under which a person agreed to underwrite the film, was not lodged with the Secretary to the Department of the Arts, Sport, the Environment, Tourism and Territories before 2 June 1988. In this case, subclauses (3), (4) and (5) will have effect as if there was no underwriting agreement entered into in relation to the film before 25 May 1988. In these circumstances, expenditure in such films may still qualify for the higher rates of deduction under subclauses (3) and (4). However, in order to so qualify, the taxpayers' moneys will need to have been deposited before 9 June 1988 in a film account. In addition, in the case of expenditure under contracts entered into on or after 25 May 1988 the Secretary to the Department of the Arts, Sport, the Environment, Tourism and Territories must certify that the film was substantially in production before 25 May 1988.

Subclause 39(8) empowers the Secretary to certify that a film is substantially in production before 25 May 1988. Such certification is necessary if the higher rates of deduction are to be available for expenditure under contracts entered into on or after that date.

Subclause 39(9) sets out the matters which the Secretary may consider when determining whether or not to make the certification referred to in subclause (8).

Subclause 39(10) provides that where a notice under subclause (8) is revoked, the notice is to be taken as never having been in force. Subclause (10) also ensures that if the Secretary revokes a certificate given under subsection (8), an assessment based on that certificate may be amended.

Subclause 39(11) applies to moneys expended under contracts entered into after 13 January 1983 by way of contribution to the cost of producing a film.

Under paragraph 124ZAFA(1)(d) of the Principal Act, if contributions were made before 1 July 1983, and the moneys were expended before that date in producing the film, the taxpayer is entitled to a deduction of 150 per cent notwithstanding that the moneys were not deposited in a film account. In order to preserve the 150 per cent deduction for such expenditure under the transitional provisions, such expenditure is deemed by subclause (11) to have been deposited in a film account before 25 May 1988.

Subclause 39(12) empowers the Secretary to delegate to a holder of a Senior Executive Service office (see notes to clause 18) in the Department of the Arts, Sport, the Environment, Tourism and Territories, his or her powers under subclause (8) to certify that a film was substantially in production before 25 May 1988.

Subclause 39(13) provides that a decision of the Secretary (or his or her delegate) to refuse to give a notice under subclause (8) or to revoke a notice given under subclause (8), may be reviewed by the Administrative Appeals Tribunal.

Subclause 39(14) provides that where a decision is made to refuse to give a notice or a decision is made to revoke a notice under subclause (8), and the Secretary (or his or her delegate) notifies in writing, a person whose interests are affected by the decision, that notice shall advise that person that an application for a review of that decision may be made to the Administrative Appeals Tribunal. The notice shall also advise the person that, unless the information has already been supplied in writing, a request may be made for a statement setting out the reasons for the decision, the findings on material questions of fact and referring to the evidence or other material on which those findings were based.

Subclause 39(15) provides that a failure to comply with subclause (14) does not affect the validity of the decision to refuse to give the notice or the decision to revoke the notice.

Subclause 39(16) contains a number of definitions of terms used in clause 39:

"former 124ZAFA(1A)" is a reference to subsection 124ZAFA(1A) of the Principal Act, which is proposed to be repealed by clause 23 and re-enacted in modified form (to take account of the withdrawal of the 120 per cent rate of deduction) in subclause (1) of the clause. Subsection 124ZAFA(1A) retains the 150 per cent rate in certain circumstances, for taxpayers who would otherwise be eligible for a deduction only at the 133 per cent or 120 per cent rate. References to "former 124ZAFA(1A)" in this clause are to be read as references to that subsection notionally amended to also apply to taxpayers who would otherwise be eligible only for the 100 per cent rate.

"former 124ZAFA(1AA)" is a definition in similar terms and having comparable effect to the definition of "former 124ZAFA(1A)". It also notionally includes a reference to the 100 per cent rate.

"Secretary" means the Secretary to the Department of the Arts, Sport, the Environment, Tourism and Territories.

"Senior Executive Service office" means an office classified as such by the Public Service Commissioner (see notes to clause 18).

"statutory lodgment condition" refers to the requirement that, in order for certain expenditure on underwritten films to be eligible for the higher rates a copy of at least one underwriting agreement applicable to the film must be lodged before 2 June 1988 with the Secretary to the Department of the Arts, Sport, the Environment, Tourism and Territories.

