House of Representatives

Explanatory Memorandum

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

GENERAL OUTLINE

This Bill will amend:

•

the Fringe Benefits Tax Assessment Act 1986 -

•.

to extend a fringe benefits tax exemption to employers who make contributions to obtain priority of access in certain commercial child care centres (proposal announced in the Budget on 21 August 1990);

•

the Income Tax Assessment Act 1936 -

•.

to modify the availability of capital gains tax roll-over relief for assets acquired before 20 September 1985 and destroyed as the result of a natural disaster (proposal announced in the 1990-91 Budget);

•.

to extend the availability of the principal residence exemption for capital gains tax purposes during a taxpayer's temporary absence (proposal announced in the 1990-91 Budget);

•.

to prevent the rollover of the excessive component of an eligible termination payment (ETP) arising from the commutation of the excessive amount of a pension or annuity and to ensure that no part of the unused undeducted purchase price of the pension or annuity can reduce the amount of such an ETP (effective from 1 July 1990);

•.

to repeal from 1 July 1990, the provisions that reduce the excessive component of an ETP by any non-qualifying component;

•.

to increase the maximum tax deductions available to people who do not receive any superannuation support from anyone else, with effect from 1 July 1990 (proposal announced in 1989 Budget);

•.

to remove the discretion given in the law to the Commissioner to treat people who have superannuation support as if they were unsupported (proposal announced 29 June 1990);

•.

to allow a rebate of tax on superannuation contributions made by employees who do not qualify for tax deductions in respect of their contributions but who, in broad terms, receive only a small amount of superannuation support (proposal announced on 29 June 1990);

•.

to impose additional tax, by way of penalty, where a taxpayer over-estimates the amount of tax instalment deductions from salary or wages in an application to vary provisional tax (proposal announced in the Budget on 21 August 1990);

•.

to allow income tax deductions for gifts to The Friends of the Duke of Edinburgh's Award in Australia Incorporated (proposal announced on 20 September 1990);

•.

to amend the income tax gift provisions to extend until 31 December 1990 the period of tax deductibility for gifts to Australian Vietnam Forces Welcome Home '87 Pty Limited;

•.

to exempt from income tax the pay and allowances of members of the Australian Defence Force who are allotted for duty in parts of the Middle East in response to Iraq's invasion of Kuwait;

•.

to ensure that the Act complies, as far as possible, with the provisions of the Sex Discrimination Act 1984 by -

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inserting a definition of "spouse", to include a de facto spouse, to apply generally throughout the Income Tax Assessment Act;

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making certain other amendments to the Act to remove discrimination on the basis of marital status; and

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replacing the daughter-housekeeper rebate with a child-housekeeper rebate;

•

the Occupational Superannuation Standards Act 1987 -

-

to correct a technical deficiency concerning the time at which a person may quote his or her tax file number to a payer of a superannuation or similar benefit on an Insurance and Superannuation Commission form.

The Bill will also make minor amendments to the Fringe Benefits Tax Assessment Act 1986, the Medicare Levy Act 1986 and the Taxation (Unpaid Company Tax) Assessment Act 1982 as a consequence of the amendments to the Income Tax Assessment Act which the Sex Discrimination Act requires.

FINANCIAL IMPACT

The extension of an exemption from fringe benefits tax to contributions by employers to obtain priority of access for employee's children in commercial child care centres is expected to be negligible.

The changes to the capital gains tax provisions will result in a small but unquantifiable cost to revenue.

The amendments concerning the excessive component of an eligible termination payment will have a negligible impact on revenue.

The cost of increasing the maximum tax deductions for people with no superannuation support and of allowing rebates for superannuation contributions by certain employees is expected to be $145 million in the 1991-92 year.

The amendments to introduce a new provisional tax penalty will have negligible revenue impact.

The revenue cost of extending the income tax gift provisions to include The Friends of the Duke of Edinburgh's Award in Australia Incorporated is estimated to be $100,000 in a full financial year.

The amendment to extend the period of tax deductibility for gifts to Australian Vietnam Forces Welcome Home '87 Pty Limited is expected to cost the revenue $75,000 in the 1991-92 financial year.

The exemption of the pay and allowances of Australian Defence Force personnel on operational service in the Middle East is estimated to cost $850,000 per month with a total cost of $8.75 million in financial year 1990-91.

The amendment to the Occupational Superannuation Standards Act 1987 will have no financial impact.

The estimated cost to revenue of the amendments relating to sex discrimination is less than $500,000 in a full year.

MAIN FEATURES

The main features of this Bill are as follows:

Contributions to obtain priority of access in commercial child care centres (Clauses 3, 4 and 5)

Subsection 47(8) of the Fringe Benefits Tax Assessment Act 1986 exempts from fringe benefits tax certain contributions made by employers (or associates of the employer) to child care centres to obtain priority of access for the children of employees. But for the exemption, such contributions would be taxable as residual fringe benefits.

The amendment proposed by clause 4 will extend the existing exemption to contributions by employers to certain commercial child care centres.

The amendment will, by clause 5 of the Bill, apply in respect of a benefit provided on or after 1 January 1991.

Capital gains tax - involuntary disposal (Clauses 15 and 16)

Clause 15 proposes a number of amendments to section 160ZZK of the Income Tax Assessment Act 1936. That section provides a form of "roll-over relief" (i.e. deferral of tax on accrued gains or the retention of Capital Gains Tax exempt status for original assets acquired before 20 September 1985) where a taxpayer acquires a replacement asset, or repairs or restores an asset, after receiving compensation for the loss, destruction, damage or compulsory acquisition of an original asset. The proposed amendments relate to the retention of pre-20 September 1985 status for replacement assets purchased following the loss or destruction of, or damage to, an original asset as a consequence of a natural disaster.

The Bill will give effect to the decision, announced in the 1990-91 Budget, to modify roll-over relief available where an original asset acquired prior to 20 September 1985 is disposed of involuntarily.

The amendments will apply where an original asset acquired before 20 September 1985 is lost or destroyed directly as the result of a natural disaster. Presently, in such circumstances, a replacement asset will be taken to have been acquired before 20 September 1985 (and therefore remain CGT-exempt) provided that its cost does not exceed 120% of the market value of the destroyed asset at the time of its destruction.

The amendment will remove this limitation only in respect of assets which replace assets destroyed as a consequence of a natural disaster. The 120% limitation will continue to apply to assets which are involuntarily lost, destroyed or disposed of under any other circumstances.

An alternative requirement in relation to assets lost etc., following a natural disaster will be that the replacement asset is "substantially the same" as the destroyed asset. Whether or not a replacement asset is substantially the same as an original asset will be determined having regard to the location, size, value, composition, utility and quality of the replacement asset when compared with the original. This requirement is being introduced to ensure that taxpayers do not retain CGT-exempt status for an asset which is not objectively a "replacement asset".

The amendment will apply to assets acquired in replacement of original assets which were lost or destroyed as a consequence of a natural disaster occurring on or after 28 December 1989, which was the date of the Newcastle earthquake.

Principal Residence Exemption (Clauses 16 and 28(6))

The Bill will amend Division 18 of Part IIIA of the Income Tax Assessment Act 1936, which contains the rules for exempting a taxpayer's sole or principal residence from the capital gains and capital losses provisions. The amendments relate to the availability of the principal residence exemption (PRE) for periods in which taxpayers cease to occupy a dwelling as their sole or principal residence. Subject to the satisfaction of certain conditions, taxpayers may be able to retain the tax exempt status of the dwelling in these circumstances.

Under the existing law, a taxpayer must elect that a dwelling is to be treated as the sole or principal residence for a period of temporary absence. Further, the dwelling must again become the taxpayer's sole or principal residence within a period of four years after it temporarily ceased to be the sole or principal residence to be eligible for the PRE for that period of absence.

The Bill will give effect to the Budget announcement made on 21 August 1990 that the PRE is to apply for an unlimited period during an absence, provided the dwelling is not used to produce income. Where the dwelling is used to produce income during an absence, a taxpayer will be able to maintain the PRE for up to six years. For periods in excess of six years in which the taxpayer continues to be absent and the dwelling is used for income producing purposes, the PRE will not be available. A further change is that it will no longer be necessary for the taxpayer to reoccupy the dwelling prior to disposal for the PRE to be available during the absence.

The amendments will be back-dated to apply to assessments in respect of the 1986 and subsequent years of income.