"underwriting agreement" is defined to mean:

(a)

an underwriting contract, a term itself defined in subsection 124ZAFA(5) of the Principal Act as an agreement under which a person has conditionally agreed to contribute to the cost of producing a film and under which no person has agreed to contribute other than conditionally. Subsection 124ZAFA(6) of the Principal Act, which applies to these transitional provisions, makes it clear that to conditionally agree to contribute to the cost of producing a film is to agree to do so only if the total of other moneys invested, or agreed to be invested, in the production is less than a sum specified in the contract under which the conditional agreement is made; or

(b)

a production contract under which a person has agreed to underwrite a film. A "production contract" is defined in subsection 124ZAFA(5) as a contract under which persons have agreed to expend capital moneys in or as a contribution towards the production of a film, but excludes an underwriting contract.

Clause 40: Special provisions relating to producers' funds deposited in film accounts after 25 May 1988 and before 1 July 1988

Introductory note

Subsection 124ZAFA(1) of the Principal Act distinguishes between moneys expended in producing a film (commonly referred to as producers' funds) and moneys expended by way of contribution to the cost of producing a film (contributors' funds). Under subsection 124ZAFA(1), contributors' funds must be deposited, upon contribution, in a film account opened in the Australian Film Industry Trust Fund, before any deduction for the expenditure is allowable.

Subsection 124ZAFA(1) does not require producers' funds to be deposited in film accounts as a condition of receiving the deduction; the deduction is available in the year in which the moneys are actually paid out in producing the film.

The deduction for producers' funds expended under contracts entered into on or after 25 May 1988 is being reduced to 100 per cent of the relevant expenditure (see notes on clause 23).

The general effect of the transitional provisions will be that where producers' funds are expended before 26 May 1988 in producing a film that expenditure will continue to qualify for the higher rates of deduction under subsection 124ZAFA(1).

Where, however, producers' funds are expended in producing a film on or after 26 May 1988, the higher rates of deduction will be available only for so much of those funds as were, prior to their expenditure in producing the film, deposited in a film account before 1 July 1988 (where the film was underwritten before 25 May 1988) or before 9 June 1988 (where the film was not underwritten before 25 May 1988).

The transitional provisions for producers' funds effectively apply on and from 26 May 1988 and not 25 May 1988 as is the case with contributors' funds. The extra day has been allowed as producers would have been unaware of the requirement to deposit moneys in a film fund until 26 May. This problem does not arise with contributors' funds as such funds have been required since 1 July 1983 to be deposited in film accounts upon contribution as a condition of deduction (subsection 124ZAFA(1)(d).

Where a producer has elected to deposit funds after 25 May 1988 and before 1 July 1988 in order to qualify for a higher rate of deduction, the deduction will be available to the producer in the financial year in which the day of the deposit fell.

Clause note

By virtue of subclause 40(1) where a taxpayer has deposited funds in a film account after 25 May 1988 and before 1 July 1988, and the taxpayer intended those funds to be expended in producing a film under a particular contract, the funds will be treated as having been expended under that contract on the date on which the funds were so deposited. As a result of this drafting device, moneys so deposited may qualify for a deduction at the time the deposit is made under subsection 124ZAFA(1) as modified by subclauses 39(3), (4) and (5). Subsection 124ZAFA(1) and subclauses 39(3), (4) and (5) take as the criteria for deduction, expenditure of moneys under a contract. Without this provision producers who deposit funds would not be able to claim the deduction until the moneys were actually expended in producing the film. The provision also deems the deposit to be expended under a particular contract (i.e., the moneys will be treated as having been expended under the contract under which the producer intended to expend the moneys at the time of the deposit). It will therefore be possible to ascertain the paragraph of subsection 124ZAFA(1) under which the taxpayer will be able to claim the deduction.

By virtue of subclause 40(2), the amount of any deduction allowed to a taxpayer in respect of an amount of producers' funds deposited in a film account after 25 May 1988 and before 1 July 1988 is to be reduced to the extent that the funds are not, upon withdrawal from the film account, dealt with in the prescribed manner. Subsection 124ZAA(7) sets out the circumstances in which moneys withdrawn from a film account will be taken to have been dealt with in the prescribed manner. The practical effect of these provisions is that the deductions will be denied for the amount of any deposited producer's funds which are not upon withdrawal expended directly in the production of the film.

By virtue of subclause 40(3) where an amount is withdrawn from a film account into which a producer's funds have been deposited, and the amount is not dealt with in the prescribed manner, the Commissioner will be authorised to determine how much of the producer's funds were included in that withdrawn amount.

Subclause 40(4) applies where a producer deposits funds after 25 May 1988 and before 1 July 1988 and the funds are treated under subclause 40(1) as having been expended under a particular contract because at the time the moneys were so deposited the producer intended they would be expended under that contract. If an amount of moneys in the film account, including some or all of the producer's funds, is spent under a different contract from that under which the producer had intended to expend his or her deposited funds, the Commissioner is authorised to determine how much of the producer's funds have been expended under that different contract.

Clause 41: Declarations

Under section 124ZADA, an appropriate person associated with a film is required to lodge a declaration with the Commissioner before the expiration of one month after the close of the financial year in which moneys were first contributed by investors. This declaration must state that all moneys withdrawn from the film account will upon withdrawal be dealt with in the prescribed manner or be paid as refunds of capital contribution.

Paragraph (a) of clause 41 requires that where a declaration under section 124ZADA is lodged after the commencement of clause 41, the declaration must also specify that moneys withdrawn from the film account will, if subclause 41(1) applies to a deposit in the film account, be paid as a repayment of that deposit.

Paragraph (b) of clause 41 specifies that where a declaration is lodged in accordance with paragraph (a) and subsequently a further declaration is required, that further declaration will be in the same terms as the declaration under paragraph (a).

Clause 42: Deductions from certain withdrawals from film accounts

The subclause applies to producers' funds deposited in film accounts after 25 May 1988 and before 1 July 1988.

As noted in the notes on clause 35, section 221ZN of the Principal Act is part of the system of withholding tax that applies in relation to investment in Australian films.

Clause 42 will ensure that where producers' funds, to which subclause 40(1) applies, are deposited in a film account and subsequently are withdrawn and not used directly in producing the film, an appropriate amount will be withheld and remitted to the Commissioner.

In the case of repayments to a company (other than in a capacity as a trustee), the amount withheld will be 39 per cent of the amount withdrawn. In all other cases, the amount withheld will be 49 per cent of the amount withdrawn.

Division 6 - Transitional Provisions relating to Dividend Imputation

Clause 43: Transitional provision - modification of dividend imputation provisions resulting from reduction in the company tax rate

Introductory note

This Division will implement transitional provisions foreshadowed by the Treasurer in the 1988 May Economic Statement to prevent dividends paid by early balancing companies during the franking year that relates to their 1989-90 year of tax, and which will carry imputation credits calculated by reference to the reduced 39 per cent company tax rate, from being able to generate imputation credits calculated by reference to the 49 per cent rate. It also contains a mechanism to ensure that no disadvantage arises for companies receiving dividends from early balancing companies that are relying on those dividends to frank their own dividends and which, because of the transitional provisions, would otherwise have a franking deficit or an increased franking deficit at the end of the franking year.

Under the imputation system of company taxation, dividends paid by Australian resident companies carry imputation credits to the extent that the dividends came from profits that have borne income tax at the corporate level. This imputation credit is calculated by reference to the company tax rate applicable in the financial year in which the dividends are paid - the "year of tax" which, for all practical purposes, corresponds with the "franking year" for companies. The majority of companies operate on the financial year (1 July to 30 June) and for these companies the next franking year will commence on 1 July 1989. Dividends paid by such companies before that date will continue to be franked on the basis of the 49 per cent company tax rate that applies for the 1988-89 year of tax (the

(49)/(51)


formula) but dividends paid on and after 1 July 1989 will be franked in accordance with the reduced company tax rate that is to apply for the 1989-90 year of tax - the formula being

(39)/(61)


.

For an early balancing company - a company that, with the leave of the Commissioner, has adopted in lieu of the financial year an accounting period that ends one month or more before the end of the financial year - its franking year also commences early. Thus, for a company that balances on 31 December 1988 in lieu of 30 June 1989, its 1989-90 franking year (corresponding to the year of tax in which the 39 per cent rate applies) commences on 1 January 1989.