Eligible termination payments - excessive component (Clauses 8, 9 and 28(3))

This Bill will amend the provisions of the Income Tax Assessment Act 1936 which deal with the excessive component of an eligible termination payment (ETP).

Under the existing law, ETPs can have six possible components. One of those components is the "excessive component" which arises when benefits in excess of a taxpayer's reasonable benefit limit (RBL) are received. The excessive component is included in the taxpayer's assessable income and is taxed at the taxpayer's marginal rate.

The Insurance and Superannuation Commissioner is responsible for determining whether a benefit is in excess of a taxpayer's RBL. If a taxpayer receives a superannuation pension or annuity that is excessive, the Commissioner must advise or request the payer of the benefit to commute to a lump sum the excessive amount of the pension or annuity. The commuted amount is treated as an ETP consisting solely of an excessive component.

Under the existing law, such an ETP can be rolled over. However, nothing in the law prevents it from being taxed when rolled over. This is contrary to the purpose of rolling over an ETP which is to defer the tax on the ETP until it is withdrawn from the rollover institution. Although it may be consistent to not tax an ETP arising on the commutation of the excessive amount of a pension or annuity at the time it is rolled over, such a measure could give rise to substantial compliance and administrative costs due to the recalculation of the components of the ETP rolled over. In order to avoid such costs, the amendments proposed by this Bill will prevent the rollover of an ETP arising on commutation of the excessive amount of a pension or annuity. In addition, the Bill will amend the Income Tax Assessment Act 1936 to ensure that the amount of such an ETP cannot be reduced by the unused undeducted purchase price of the commuted pension or annuity.

The existing income tax law contains certain rules for reducing the excessive component of an ETP by the amount of any non-qualifying component. These rules provide that where there is both an excessive component and a non-qualifying component in relation to an ETP, the excessive component is reduced (to nil, if necessary) by the amount of the non-qualifying component. These rules are based on an assumption that the non-qualifying component of an ETP is included in the calculation of a taxpayer's RBL and therefore the excessive component and the non-qualifying component may cover the same part of the ETP.

As a consequence of amendments to the Occupational Superannuation Standards Regulations, the non-qualifying component is excluded from the calculation of a taxpayer's RBL and therefore the excessive component and non-qualifying component will never cover the same part of an ETP. This Bill will repeal the provisions in the income tax law which reduce the excessive component of an ETP by the non-qualifying component.

These amendments will apply to ETPs made on or after 1 July 1990.

Deductions for personal superannuation contributions (Clauses 12, 13, 27 and 28(5))

This Bill will give effect to the proposal, announced in the 1989 Budget Statement, to increase the maximum amount of tax deductible superannuation contributions that may be made by a particular group of people. Under the existing law, there are two groups of people who qualify for tax deductions in respect of their contributions to superannuation funds to provide themselves with superannuation benefits.

The first group comprises people who do not get any superannuation support from anyone else, i.e., generally self-employed people and employees who do not belong to employer sponsored superannuation schemes. The second group is made up of people who get superannuation support from someone else (usually their employer) but only under so called "3% award superannuation arrangements". At present the limit on tax deductible contributions that may be made by people (eligible persons) in both groups is $3,000 in a year of income. This Bill will increase the limit for the first group from 1 July 1990. The new limit is to be the lesser of :

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$3,000, plus 75% of contributions exceeding $3,000; and

•

the amount of contributions required to fund a benefit equal to the person's reasonable benefit limit (the maximum concessionally taxed benefit that a person can receive during the person's lifetime).

No change is proposed to the limit for the second group.

The Bill will also remove a discretion in the law that allows the Commissioner to treat someone as an eligible person for a year of income even though the person does not qualify as an eligible person for the full year of income.

Tax rebate for superannuation contributions by employees (Clauses 14 and 28(5))

This Bill will also give effect to the proposal, announced on 29 June 1990, to allow a tax rebate for superannuation contributions made by certain employees who do not qualify for tax deductions in respect of those contributions. The base rebate available is 25% of the superannuation contributions in a year of income. But the maximum amount of rebatable contributions is $3,000, which means the amount of rebate is limited to $750. The proposal applies to superannuation contributions made on or after 1 July 1990.

The rebate is intended for people who have superannuation support other than solely under a 3% award superannuation arrangement, where that superannuation support is, in broad terms, not more than $1,600 in a year. To identify this group of people, the Bill will introduce the concept of an "eligible scheme". A person will have to be a member of an eligible scheme in order to qualify for a rebate. An eligible scheme may consist of an individual member of a superannuation scheme or a group of members where the trustee or administrator of the scheme determines that the amount of superannuation support in a year for that person, or the average support for members of the group, does not exceed $1,600.

Another criterion for getting a rebate is that the person's assessable income in the year of income is not bigger than a threshold specified in the law. A person whose assessable income is not more than $25,000 will qualify for the maximum rebate. For each dollar of assessable income over $25,000, the maximum amount of rebatable contributions will be reduced by fifty cents. This means that the rebate cuts out at an assessable income level of $31,000.

Provisional tax penalty (Clause 21, 22, 25, 28(8) and 32)

The Bill gives effect to a proposal announced in the 1990-91 Budget to impose additional tax, by way of penalty, where a taxpayer over-estimates the amount of tax instalment deductions from salary or wages in an application to vary provisional tax.

The proposed penalty will apply in respect of a variation of provisional tax payable by a taxpayer in respect of 1990-91 and all subsequent years of income where:

(a)

the existing provisional tax penalty, payable where a taxpayer under-estimates his or her taxable income in an application to vary, does not apply (i.e., the estimate of taxable income in the application to vary is not less than 90% of the actual taxable income for the year); and

(b)

in the preceding year, the taxpayer had tax payable on assessment of $3,000 or more and the tax instalments deducted from the salary or wages income were less by $3,000 or more than the tax that would have been assessed on that income, if it had been the only income derived during the year (i.e., the situation where in 1990-91 and subsequent income years provisional tax is to be imposed on salary or wages).

The trigger for the penalty is to be that a taxpayer, in an application to vary in respect of a year, has over-estimated by more than 10%, the tax instalment deductions actually made from salary or wages in the year. The penalty will apply in respect of "lump sum" and instalments of provisional tax.

The amount of the penalty is to be calculated as follows:

(a)

for lump sum provisional tax payers, 20% of the over-estimate of tax instalment deductions; and

(b)

for instalment payers, 20% per annum (for the "penalty period" as defined in subsection 221YA(1) of the Income Tax Assessment Act) of the shortfall in an instalment by virtue of the taxpayer's over-estimate of tax instalment deductions.

The proposed penalty is not to exceed the amount of penalty that would have applied had the existing penalty structure, where a taxpayer has under-estimated the actual taxable income by more than 90%, been triggered in respect of the provisional tax paid by the relevant taxpayer. This will ensure that a taxpayer will not be liable for penalty on an amount which is greater than the actual tax effect of the application to vary.

The Commissioner of Taxation will have the same power to remit any penalty (additional tax) as under the existing law. Therefore, where circumstances affect the tax instalment deductions made from the taxpayer's salary or wages during the year, and the taxpayer was not aware of the circumstances at the time the application to vary was furnished, the Commissioner may remit the whole or a part of the penalty.

A penalty applies in respect only of an application to vary furnished after the date of introduction of the Bill.

Gifts (Clauses 10 and 28(4))

The Bill will give effect to the proposal announced on 20 September 1990 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 Friends of the Duke of Edinburgh's Award in Australia Incorporated. In accordance with the announcement, gifts made to this incorporated body will qualify for deduction when made on or after 20 September 1990.

In addition, the Bill will amend the Act to extend the period of deductibility for gifts to Australian Vietnam Forces Welcome Home '87 Pty Limited. Gifts to this body are deductible where the gift is for the purpose of the Australian Vietnam Forces National Memorial project. Under an existing provision, only gifts made on or after 1 July 1989 and on or before 30 June 1990 are allowable deductions. The Bill authorises an extension of the period of deductibility by six months, until 31 December 1990.

Exemption of pay and allowances of members of the Australian Defence Force on operational service (Clauses 7, 11, 28(2) and 29)

The pay and allowances earned by members of the Australian Defence Force (ADF), while on operational service in parts of the Middle East in response to Iraq's invasion of Kuwait, will be exempt from income tax.