An early balancing company could therefore pay a dividend in the period 1 January to 30 June 1989, i.e., in its 1989-90 franking year, which would be franked on the basis of the 39 per cent rate, to a company that is not an early balancing company and is therefore still in its 1988-89 franking year and required to frank dividends on the basis of the 49 per cent rate. If, for example, the early balancing company paid a fully franked dividend of $61, the recipient company would credit its franking account with that amount. If that dividend is effectively passed on by the recipient company to its shareholders before the commencement of that company's 1989-90 year of tax, it will have attached to it an imputation credit of $58.60 (

61 * ((49)/(51))


), instead of $39 (

61 * ((39)/(61))


).

A similar situation arises where an early balancing company pays a franked dividend to an individual shareholder before 1 July 1989. Although the dividend would be franked on the basis of the 39 per cent company rate, the extra amount to be included in the assessable income of the individual shareholder and the franking rebate would be calculated on the basis of the company tax rate for that financial year which is 49 per cent, i.e., $58.60 as noted above.

To overcome this transitional problem, this Division, which will not amend the Principal Act, will modify the existing imputation provisions contained in Part IIIAA of that Act to ensure that:

•

the imputation credit that attaches to a dividend paid by an early balancing company before 1 July 1989 but during a 39 per cent franking year of the company is to be calculated by reference to the 39 per cent company tax rate;

•

where a company derives a dividend which carries an imputation credit calculated on the basis of the 39 per cent company tax rate, either directly or through a partnership or trust, the franking credit that would ordinarily arise on the date the dividend is paid (or at the end of the year of income if derived through a partnership or trust) will be deferred until the beginning of the company's first 39 per cent franking year; and

•

if a franking deficit arises, or is increased, as a result of the above mentioned arrangement, the deferred franking credits will be deemed to have arisen on the last day of the 49 per cent franking year instead of at the beginning of the following 39 per cent franking year to the extent necessary to eliminate the deficit; in such cases, the amount of the franking credits will be reduced by one-third to reflect the fact that the origin of the dividends was a company already paying tax at the 39 per cent rate.

Clause note

Paragraph (c) of the definition of "applicable general company tax rate" contained in section 160APA of the Principal Act specifies that the company tax rate to be used in relation to the payment of a franked dividend to a person or a partnership or trust during a financial year is the tax rate applicable for that financial year. Subclause 43(1) will modify that definition in circumstances where a franked dividend is paid by an early balancing company in an accounting period that commences on or after 1 January 1989 in lieu of the financial year that ends on 30 June 1990, i.e., its 1989-90 franking year (paragraphs (a) and (b)). In such cases, references in the imputation provisions of the Principal Act to the "applicable general company tax rate", as that definition relates to dividends paid to a shareholder or received through a partnership or trust, which would otherwise refer to a rate of 49 per cent in the period before 1 July 1989, are to be a reference to 39 per cent (paragraphs (c) and (d)).

By section 160APP of the Principal Act, a franking credit accrues to a resident company receiving a dividend on the day the dividend is paid. Subclause 43(2) will operate to postpone this date to the beginning of the first "39 per cent franking year" of the company receiving the dividend. To ensure that this transitional measure is limited to cases where a dividend paid by an early balancing company is received by a company that is still in a "49 per cent franking year", the operation of subclause (2) is subject to the following conditions:

•

a dividend franked on the basis of the 39 per cent rate is paid during the period 1 January 1989 to 30 June 1989 and the date of payment occurs during a 49 per cent franking year of the shareholder company (paragraph (a));

•

a franking credit under section 160APP would arise on the date the dividend was paid (paragraph (b)); and

•

the applicable company tax rate in relation to the payment of the dividend is 39 per cent because of the operation of subclause (1) (paragraph (c)).

The terms "39% franking year" and "49% franking year" are drafting aids to describe the franking years in which different company tax rates apply. The terms are defined in subclause 43(6) of this clause.

Subclause 43(3) is to have a similar effect to subclause (2). It will apply when a dividend franked on the basis of the 39 per cent rate is derived by a company during its 49 per cent franking year indirectly through a partnership or trust. In such cases, a franking credit arises to the company under section 160APQ of the Principal Act at the end of the year of income of the partnership or trust which received the dividend. By this subclause, the franking credit will arise at the beginning of the company's first 39 per cent franking year instead of at the end of the year of income of the partnership or trust when the following conditions are met:

•

a franking credit under section 160APQ would arise at a time during the period 1 January 1989 to 30 June 1989 inclusive, that is also during a 49 per cent franking year of the company entitled to the partnership or trust income (paragraph (a)); and

•

the applicable company tax rate for the calculation of the franking rebate is 39 per cent, i.e., the dividend is paid by an early balancing company that is required to frank the dividend on the basis of the 39 per cent tax rate (paragraph (b)).

Subclause 43(4) will apply where franking credits have been deemed by subclause (2) or (3) to arise at the beginning of the company's first 39 per cent franking year instead of during the 49 per cent franking year when the franking credits actually arose, and the company has a liability for franking deficit tax in respect of the last-mentioned year. Where these conditions are met, subclause (4) will deem the franking credits to which subclause 43(2) or (3) would otherwise apply, or so much of them as is not greater than one and a half times the amount of the franking deficit, to arise on the last day of the 49 per cent franking year instead of at the beginning of the 39 per cent franking year. The franking credits that will be deemed by this subclause to arise on the last day of the 49 per cent franking year are to be reduced by one-third to reflect the fact that they arose from the payment of a dividend by an early balancing company already in its 39 per cent franking year.

The way in which subclause (4) applies in a particular case depends on whether or not the company's franking credits otherwise subject to subclause 43(2) or (3) are more than 150 per cent of the potential franking deficit at the end of the company's 49 per cent franking year.

Where the relevant franking credits are not greater than 150 per cent of the deficit, all of those franking credits will be reduced by one-third and be deemed to arise on the last day of the 49 per cent franking year (paragraph 43(4)(c)). In these cases, the franking deficit will be reduced to the amount it would have been if subclause (2) or (3) had not applied and the franking credits had arisen from the payment of a lower cash dividend franked in accordance with the formula

(49)/(51)


applying in a 49 per cent franking year.

Paragraph 43(4)(d) is to have the same general effect, but will apply where the franking credits otherwise subject to subclause 43(2) or (3) are greater than 150 per cent of the franking deficit at the end of the 49 per cent franking year. In such cases, however, the provision applies to only so much of the company's relevant franking credits as is necessary to eliminate the franking deficit at the end of the 49 per cent franking year.

Under subparagraph 43(4)(d)(i), the formula for calculating the amount of each franking credit otherwise subject to subclause 43(2) or (3) that is to be applied in offsetting the franking deficit is:

Franking credit * (150% franking deficit)/(Total franking credits)


where -

•

franking credit is the amount of each franking credit that would have arisen under section 160APP on the date the dividend was paid, or under section 160APQ at the end of the year of income of the partnership or trust that paid the amount, but for the operation of subclause 43(2) or (3) to postpone the franking credit date;

•

150% franking deficit is the amount of the deficit in the franking account at the end of the 49 per cent franking year of the company from which franking credits have been excluded by the operation of subclause 43(2) or (3); and

•

total franking credits is the sum of the franking credits that would have arisen under sections 160APP or 160APQ before the end of the 49 per cent franking year but for the operation of subclause 43(2) or (3).

By subparagraph 43(4)(d)(ii), the amount of the total franking credits that is in excess of 150 per cent of the franking deficit will be credited to the franking account at the beginning of the company's first 39% franking year.

Section 160AR of the Principal Act ensures that, where a company has received a franked dividend through a partnership or trust, the company is not subject to tax on the amount included in the assessable income of the partnership or trust under section 160AQT, that is, in effect, on the imputation credit attached to the franked dividend. Subclause 43(5) makes it clear that the year in which the deduction is allowable under section 160AR will not be affected by the operation of subclauses 43(2), (3) and (4) in deeming the franking credit to arise in a year of income later than the one in which the franked dividends received by the partnership or trust are brought to account in the assessable income of the company.

Subclause 43(6) defines certain terms used in clause 43 which are not defined in Part IIIAA of the Principal Act. The major definitions relating to franking years are described in the earlier notes on subclause (1).

Division 7 - Amendment of Assessments

Clause 44: Amendment of assessments

This clause gives the Commissioner of Taxation authority to re-open an income tax assessment made before the Bill becomes law should this be necessary for the purposes of giving effect to the amendments proposed by the Bill.

PART IV - AMENDMENT OF THE SALES TAX ASSESSMENT ACT (No.1) 1930

Clause 45: Principal Act

This clause facilitates references to the Sales Tax Assessment Act (No. 1) 1930 which, in Part IIIA, is referred to as "the Principal Act".