An ADF member will be taken to be on operational service if the member, or the ADF unit to which the member is attached, is allotted for duty in the operational area in response to Iraq's invasion of Kuwait. The ADF member must also have served in the operational area during some part of that period.

The exemption will also apply to the pay and allowances of ADF personnel attached to units of the Armed Forces of the United Kingdom or the United States of America which are allotted for duty in the operational area in response to the invasion. Additionally, any member who was serving with those Forces in the operational area on 2 August 1990 (the date of the invasion) will also qualify for the concession.

The operational area will comprise :

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Bahrain, Oman, Qatar, Saudi Arabia, the United Arab Emirates and Cyprus;

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the sea areas of the Gulf of Suez, the Gulf of Aqaba, the Red Sea, the Gulf of Aden, the Persian Gulf and the Gulf of Oman;

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certain parts of the Suez Canal and parts of the Arabian Sea and the Mediterranean Sea.

The exemption will apply to pay and allowances earned throughout the period of operational service, which may include periods of service outside the operational area. In general terms, operational service will commence at the time the ADF member leaves Australia and will continue until the time of return. However, these rules may vary according to the time when allotment occurs and the location of the member at that time.

Amendments to the Occupational Superannuation Standards Act 1987 (Clauses 34, 35 and 36)

This Bill will amend subsections 15E(1) and 15H(2) of the Occupational Superannuation Standards Act 1987.

Subsection 15H(2) currently provides that, for reasonable benefit limit purposes, a person may quote his or her tax file number to a payer when the payer makes an eligible termination payment or commences to pay a superannuation pension or annuity. A payer therefore cannot request a person to quote his or her tax file number until the payer has made the payment. In contrast, a person may request another person to quote, for PAYE purposes, his or her tax file number when the person becomes entitled to a payment which in most cases would be before the payment is actually made.

The proposed amendment will allow a payer to request a person to quote his or her tax file number at the time at which the person becomes entitled to receive the payment. This amendment will bring the timing of the quotation of the tax file number on Insurance and Superannuation Commission forms into line with the quotation of tax file numbers on Australian Taxation Office forms.

"Payer" is currently defined at subsection 15E(1) as an approved deposit fund, a superannuation fund, an employer, a life assurance company or a registered organisation that makes an eligible termination payment, a payment of a superannuation pension or a payment of an annuity. That is, a body does not become a payer until a payment has been made.

The proposed amendment to subsection 15H(2) necessitates a consequential amendment to the definition of payer under subsection 15E(1). The definition of payer will now be extended to a body which is liable to make an eligible termination payment or payments of a superannuation pension or annuity. A body can therefore become a payer before a payment is made but not before liability to make the payment arises.

Amendments relating to sex discrimination (Clauses 37, 38, 39 and Schedule)

This Bill will amend certain taxation laws administered by the Commissioner of Taxation so that they comply, as far as possible, with the policy of the Sex Discrimination Act 1984. That Act declares discrimination on the grounds of sex, marital status and pregnancy to be unlawful in a number of areas of community life.

Hitherto the taxation laws have been exempted from the operation of the Sex Discrimination Act by regulations made under that Act. The amendments made by this Bill will reduce the scope of the exemption provided in respect of the tax laws under those regulations. This is a result of the ongoing review process which is part of the Government's National Agenda for Women.

The Bill will insert a definition of "spouse", to include a de facto spouse, in the Income Tax Assessment Act 1936 (the Assessment Act) to apply generally throughout that Act. This will have the effect of removing discrimination between a legally married spouse and a de facto spouse where the latter would otherwise be treated as a single person. In many areas the Assessment Act already applies as if the term "spouse" includes a de facto spouse. The insertion of the definition will necessitate several consequential adjustments to other provisions of the Assessment Act and to the Medicare Levy Act 1986, the Fringe Benefits Tax Assessment Act 1986 and the Taxation (Unpaid Company Tax) Assessment Act 1982.

The Bill will also amend the Assessment Act to remedy other discriminatory features by :

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ensuring that expenditure incurred or payments made by a taxpayer for the maintenance of his or her spouse will not automatically be non-deductible where the taxpayer lives separately and apart from the spouse;

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removing the qualification of marital status from the trust provisions that deal with income or property subject to a power of revocation by the trustee. The qualification on the basis of age is to be adjusted to apply only for children under the age of 18 years;

•

ensuring that the application of the provisions that apply to tax certain unearned income of minors at the top marginal rate of personal tax will not be dependent on the marital status of the child; and

•

changing the rebate allowable in respect of a daughter wholly engaged in keeping house for a taxpayer to a rebate allowable in respect of a child doing the housekeeping, and removing any requirement that a taxpayer who claims such a rebate be widowed.

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

NOTES ON CLAUSES

PART 1 - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act (No. 5) 1990.

Clause 2: Commencement

Subject to subclauses 2(2), (3) and (4) the amending Act is by subclause 2(1), to commence on the day on which it receives the Royal Assent. But for this subclause, the Act would, by reason of subsection 5(1A) of the Acts Interpretation Act 1901, commence on the twenty-eighth day after the date of Assent.

By subclause 2, the amendments to the Occupational Superannuation Standards Act 1987 commence 28 days after the date of Royal Assent.

Subclause 3 of clause 2 provides an exception to the commencement date of the Bill. All the amendments relating to Part III of the Schedule to the Bill will commence on 1 July 1993.

Subclause 4 provides that all the amendments to the Taxation Laws Amendment (Foreign Income) Act 1990 made pursuant to the Sex Discrimination Act 1984 will commence either on the date that this Bill becomes law or on the date that the Taxation Laws Amendment (Foreign Income) Bill becomes law, whichever is the later.

PART 2 - 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: Exempt residual benefits

Subsection 47(8) of the Principal Act exempts from fringe benefits tax a benefit arising in relation to community child care facilities that are jointly funded by the Commonwealth and private sector employers under the Children's Services Program operated by the Commonwealth Department of Community Services and Health. Clause 4 proposes to replace subsection 47(8) with a new subsection which will retain the present exemption and extend an exemption from fringe benefits tax to a benefit of access conferred on an employee's children by an employer's contribution to certain commercial child care centres.

Two broad conditions must be satisfied under the proposed new subsection if the benefit in respect of a contribution to obtain priority of access is to be exempt. First, the benefit provided (the contribution by the employer) must relate to the obtaining of priority of access for a child or children of an employee at a child care centre that is an "eligible child care centre" for the purposes of the Child Care Act 1972 (paragraph (a)).

The second requirement which must be satisfied to qualify for the exemption is that the contribution to obtain the priority of access is made under the program administered by the Commonwealth and known as Services for Families with Children (paragraph (b)). This scheme was formerly known as the Children's Services Program.

As a result of this amendment, the exemption currently available in respect of employer contributions to obtain priority of access in non-profit child care centres will be extended to also apply to certain commercial child care centres.

The amendment will, by clause 5, apply to benefits provided on or after 1 January 1991.

Clause 5: Application of amendments

By clause 5, the new subsection 47(8) of the Fringe Benefits Tax Assessment Act 1986 to be inserted by clause 4 will apply to residual benefits provided on or after 1 January 1991.

PART 3 - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 6: Principal Act

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

Clause 7: Exemption of pay and allowances of members of Defence Force serving in operational areas

This clause will amend section 23AC of the Principal Act, which presently exempts from income tax the pay and allowances earned by members of the Australian Defence Force (ADF) while serving in Namibia. The amendments will:

•

cease the section applying in relation to Namibia;

•

apply the section (with some changes) to exempt the pay and allowances of members of the ADF earned during a period of operational service arising from the invasion of Kuwait by Iraq.

The details of the new exemption, and the other changes proposed by this clause, are set out below.

The general exemption

The amendment proposed by Paragraph (a) of this clause will set out the exemption in general terms. That is, the pay and allowances of members of the ADF earned during a period of operational service will be exempt from income tax, provided that the member served in the operational area at some time during that period. Operational service and operational area are defined terms, discussed below.

The requirement that the member must serve in the operational area is new. As a result, for example, the exemption will not apply to personnel who are posted to the operational area, but who do not complete their journey and return to Australia.

Operational Service

Paragraph (a) will also insert new subsection 23AC(2) which will define "operational service". There will be three classes of ADF personnel who can qualify for operational service :

(i)

ADF members who are allotted for duty in the operational area, on an individual basis;

(ii)

ADF members who are attached to a unit, contingent or detachment of the ADF that is allotted for duty in the operational area;

(iii)

ADF members who are attached to part of the Armed Forces of the United Kingdom or the United States of America, where that part is allotted for duty in the operational area.