Clause 46: Interpretation

Under the present wholesale sales tax arrangements tax is usually paid on the last wholesale sale and the wholesaler/taxpayer is required to remit the tax to the Australian Taxation Office. The wholesaler/taxpayer passes the tax on to the purchaser, usually the retailer, of the goods as part of the price for which the goods are sold. The retailer in turn passes the tax on to the consumer by including it in the retail sale price.

However, to obtain a refund where tax is overpaid it is arguably necessary for the taxpayer only to have refunded the tax to the retailer. In other words, the person who ultimately bore the tax, the consumer, need not be recompensed.

Clause 46 will amend section 3 of the Principal Act by inserting new subsection (7A). Proposed subsection (7A) is to the effect that where the Principal Act otherwise authorises a refund to a taxpayer, the refund is not to be made unless the tax has been refunded to the person who ultimately bore it.

This amendment will apply to the refund provisions of all of the Sales Tax Assessment Acts. Each of the Sales Tax Assessment Acts (Nos. 2-11) contain a provision which applies relevant provisions in the Sales Tax Assessment Act (No. 1) to the imposition, assessment and collection of tax chargeable under those Acts.

Section 3 of the Sales Tax Assessment Act (No. 1) is one of the provisions which apply to all Sales Tax Assessment Acts. The amendment to section 3 made by this clause will therefore apply to all sales tax refunds available under the Sales Tax Assessment Acts.

Clause 47: Application of amendment

The amendments made by the Part will apply prospectively from the day on which the amending Act receives the Royal Assent.

Paragraph (a) of subclause 47(1) operates so that, where a person makes a request to the Commissioner for a refund, the amendments made by this Part only apply in relation to requests made on or after the date of commencement of the amending Act.

In cases where a person has not requested a refund but the Commissioner determines whether a refund should be made, by virtue of paragraph (b) of subclause 47(1) the amendments made by this Part apply to any notification of a refund by the Commissioner issued on or after the date of commencement of the amending Act.

Under the existing sales tax law the Commissioner can apply an amount of tax overpaid by a person against any liability the person has to the Commonwealth arising under an Act administered by the Commissioner. Subclause 47(2) will ensure that the amendment proposed by clause 46 applies to applications by the Commissioner of tax overpaid by a person against liabilities the person has to the Commonwealth arising under an Act administered by the Commissioner made on or after the commencement of the amending Act.

Subclause 47(3) ensures that the amendment made by this Part will not to give rise to any implication that under the existing law, before refunding or applying overpaid tax, the Commissioner does not have to be satisfied that overpaid tax that has been passed on has since been refunded to the person who ultimately bore the tax.

Subclause 47(4) provides that references in this clause to "Sales Tax Assessment Act" are references to the Principal Act or any Act that provides for the assessment of sales tax.

SALES TAX (EXEMPTIONS AND CLASSIFICATIONS) AMENDMENT BILL (No.2) 1988

Clause 1: Short title etc.

Subclause (1) of this clause provides for the amending Act to be cited as the Sales Tax (Exemptions and Classifications) Amendment Act (No.2) 1988.

Subclause (2) facilitates references to the Sales Tax (Exemptions and Classifications) Act 1935 that is referred to in this Bill as "the Principal Act".

Clause 2: Commencement

By reason of subsection 5(1A) of the Acts Interpretation Act 1901, Acts come into operation on the twenty-eighth day after Royal Assent, unless otherwise specified in the Act. By clause 2 the amending Act is to be taken to have commenced at 8 o'clock in the evening by standard time in the Australian Capital Territory on 23 August 1988.

Clause 3: Classification of goods

The Exemptions and Classifications Act contains two definitions of "container". The definition in subsection 6B(2) of the Principal Act applies to goods covered by the Second and Third Schedules to the Act. Another definition in the First Schedule applies to goods covered by that Schedule.

The First Schedule definition includes accessories to containers within the meaning of container. The subsection 6B(2) definition does not include accessories.

This clause will amend the subsection 6B(2) definition so that it does not apply to goods covered by proposed item 18 in the Third Schedule - i.e., biscuit, ice cream and take-away food containers.

A related amendment also made by the Bill will apply the definition of 'container' for the purposes of the First Schedule to goods covered by proposed Third Schedule item 18 (refer notes on Part II - Amendment of Third Schedule).

These amendments will ensure that accessories, such as spoons, serviettes and refresher towels, to containers covered by proposed Third Schedule item 18 are subject to tax at the 10 per cent rate.

Clause 4: Amendment of First and Third Schedules

Clause 4 proposes that the First and Third Schedules to the Principal Act be amended as set out in the Schedule to this Bill.

The Schedule to the Bill will amend the First and Third Schedules with effect from 8 o'clock in the evening on 23 August 1988.

The contents of the Schedule to this Bill are explained in detail later in the notes on the Schedule.

Clause 5: Application of amendments

By clause 5 the amendments proposed by this Bill apply in relation to transactions, acts and operations effected or done in relation to goods after 8 o'clock in the evening on 23 August 1988.

Clause 6: Transitional

This clause is a transitional provision which applies for the period beginning at the time the amending Act is taken to have commenced - 8 o'clock in the evening by standard time in the Australian Capital Territory on 23 August 1988 - and ending at the end of the twenty-seventh day after the amending Act receives the Royal Assent.

Where the amendments made by this Bill have the effect of making a person liable to a penalty of a kind defined in subclause 6(3) in respect of any action of the person or any failure of the person to do something which would give rise to such a penalty during the period of time to which this clause applies, subclause 6(1) will ensure that the person is not liable to the penalty.

Where, because of an amendment made by this Bill, a person is required under a provision of the sales tax law to do something within a specified period or before a specified time and the period ends or the time occurs during the period to which this clause applies, subclause 6(2) will operate so that the obligation on the person to meet the requirement may be met without penalty until the beginning of the twenty-eighth day after the amending Act receives the Royal Assent.

By subclause 6(3) references in this clause to a person being liable to a defined penalty refer to the person being guilty of an offence or the person being liable to additional tax by way of penalty.

Subclause 6(4) defines "postponed day", for the purposes of this clause, to mean the twenty-eighth day after the amending Act receives the Royal Assent.

Examples of the way in which this clause could apply to requirements arising from the amendments made by this Bill are:

•

an unregistered manufacturer of exempt goods which are made taxable by this Bill is required under the sales tax law to apply to be registered within 28 days of the goods becoming taxable, i.e., by 20 September 1988 in the case of amendments effected by this Bill. This clause will postpone that requirement so that the manufacturer is required to apply to be registered before the twenty-eighth day after the day on which the amending Act receives the Royal Assent.

•

a manufacturer is required to furnish the Commissioner with a return (setting out sales, goods treated as stock for sale by retail and goods applied to his own use) within 21 days after the close of a month in which sales of taxable goods are made. Clause 6 will postpone the last day for lodging returns, that should otherwise be lodged during the period to which the clause applies, to the twenty-seventh day after the day on which the Amending Act receives the Royal Assent.

SCHEDULE

AMENDMENT OF SCHEDULES TO PRINCIPAL ACT

PART I - AMENDMENT OF FIRST SCHEDULE

Goods covered by the First Schedule to the Principal Act are exempt from sales tax.

Item 92

Item 92 in the First Schedule to the Principal Act exempts bags and sacks used for fertilisers or chaff or for marketing exempt goods.

To give full effect to the proposal to tax at the 20 per cent rate goods of a kind used to wrap or secure goods for marketing or delivery, Part I of the Schedule to the Bill will insert a new sub-item (2) in First Schedule item 92.

The new sub-item effectively excludes goods such as paper and plastic bags from item 92.

Item 113

Item 113 in the First Schedule to the Principal Act provides an exemption from sales tax for materials used by an unregistered manufacturer in the manufacture of exempt goods. The exemption does not apply to biscuit and ice cream mixes which are taxable at the 10 per cent rate.

To give full effect to the proposal to bring the sales tax treatment of thick shake mixes into line with ice cream mixes the Schedule will insert a reference to paragraph (ja) of First Schedule item 23 in the exclusion to item 113. This will have the effect of excluding thick shake mixes from the materials eligible for exemption under First Schedule item 113.

PART II - AMENDMENT OF THIRD SCHEDULE

Goods covered by the Third Schedule to the Principal Act are taxed at the 10 per cent rate.

Item 18

Proposed Item 18 in the Third Schedule to the Principal Act applies to containers for use in marketing:

•

biscuits and ice cream manufactured on retail premises for sale by the retailer direct to the public; and

•

take-away beverages and foodstuffs irrespective of where the food is consumed.