ADF members covered by any of the above three categories will be taken to be on operational service if the Chief of the Defence Force staff issues a written certificate to the effect that the allotment for duty to the operational area was in response to Iraq's invasion of Kuwait. The purpose of this requirement is to exclude from the exemption ADF personnel who are allotted for duty in the operational area for reasons unconnected with the invasion.

This requirement will not apply to ADF personnel who were serving with UK or US Forces in the operational area on 2 August 1990. In these cases, allotment to the operational area preceded the invasion. The few ADF members falling into this category have been undertaking duties similar to those undertaken by personnel sent to the operational area in response to the invasion, and are to be taken to be on operational service.

There will be a general exclusion from operational service for any person serving as, or under, an attache at an Australian embassy or legation.

Changes in terminology

Paragraphs (b), (c) and (d) of this clause are drafting measures designed to update some terms used in section 23AC to reflect modern usage.

Period of operational service

Paragraph (e) will continue the existing extension of the period of operational service to include any period of hospital treatment arising from an illness contracted or any injury sustained during a period of operational service, wherever that treatment is given. The amendment removes a commencement date that is relevant only to the Namibia disturbance.

Delegation by Chief of the Defence Force

Paragraph (f) will authorize the Chief of the Defence Force to delegate the power to issue a certificate, under proposed paragraph 23AC(2)(b), that an allotment for duty was in response to Iraq's invasion of Kuwait (new subsection 23AC(4)). A decision by the Chief will be renewable by the Administrative Appeals Tribunal (new subsection 23AC(S)).

Paragraph (f) will also repeal provisions applying to Namibia, including powers to make regulations describing the operational area.

Operational Area

Paragraph (f) will insert a definition of "operational area" (in new subsection 23AC(6)) to comprise :

•

Bahrain, Oman, Qatar, Saudi Arabia, the United Arab Emirates and Cyprus;

•

the sea areas of the Gulf of Suez, the Gulf of Aqaba, the Red Sea, the Gulf of Aden, the Persian Gulf and the Gulf of Oman;

•

certain parts of the Arabian Sea;

•

the Suez Canal and part of the Mediterranean Sea.

Clause 8: Interpretation

Clause 8 will amend section 27A of the Principal Act which contains definitions for the purposes of Subdivision AA of Division 2 of Part III of the Act which deals with the assessment of superannuation, termination of employment and kindred payments.

Paragraphs (d) and (g) of the definition of "eligible termination payment" in subsection 27A(1) of the Principal Act treat an amount received by a taxpayer on commutation in whole or in part of a superannuation pension or annuity as an eligible termination payment (ETP). The amount of the ETP is the amount received on commutation reduced by the "unused undeducted purchase price" (as defined in subsection 27A(1)) of the superannuation pension or annuity.

Paragraph (a) of clause 8 will amend paragraphs (d) and (g) of the definition of "eligible termination payment" to ensure that, in the case of an "ISC-directed commutation payment", the amount of the ETP is not reduced by any unused undeducted purchase price of the pension or annuity being commuted.

Paragraph (d) of clause 8 inserts the following new definition:

"ISC-directed commutation payment" which means the amount of an ETP representing the commutation of all or part of an annuity or pension which is in excess of the reasonable benefit limits (RBL) as advised or requested by the Insurance and Superannuation Commissioner under section l5S of the Occupational Superannuation Standards Act 1987 (OSS Act).

The effect of the amendments made by paragraphs (a) and (d) of clause 8 is that the amount of an ETP arising on the commutation of the excessive amount of an annuity or pension under section 15S of the OSS Act cannot be reduced by any unused undeducted purchase price of the annuity or pension. This ensures that the full amount of the benefit which the Insurance and Superannuation Commissioner has determined is excessive is taxed as an excessive component in the taxpayer's hands. The "excessive component", as defined in subsection 27A(1) of the Act, is one of the six possible components of an ETP and arises when benefits in excess of a taxpayer's RBL are received. The excessive component is included in the taxpayer's assessable income and is taxed at the taxpayer's marginal rate.

Paragraphs (b) and (c) of clause 8 are minor drafting amendments which simply clarify the definition of "excessive component" in subsection 27A(1).

Paragraph (e) of clause 8 proposes to insert new subsection 27A(12E) which will ensure that a taxpayer cannot rollover an ETP arising on commutation of the excessive amount of an annuity or pension under section 15S of the OSS Act. Subsection 27A(12E) will prevent an "ISC-directed commutation payment" (see above for an explanation of this term) from being a "qualifying eligible termination payment". A "qualifying eligible termination payment" (see subsection 27A(12)) is an ETP that can be rolled over for the purposes of section 27D of the Principal Act.

By subclause 28(3) the amendments proposed by this clause will apply to payments made on or after 1 July 1990.

Clause 9: Components of an ETP

Clause 9 will repeal existing subsections 27AA(4) and (5). Those subsections provide that where there is both an excessive component and a non-qualifying component in relation to an ETP, the excessive component is reduced (to nil, if necessary) by the amount of the non-qualifying component. Subsections 27AA(4) and (5) are based on an assumption that the non-qualifying component is included in the calculation of a taxpayer's RBL and therefore the non-qualifying component and the excessive component could cover the same part of an ETP.

As a result of amendments to the Occupational Superannuation Standards Regulations (regulation 4S), the non-qualifying component of an ETP is not included in the calculation of a taxpayer's RBL. Accordingly, the non-qualifying component and excessive component could never cover the same part of an ETP. It follows that subsections 27AA(4) and (5) are not necessary.

By subclause 28(3) the amendments proposed by this clause will apply to payments made on or after 1 July 1990.

Clause 10: 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 paragraph (a) of clause 10 will insert new sub Paragraph 78(1)(a)(cvi) in the Principal Act. The subparagraph will authorise deductions for gifts to The Friends of the Duke of Edinburgh's Award in Australia Incorporated.

By subclause 28(4), proposed subparagraph 78(1)(a)(cvi) will apply to gifts made on or after 20 September 1990.

The amendment proposed by paragraph (b) of clause 10 will omit from subsection 78(6AK) the reference to the date 1 July 1990 and substitute the date 1 January 1991. The effect of the amendment will be to extend the period of deductibility for gifts made under subparagraph 78(1)(a)(xcix) to Australian Vietnam Forces Welcome Home '87 Pty Limited by a further six months. Gifts will therefore be deductible where made on or after 1 July 1989 and on or before 31 December 1990.

Clause 11: Rebates for members of Defence Force serving overseas

Clause 11 makes a minor amendment of section 79B of the Principal Act, to change the reference to "special service" to "operational service". The amendment is consequent upon changes to section 23AC proposed by clause 7, and have no substantive effect.

Clause 12: Interpretation

Clause 12 will amend section 82AAS of the Principal Act which contains the definitions and interpretative provisions for Subdivision AB of Division 3 of Part III of the Principal Act. Subdivision AB deals with the tax deductibility of contributions made to superannuation funds by fund members to provide benefits for those members or their dependants.

To qualify for a deduction for personal superannuation contributions a fund member must be an "eligible person" within the meaning in subsection 82AAS(2). There are two groups of people who may qualify as eligible persons. The first group covers those people who do not get any superannuation support from anyone else, i.e., generally, self-employed people and employees with no employer support. The second group is made up of people whose superannuation is sponsored by someone else but only to the extent required under a so-called "3% productivity superannuation agreement". The law describes this support as support by way of superannuation agreement contributions.

Paragraph (a) of clause 12 will provide a basis for identifying the two separate groups of people who may qualify for deductions in respect of their personal superannuation contributions. This has not been necessary in the past but, with effect from 1 July 1990, people in the first group are to be entitled to bigger deductions than those allowed under the present law. There is not to be any change in the entitlement for people in the second group.

Paragraph (a) will insert two new definitions in subsection 82AAS(1). The definition of "eligible person", which simply has the meaning given by subsection 82AAS(2), is being inserted solely for the purpose of the other new definition being inserted by paragraph (a). The other definition describes an unsupported eligible person. The definition of "unsupported eligible person" identifies the people, i.e., those in the first group of eligible persons discussed above, who are to qualify for increased deductions from 1 July 1990 (see also notes on clause 13).