Such containers are, by reason of their inclusion in the Third Schedule, to be taxable at the 10 per cent rate.

To give full effect to the proposal to tax at the 10 per cent rate containers and accessories to containers covered by proposed item 18 such as spoons, serviettes and refresher towels, Part II of the Schedule to the Bill will insert the words 'within the meaning of the First Schedule' in proposed Third Schedule item 18. The effect of this amendment will be to ensure that the accessories, which are included in the definition of "container" in the First Schedule to the Principal Act, are subject to tax at the 10 per cent rate.

INCOME TAX RATES AMENDMENT BILL 1988

This Bill will amend the Income Tax Rates Act 1986 to declare the rates of tax payable by companies and by trustees of prescribed unit trusts for the 1989-90 and subsequent financial years in respect of income of the 1988-89 and subsequent income years. A further amendment of that Act to be made by this Bill will declare the rate of tax payable by trustees assessed under subsection 98(3) of the Income Tax Assessment Act 1936 in respect of trust income of non-resident company beneficiaries for the 1988-89 and subsequent financial years.

The declaration of a 39 per cent rate of company tax proposed by this Bill will give effect to the announcement made in the 1988 May Economic Statement. As a consequence of the reduction in the tax rate in respect of company income for the 1988-89 income year, the Bill also proposes a decrease to 39 per cent in the rate of tax payable by trustees on 1988-89 trust income of non-resident company beneficiaries for the 1988-89 and subsequent financial years.

Clause 1: Short title etc.

Subclause (1) provides for the amending Act to be cited as the Income Tax Rates Amendment Act 1988.

Subclause (2) facilitates references to the Income Tax Rates Act 1986 which, in this Bill, is referred to as the Principal Act.

Clause 2: Commencement

By this clause it is proposed that the amending Act will come into operation on the day on which it receives the Royal Assent. But for this clause, the Act would, by virtue 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: Rates of tax payable by companies

Paragraph (a) of this clause will amend subsections 23(2) and 23(3) of the Principal Act to reduce the rate of tax payable on taxable income by companies, other than companies that are registered organisations, from 49 per cent to 39 per cent.

By paragraph (b), the shading-in threshold of $3,813 in subsection 23(5) that applies in respect of non-profit companies, other than registered organisations, is to be substituted by a threshold of $1,429. The new threshold will mean that for the purpose of calculating the tax payable by a non-profit company, not being a registered organisation, in respect of the company's taxable income of the 1988-89 income year and subsequent income years where the taxable income exceeds $416 but does not exceed $1,429, tax payable will be 55 per cent of the excess of the taxable income over $416. Where taxable income exceeds $1,429, tax will be payable at the proposed new rate of 39 per cent on the whole of the non-profit company's taxable income .

Clauses 4 and 5: Rate of tax payable by trustees of corporate unit trusts and public trading trusts

Clauses 4 and 5 will amend sections 24 and 25 of the Principal Act, respectively, to substitute references to 49 per cent with 39 per cent. Those sections provide for the rate of tax payable by corporate unit trusts (section 24) and public trading trusts (section 25) collectively referred to as prescribed unit trusts. For the purposes of the imposition, assessment and collection of tax, prescribed unit trusts are treated as companies.

Clause 6: Rate of tax payable by trustee to whom subsection 98(3) of Assessment Act applies

This clause will amend section 28 of the Principal Act to reduce the rate of tax payable by a trustee of a trust estate assessed under subsection 98(3) of the Income Tax Assessment Act 1936 (the "Assessment Act") in respect of trust income of a non-resident company beneficiary of the trust estate. The rate of tax is to be reduced from 49 per cent to 39 per cent.

By subclause 7(2), the new 39 per cent rate of tax is to apply for the 1988-89 financial year and all subsequent financial years - that is, in respect of 1988-89 and subsequent years' trust income of a non-resident company beneficiary that is assessed to a trustee under subsection 98(3) of the Assessment Act.

Clause 7: Application of amendments

Clause 7 sets the commencement dates of the new rates of tax to be declared by this Bill.

By subclause (1), all the amendments to be made by this Bill, other than the amendment to declare the rate of tax payable by a trustee assessed under subsection 98(3) of the Assessment Act (see notes on clause 6) are to apply for 1989-90 and all subsequent financial years.