Paragraph (c) of this clause will omit the discretion in subsection 82AAS(3) of the Principal Act, that allows the Commissioner to treat someone as an eligible person in a year of income even though the person receives employer support in the year other than solely by way of superannuation agreement contributions. Paragraph (b) performs the complementary task of removing the reference to subsection 82AAS(3) in subsection 82AAS(2).

Clause 13: Deductions for superannuation contributions by eligible persons

Clause 13 will amend subsection 82AAT(2) of the Principal Act to put in place the new increased deduction limit for self-employed people and employees with no employer superannuation support. People in this group of eligible persons are to be known as unsupported eligible persons (see notes on clause 12).

The new deduction limit for superannuation contributions by unsupported eligible persons is to be the lesser of :

•

$3,000 plus 75% of the amount of contributions exceeding $3,000 (new subparagraph 82AAT(2)(a)(i)); and

•

the amount of contributions needed to fund a benefit equal to the person's reasonable benefit limit (new subparagraph 82AAT(2)(a)(ii)).

Because the reasonable benefit limit for a person is determined under the Occupational Superannuation Standards (OSS) Regulations, the second limb of the new deduction limit relies upon the OSS Regulations. In particular, the deduction limit is linked to subregulations 18B(7) (which covers defined benefit funds) and (9) (which covers other funds), which identify the maximum amount of personal superannuation contributions that could be made by a superannuation fund member if all of the contributions were tax deductible. Funds can in fact accept contributions (non-deductible) in excess of the amounts so identified.

The method for determining the alternative deduction limit under new subparagraph 82AAT(1)(a)(ii) is to be set out in the Income Tax Regulations.

Examples of how the new deduction limit will work are :

Example 1

A self-employed person contributes $6,000 to a superannuation fund in the 1990-91 income year. The amount calculated under subregulation 18B(9) of the OSS Regulations is $7,000.

The maximum deduction available is $5,250, i.e., the lesser of

•

$3,000 plus 75% of $3,000, i.e., $5,250; and

•

$7,000.

Example 2

An unsupported employee makes contributions of $8,000 in the 1990-91 income year. The subregulation 18B(9) amount is $7,000.

The maximum deduction available is $6,750, i.e., the lesser of

•

$3,000 plus 75% of $5,000, i.e.. $6,750; and

•

$7,000.

Example 3

An amount of $11,000 is contributed by a self-employed person during the 1990-91 year of income. The amount required to fund the person's reasonable benefit limit is $7,000.

The maximum deduction available is $7,000, i.e., the lesser of

•

$3,000 plus 75% of $8,000, i.e., $9,000; and

•

$7,000.

Clause 14: Subdivision AAC - Rebate for Personal Superannuation Contributions

Purpose of new Subdivision

Clause 14 will insert new Subdivision AAC in Division 17 of Part III of the Principal Act. The new Subdivision will provide rebates for personal superannuation contributions by certain people who do not qualify for tax deductions in respect of those contributions.

Who will qualify for the new rebate?

In broad terms, people will qualify for rebates if the amount of superannuation support they receive from someone else, other than support under a 3% award superannuation agreement, is no more than $1,600 in a year and their assessable incomes do not exceed $31,000.

How will people know whether they qualify?

Trustees of superannuation schemes who determine that the amount of superannuation support for individual members of the scheme, or a particular group of members, is less than $1,600, can notify the member or members of that fact.

When does the new Subdivision apply from?

Subdivision AAC is to apply to superannuation contributions made on or after 1 July 1990.

A detailed explanation of how the new Subdivision works is contained in the notes that follow.

Section 159TA: Interpretation

New section 159TA sets out the meanings of terms used in new Subdivision AAC. Since many of the terms are self-explanatory, this note only discusses those definitions that warrant further explanation.

"active member" is defined for the purpose of the formulas in new sections l59TF and l59TH that are to be used to calculate the average level of superannuation support for the members of a superannuation scheme. If the average level of support is no more than a threshold, called the employer support threshold, a scheme may qualify as an eligible scheme (see notes on new section 159TE). Only members of eligible schemes can qualify for a rebate. The initial employer support threshold is to be $1,600 in a year.

The term active member is intended to cover all of those members who are continuing to receive superannuation support from someone else that is attributable to the particular period (see notes on new section 159TC) being examined. It is not meant to cover people who, though still members of a scheme, no longer can expect to get any additional superannuation support for the relevant period. Examples of these inactive members would be :

•

members who have retired and are receiving pension benefits;

•

members whose only interest in a scheme is a compulsorily preserved benefit; and

•

members whose only interest in a scheme is a voluntarily deferred benefit.

In short, the people who are active members of a superannuation scheme are those who would not qualify as eligible persons under subsection 82AAS(2), if their only superannuation scheme membership were with that scheme.

"daily threshold component" is defined for the purpose of calculating the employer support threshold for a particular period. The initial standard threshold is $1,600 for a year (called the annual rate in this definition).

Ordinarily, the level of superannuation support in a superannuation scheme is to be determined for the most recent statutory reporting period (see notes on section 159TC) of the scheme. For instance, to determine whether a scheme member, or a group of members, is a member of an eligible scheme for the 1990-91 year of income, the level of support in the scheme for the individual or group would be measured for the last statutory reporting period that ended before 1 July 1990. The dollar amount of support so determined (under section 159TF, TG, TH or TJ) would be compared to the employer support threshold. If it is less than the threshold, the scheme will satisfy one of the tests of an eligible scheme.

In some cases, though, the period being examined may be less than a year. For example, a scheme may have been established on 1 January 1990 and its first statutory reporting period may not end until 31 December 1990. At 1 July 1990 the scheme will only have been operating for six months. It would be inappropriate to compare the amount of employer support in a six month period to the threshold for a full year.

For that reason, the daily threshold component will convert the threshold for a year into a daily threshold. The relevant daily threshold can then be multiplied by the number of days in the period under examination to arrive at the appropriate employer support threshold.

For example, if the level of support was to be measured for the period 1 January 1990 to 30 June 1990 the relevant employer support threshold would be calculated as follows:

daily threshold component in the relevant period * number of days


i.e.

4.3836 * 181 = $794 (rounded up to the nearest dollar)


The concept of the daily threshold component is also important if the standard threshold (to be $1,600 initially) is changed. Because the period (see notes on statutory reporting period - section 159TC) in which superannuation support is to be measured can vary from scheme to scheme, it is very difficult to attach the employer support threshold to any particular year. The daily threshold component links the standard threshold to the financial year, i.e., the period from 1 July until 30 June of the following year. For the 1990-91 year the standard threshold is $1,600. The law allows a higher standard threshold to be prescribed in the income tax regulations. If a higher rate is prescribed, it will also be linked to a particular financial year. Where a scheme's statutory reporting period traverses two financial years with different standard thresholds, the daily threshold concept will allow a threshold to be calculated that is, effectively, a proportion of each of the new standard threshold and the previous threshold.

"defined benefit scheme" is a term used to distinguish between the two basic types of superannuation scheme, commonly known as defined benefit schemes and accumulation, or defined contribution, schemes. The distinction is necessary because the method for calculating the level of superannuation support in a superannuation scheme (see notes on new sections 159TF, 159TG, 159TH and 159TJ) differs according to whether the scheme is a defined benefit or an accumulation scheme.

The definition being inserted is based on the definition of "defined benefit superannuation fund" in subregulation 3(1) of the Occupational Superannuation Standards (OSS) Regulations. But it differs slightly from the OSS definition in that the final qualification in the OSS definition, in paragraph (b) of the new tax law definition, has been applied only to schemes that are not public sector schemes (a term also defined in section 159TA and based on an OSS definition).

There are two reasons for the difference. First, some public sector schemes are not funded and, therefore, the qualification in paragraph (b), which refers to contributions to a scheme, has no meaning for those schemes. (New Subdivision AAC has to deal with some superannuation schemes that don't have a fund. That is why the references throughout the Subdivision to superannuation arrangements are generally to superannuation schemes rather than superannuation funds). Secondly the OSS definition is designed to exclude some superannuation funds found in the private sector that, on the surface, may look like defined benefit funds but that, in reality, are accumulation funds. Contributions to these funds are not paid in an unsegregated lump sum but are allocated to individual members. On the other hand, there are some public sector schemes that are true defined benefit schemes but where, because employer contributions are not made until a benefit is due to be paid, the "last minute" employer contributions are determined for and allocated to particular members of the schemes.

"employer contributions" is defined for the purpose of identifying the level of superannuation support being provided for a member or a group of members of a superannuation scheme that is not a defined benefit scheme. In broad terms, the level of support is the amount of employer contributions per member in a year. The definition covers all contributions made on behalf of a member by someone other than the member, not just contributions by an employer.

"funded scheme" is a term used to distinguish between two types of defined benefit scheme that are sponsored by an employer or someone else other than the members. The term covers those schemes where the sponsor makes regular contributions to a sinking fund to provide for the liability to pay the superannuation benefits under the scheme. A scheme where the sponsor's contributions are not made until the benefits payable are determined and ready to be paid is not covered by this definition.

The distinction between the two types of scheme is relevant for the purpose of determining the "normal employer cost" (see also notes on that definition) for a particular defined benefit scheme. For a funded scheme the normal employer cost is based on the amounts of contributions that should be made by a sponsor to fund the benefits payable under the scheme. If a scheme is not a funded scheme, the normal employer cost is to be determined on the basis that would have been used if the scheme was funded.

"individual superannuation salary" is a term used for the purpose of calculating the level of superannuation support in a defined benefit scheme (see notes on sections 159TF, 159TG and 159TJ). The relevant salary is the amount of salary for the purpose of the scheme's governing rules.

Where a member's salary for superannuation purposes is determined on a particular day (defined as the "salary determination date") in a year, the salary figure to be used is the salary so identified. If the superannuation salary is determined on more than one day in a year, the salary figure to be used is usually the most recent one identified before the end of the most recent statutory reporting period (see notes on new section l59TC).

"normal employer cost" is also defined for the purpose of calculating the level of superannuation support in a defined benefit scheme. When the normal employer cost is multiplied by the individual superannuation salary for a member of a scheme, or the salaries for a group of members, the result is a dollar amount of superannuation support for the relevant member or members. If the dollar amount per member does not exceed $1,600, the scheme may qualify as an eligible scheme (see notes on section 159TE). This is important because only people who are members of an eligible scheme can qualify for the new tax rebate in new Subdivision AAC.

The normal employer cost for a defined benefit scheme is related to a statutory reporting period (see notes on section 159TC). This will normally be a twelve month period. However, there may be occasions where the period is shorter, e.g., in the first period of operation of a new scheme, or longer, e.g., where the Commissioner substitutes a longer period under section 159TD (see notes on that section). In either of those cases, the normal employer cost, as a percentage of salary, would be smaller or bigger, respectively, than it would be for a twelve month period.

The definition of normal employer cost doesn't spell it out but, the normal employer cost will need to be determined by an actuary. This is because, for a scheme to qualify as an eligible scheme (section 159TE), an actuary must certify that the level of employer support in a defined benefit scheme is less than $1,600 (new subparagraph 159TE(f)(v)). It is expected that actuaries will calculate the normal employer cost in accordance with guidelines issued by The Institute of Actuaries of Australia.

"notifiable member" is a term used to limit the number of members of a superannuation scheme who must be given a notice under sub-subparagraph 159TE(f)(iv)(B). These notices must be given by the trustee of a superannuation scheme if the scheme is to qualify as an eligible scheme under section 159TE. The trustee need only give notices to notifiable members to meet this test of an eligible scheme. A person must be a member of an eligible scheme to qualify for a rebate under new Subdivision AAC.

Notifiable members are those members whom the trustee of a superannuation scheme knows, because they receive superannuation support under the relevant scheme, do not qualify for tax deductions in respect of their superannuation contributions. This will save trustees from having to give notices to people who are unlikely to qualify for rebates under Subdivision AAC, i.e., because they are likely to be eligible persons who qualify for tax deductions in respect of their superannuation contributions.

The restriction on the number of eligible scheme members who have to be given notices is intended to ease the administrative burden on trustees.

Section l59TB: Parts of schemes may be treated as separate schemes

Section 159TB is designed to allow the trustee or administrator of a superannuation scheme to isolate a particular group of members of the scheme for the purpose of determining whether the average level of superannuation support for that group is no more than the employer support threshold (to be $1,600 initially). The section will allow the trustee to nominate any group of persons for this purpose. For instance, a group might consist of all those members whose superannuation salaries do not exceed $31,000.

Where a trustee elects, in writing, to identify a scheme covering a specified class of members within a larger scheme (called the main scheme), the smaller scheme (called the subscheme), may qualify as an eligible scheme in its own right. The election should specify the criteria used in identifying the group of people covered by the subscheme. By virtue of new subsection 262A(4A) (being inserted by clause 26 of this Bill), the election must be retained by the trustee for a period of 5 years.

A subscheme is not to be capable of being subdivided any further (subsection 159TB(2)). Nor may a member of the main scheme be a member of more than one subscheme (subsection 159TB(3)).

Finally, where a trustee makes use of section 159TB, the statutory reporting period for a subscheme identified by the trustee is deemed to be the statutory reporting period for the main scheme. This is because a statutory reporting period, such as a year of income, may not otherwise have any meaning in relation to a subscheme.

Section 159TC: Statutory reporting period for schemes

Section 159TC identifies the period during which the superannuation support provided for members of a superannuation scheme is generally to be measured. This is for the purpose of determining whether the level of support is no more than the threshold (to be $1,600 initially - see notes on the definition of daily threshold amount) allowed before a scheme is disqualified from being an eligible scheme. The relevant period is to be known as the statutory reporting period.

The concept of a statutory reporting period has to cover two different types of scheme. The first type is covered by paragraph 159TC(1)(a). Paragraph 159TC(1)(a) deals with schemes where the benefits provided under the scheme are, at least to some extent, funded through a superannuation fund. Where the trustee of such a scheme has given scheme members a statement in accordance with subregulation 17(4) of the OSS Regulations, the statutory reporting period is to be the 12 month period covered by the statement, unless the trustee elects to use the fund's year of income as the statutory reporting period. Subregulation 17(4) of the OSS Regulations allows funds to give members certain information statements based on a 12 month period that is different to the fund's year of income. The period is the 12 months ending on a day commonly known as the annual review date for the fund.

If members' information statements have not been given in accordance with subregulation 17(4) of the OSS Regulations, or the trustee of a fund elects under sub-subparagraph 159TC(1)(a)(i)(B), the statutory reporting period is to be the fund's year of income. An election under sub-subparagraph 159TC(1)(a)(i)(B) is to be retained by the trustee for five years (per new subsection 262A(4A) - see note on clause 26). The election is irrevocable. Moreover, the election continues to have effect in later years by the operation of subsection 159TC(3), unless the Commissioner allows otherwise. This means that, ordinarily, statutory reporting periods for schemes will be continuous 12 month periods.

Paragraph 159TC(1)(b) deals with the second type of superannuation scheme, where none of the benefits payable under the scheme are funded. These schemes need not satisfy the OSS Regulations. Nor would they have a year of income (they do not derive any income). For these types of scheme the statutory reporting period is to be the relevant accounting period used in preparing any general accounts of the scheme if there is one. If there is not, the reporting period is to be the financial year.

Section 159TD: Commissioner may determine that a period be treated as a statutory reporting period

Section 159TD will deal with cases where the statutory reporting period (see notes on section 159TC) for a superannuation scheme changes, e.g. where the Commissioner allows a scheme to change its statutory reporting period in accordance with subsection 159TC(3). In these cases the Commissioner will be able to notify the trustee of a scheme that a period specified in the notice is to be treated as a statutory reporting period. The relevant period may be shorter or longer than the normal 12 month statutory reporting period.

For instance, take the case of a scheme seeking to establish whether it is an eligible scheme for the 1991-92 year of income. The scheme's most recent statutory reporting period is 1 January 1990 to 31 December 1990 (the period covered by member information statements given to members under subregulation 17(4) of the OSS Regulations). The trustee of the scheme elects to use the scheme's year of income (say 1 July 1990 to 30 June 1991) as the statutory reporting period. The appropriate period for examining the level of superannuation support in such a scheme would be the 18 month period from 1 January 1990 to 30 June 1991 (the last period having been examined being the year from 1 January 1989 to 31 December 1989).

Section 159TE: Eligible scheme

Section 159TE will identify those superannuation schemes that are to qualify as eligible schemes. A person must be a member of an eligible scheme in order to qualify for a rebate under new Subdivision AAC. Section 159TE works by relating a scheme to a taxpayer and looking at the scheme's status (i.e., as eligible or not) in relation to the taxpayer's year of income.

There are three main features of an eligible scheme. Paragraphs 159TE(c) to (e) are designed to test whether particular schemes have these features and, therefore, are eligible schemes. Paragraph (f) sets one further test of an eligible scheme. This is that the trustee of the scheme notifies the scheme's members that, in the trustee's opinion, the scheme is an eligible scheme.

The features of an eligible scheme are:

•

that in the taxpayer's year of income it can reasonably be expected that superannuation benefits will be provided under the scheme for the taxpayer on retirement, or the taxpayer's dependants should the taxpayer die in the year of income (paragraph 159TE(c));

•

if the scheme is a funded scheme (see notes on that definition) the relevant fund is a complying superannuation fund for the whole of the taxpayer's year of income (paragraph 159TE(d)). That may cover two income years of the fund if, for instance, the fund has a substituted accounting period;

•

that the level of superannuation support for members of the scheme in a statutory reporting period, or other period being examined, does not exceed a threshold (the employer support threshold) set in the law (paragraph 159TE(e)). The standard threshold is to be $1,600 initially.

The paragraphs of section 159TE dealing with the first two features are straight forward. So are subparagraphs 159TE(e)(i) and (ii). These subparagraphs simply test whether the level of superannuation support in the scheme during the most recent statutory reporting period before the current year of income did not exceed the employer support threshold. The remaining subparagraphs of paragraph 159TE(e) deal with the odd cases where it is not possible to look at the most recent statutory reporting period, e.g., because the scheme was only established in the current year of income or the first statutory reporting period had not ended before the current year of income.

Subparagraphs 159TE(e)(iii), (iv) and (v) deal with accumulation schemes, while subparagraphs 159TE(e)(vi) and (vii) cover defined benefit schemes. The effect of subparagraph (iii) is that an accumulation scheme established in the taxpayer's current year of income is deemed to have met the employer support threshold test. For an accumulation scheme established before the current year of income but where the first statutory reporting period has not ended, subparagraphs (iv) and (v) look at the amount of superannuation support in the period from the commencement of the scheme to the beginning of the current year of income. The employer support threshold will be the appropriate pro-rated amount of the standard $1,600 threshold (see notes on definition of daily threshold component).

Subparagraphs 159TE(e)(vi) and (vii) cover newly established defined benefit schemes and those defined benefit schemes where the first statutory reporting period has not ended before the start of the current year of income. These schemes will satisfy the employer support threshold test if an actuary certifies (see subparagraph 159TE(f)(v)) that the expected level of employer support (see notes on section 159TJ) for the first statutory reporting period will not be more than the employer support threshold.

Paragraph 159TE(f) sets down requirements for notices to be given to members of an eligible scheme. A scheme will not qualify as an eligible scheme unless the trustee notifies certain of the scheme members (either an individual or a group of members) that in the trustee's opinion, the scheme is, or will be, an eligible scheme. The notices must be given to any notifiable members of the scheme (see notes on definition of notifiable members). In broad terms, the notifiable members are those who do not qualify for tax deductions in respect of their superannuation contributions to the scheme. If the relevant scheme is a defined benefit scheme, the trustee must first have obtained a certificate from an actuary to certify that the level of superannuation support does not exceed the employer support threshold (subparagraph l59TE(f)(v)).

Subparagraphs 159TE(f)(i), (ii) and (iii) set down the general deadlines for giving of notices by trustees in particular cases. But for the first year of operation of new Subdivision AAC, a special transitional provision in the Bill (see clause 31) applies. If the date specified in paragraph 159TE(f) occurs before 90 days from the date of Royal Assent to the Bill, the deadline is to be 90 days from the date of Royal Assent or such later date as the Commissioner allows.

Section 159TF: Recognised average level of employer support

Section 159TF provides the bases for calculating the average level of superannuation support being provided in accumulation schemes (subsection 159TF(1)) and defined benefit schemes (subsections 159TF(2) and (3)). Once calculated, the recognised average level of employer support may be compared to the employer support threshold for the most recent statutory reporting period or other relevant period. If it does not exceed the threshold, the scheme will satisfy the condition in subparagraph 159TE(e)(i) for qualification as an eligible scheme.

Section 159TG: Individual level of employer support

Section 159TG serves a similar purpose to section 159TF but, instead of calculating the average level of superannuation support for a group of scheme members, it allows the level of support to be determined for a single member. If the individual level of employer support does not exceed the employer support threshold, the relevant scheme will satisfy the test of an eligible scheme in subparagraph 159TE(e)(ii).

Section 159TH: Notional average level of employer support

Like section 159TF, section 159TH is designed to calculate the average level of superannuation support for the members of a superannuation scheme. But section 159TH only applies to accumulation schemes.

Section 159TH is to be used to determine the level of support in an accumulation scheme where the first statutory reporting period of the scheme has not ended. Section 159TF measures the level of support over a statutory reporting period which is then compared with the employer support threshold for a full year. The level of support calculated under section 159TH is simply compared to the employer support threshold for the relevant period (see notes on definition of daily threshold component). If the level of support does not exceed the threshold, the scheme will satisfy the test of an eligible scheme in sub-subparagraph 159TE(e)(iv)(D) (covering a group) or 159TE(e)(v)(D) (covering an individual).

Section 159TJ: Expected level of employer support

Section 159TJ serves the same purpose as section 159TH but deals with defined benefit, rather than accumulation, schemes. Where the expected level of employer support is no greater than the employer support threshold, the scheme satisfies the test of an eligible scheme in sub-subparagraph 159TE(e)(vi)(C) (covering a group) or sub-subparagraph 159TE(e)(vii)(C) (covering an individual).

Section 159TK: Potential recipient of ineligible superannuation benefit

Section 159TK identifies certain people who are not to qualify for rebates under new Subdivision AAC. These are people referred to in the third dot point in the note on section 159TL. The relevant people are those receiving superannuation support under a superannuation scheme that is not either an eligible scheme or a 3% award superannuation agreement scheme. Section 159TK uses the same test as in subsection 82AAS(2) to determine whether a person is receiving superannuation support in the year of income. A second test applies to determine whether the benefits that would be provided under the scheme are ineligible superannuation benefits, i.e., they would be paid from a scheme that is not either an eligible scheme or a 3% award superannuation agreement scheme. Where both tests are met, a person will not qualify for a rebate.

Section 159TL: Rebate for personal Superannuation contributions

Section 159TL sets down (in paragraphs 159TL(1)(a) to (d)) the conditions to be satisfied before a person is given a rebate under new Subdivision AAC in respect of personal superannuation contributions. Those conditions are:

•

the person is a member of an eligible scheme;

•

the person is not entitled to a deduction under section 82AAT in respect of personal superannuation contributions;

•

the person is not receiving superannuation support under a superannuation scheme that is not either an eligible scheme or 3% award superannuation agreement scheme (see note on section 159TK);

•

the contributions are made to:

•.

an eligible scheme; or

•.

a scheme where the person is not getting any superannuation support, other than support through a 3% award superannuation agreement.

If those conditions are satisfied a person whose assessable income is $25,000 or less will qualify for a rebate of 25% of the person's superannuation contributions (up to a maximum of $3,000 contributions). If a qualifying person's assessable income is more than $25,000, the maximum amount of rebatable contributions is reduced by 50 cents for every dollar of assessable income over $25,000. This means that no rebate is available to people whose assessable income is $31,000 or more.

Clause 15: Involuntary disposal

Paragraph (a) of clause 15 will substitute new subsections 160ZZK(4) and (5) for existing subsections 160ZZK(4) and (5) of the Principal Act. Subsection 160ZZK(4) presently operates in relation to original assets which were acquired prior to 20 September 1985. It provides that replacement assets acquired following the involuntary loss or destruction of an original asset (or repaired or restored original assets which had been damaged), will be taken to have also been acquired prior to 20 September 1985, and thus not subject to the capital gains and loss rules. Subsection 160ZZK(4) as amended will continue to apply as before, but only to assets which are damaged and subsequently repaired or restored.

Availability of roll-over relief for assets which are replaced following an involuntary disposal will now be determined by new subsection 160ZZK(5).

Under subsection 160ZZK(5) as presently enacted, no roll-over relief for pre-20 September 1985 original assets is available where the cost of a replacement asset exceeds 120% of the market value of the original asset at the time of loss or destruction. New Paragraph 160ZZK(5)(a) maintains that requirement as a general condition for retention of pre-20 September 1985 status for replacement assets.

However, new Paragraph 160ZZK(5)(b) provides an alternative test where the loss or destruction of the original asset is directly caused by a natural disaster, regardless of the cost of the replacement asset.

Where the loss has been occasioned by a natural disaster, paragraph (5)(b) also specifies that the replacement asset must be substantially the same as the original asset. In forming an opinion as to whether this is the case, consideration is to be given to such matters as the use to which the replacement asset is put, its location, size, value, quality, composition and utility as compared to the original asset. This test is intended to ensure that pre-20 September 1985 status is only retained for a new asset which in reality is a "replacement" for the destroyed original asset.

Where these tests are satisfied, existing subsection 160ZZK(7) will continue to operate so that an asset will be deemed to be a replacement asset only if it is used by the taxpayer in the same business, or for the same purpose, as the original asset was used by the taxpayer.

Paragraph (b) of clause 15 will insert a definition of "natural disaster" in existing subsection 160ZZK(7D) for the purposes of applying new paragraph 160ZZK(5)(b). A natural disaster as defined includes a bushfire, cyclone, earthquake, flood or storm.

Clause 16: Principal residence

Clause 16 will omit subsections 160ZZQ(11) and (11A) of the Principal Act and insert new subsections 160ZZO(11) and (11A). Existing subsection 160ZZQ(11) applies in situations where a person is temporarily absent from his or her sole or principal residence. It permits a taxpayer's sole or principal residence to continue to be treated as such for a period of absence up to four years, notwithstanding, that during that period, the dwelling had actually ceased to be the sole or principal residence of the taxpayer. However, a condition for the application of the subsection is that the dwelling must again become the sole or principal residence of the taxpayer prior to disposal and within four years of the temporary cessation of residency.

Where these requirements are satisfied, the dwelling is deemed to be the sole or principal residence of the taxpayer for the period from the date it temporarily ceased to be the sole or principal residence to the date on which it again became so, and no other dwelling may be treated as the sole or principal residence of the taxpayer in that period.

The amendments proposed by clause 16 will extend the availability of the principal residence exemption during taxpayers' absences to allow an unlimited period of exemption where the dwelling is not used to produce income. In addition, taxpayers will also be able to maintain the exemption for up to six years in periods in which the dwelling produces income. If the taxpayer's absence continues for more than six years and income from the dwelling is derived, the exemption will not be available in respect of the period of income-producing use exceeding six years. It will no longer be necessary for the taxpayer to reoccupy the dwelling after a period of absence to obtain the extended exemption.

Subsection 160ZZQ(11) will apply where a dwelling owned by a taxpayer ceases to be his or her sole or principal residence. The subsection will apply only where an election has been made in accordance with new subsection 160ZZQ(11A) (see later notes on that subsection). Ordinarily, such an election must be made by the taxpayer (new subparagraph 160ZZQ(11)(b)(ii)). However, where a taxpayer has died before it has become necessary to make an election under subsection 160ZZQ(11A), the following persons must make the election:

•

the surviving joint tenant, where the taxpayer owned the dwelling as a joint tenant with another person (new sub-subparagraph 160ZZQ(11)(b)(i)(A)); or otherwise

•

the trustee of the estate of the taxpayer (new sub-subparagraph 160ZZQ(11)(b)(i)(B)).

Paragraphs (11)(c) and (11)(d) define the periods during which a taxpayer may be absent yet still enable a residence to be treated as the sole or principal residence.

Their combined effect is that there is an unlimited exemption for periods of temporary absence during which a home is not used for income producing purposes. This basic rule is reflected in new subparagraphs 160ZZQ(11)(d)(i) and (ii) to allow an exemption for an unlimited period of absence where the dwelling is not used to produce income, from the time it ceases to be the sole or principal residence to the time it again retains that status or is disposed of.

For periods during which the home is used to produce assessable income, new subparagraph 160ZZQ(11)(d)(iii) limits the principal residence exemption period to a maximum of six years. That is, the home may not be used to derive income for more than six years during an absence and also qualify for exemption. Where, after six years, the taxpayer continues to be absent and derives income from the dwelling, the exemption will be lost in respect of the period exceeding six years. During a period of temporary absence, such income producing periods may be continuous or may be during two or more separate periods.

For example, if at some time in the future prior to disposal a taxpayer owned a principal residence for a period of ten years and rented it out for seven consecutive years (whilst absent), the taxpayer would be subject to tax on only one tenth of any capital gain on the disposal of the dwelling that otherwise would be included in net capital gains in accordance with section 160ZC of the Principal Act. That is, the "assessable" amount would be that proportion of the capital gain equal to the period in excess of six years during which the dwelling was used to produce income (i.e. one year) divided by the total period during which the taxpayer owned the dwelling (i.e. ten years). If, during that ten year ownership, the taxpayer had rented the property out for five years, left it vacant for one year and rented it out for a further year, the principal residence exemption would be fully preserved because the period during which the dwelling was used to derive income during the taxpayer's absence did not exceed six years.

Provided the conditions imposed by paragraphs (11)(a) to (11)(d) are satisfied for a period of absence, the dwelling will be taken to have been the sole or principle residence of the taxpayer (paragraph 160ZZQ(11)(e)), and no other dwelling will be taken to be the sole or principal residence of the taxpayer during that period (paragraph 160ZZQ(11)(f)). In effect, taxpayers can choose that a dwelling which is not in fact their sole or principal residence will nevertheless be treated as such and therefore eligible for the capital gains tax exemption. For example, a taxpayer who is absent from home may purchase a second home and actually live in the new home, but elect that the original home remains the sole or principal residence. In that case, the exemption would be preserved in respect of the dwelling that has ceased to be the taxpayer's home, but the dwelling in which the taxpayer actually resides would be ineligible.

The effect of Paragraph 160ZZQ(11)(g) is that any principal residence exemption preserved during a taxpayer's period of absence is not to be affected by any income producing use of the home during that period. But for paragraph 160ZZQ(11)(g), subsection 160ZZQ(21) would require a capital gain (or capital loss) on disposal of the home to be calculated by reference to concurrent income producing use of the home. Paragraph (g) also means that the preserved exemption will be on an appropriately proportional basis where, prior to the time when it ceased to be the principal residence, the home was partially used for income producing purposes. That is, the extent of the exemption available during the taxpayer's absence is no greater than that available at the time the home ceased to be the sole or principal residence.

New subsection 160ZZQ(11A) prescribes the time within which a taxpayer (or, if the taxpayer has died, the trustee or the surviving joint tenant) must elect that new subsection 160ZZQ(11) is to apply. This time is:

(a)

if the taxpayer makes the election - on or before the date of lodgment of the taxpayer's return of income for the later of the income year in which the dwelling is disposed of or the 1990-91 income year.

(b)

if a surviving joint tenant or trustee makes the election - the later of the date of lodgment of the return of income of the deceased taxpayer's estate for the income year in which the taxpayer died or the last day of the 1990-91 income year.

The Commissioner of Taxation is empowered to extend the time allowed for the making of an election by the taxpayer, the trustee or the surviving joint tenant, as the case may be.

New subsections 160ZZQ(11) and (11A) will, by subclause 28(6), apply to assessments in respect of the year of income in which 20 September 1985 occurred (that is, the 1985-86 year of income) and of all subsequent years of income.

Clauses 17-20: Part IVA - Schemes to reduce income tax

Part IVA of the Principal Act contains the general anti-avoidance provisions of the income tax law. Part IVA deals with tax avoidance schemes entered into after 27 May1981.

The anti-avoidance provisions apply where a tax benefit is obtained in connection with a scheme that is entered into or carried out for the sole or dominant purpose of obtaining the tax benefit. A tax benefit arises where an amount has not been included in assessable income or a deduction has been allowed and, apart from the scheme, the amount would have been assessable or the deduction would not have been allowed. Part IVA works by allowing the Commissioner to cancel the tax benefit. The description of a tax benefit in Part IVA does not cover a tax benefit, consisting of an entitlement to a tax rebate obtained under a scheme, that is not available apart from the scheme. Of course, a scheme designed to produce a tax benefit in the form of a particular amount not being included in assessable income is not protected from the operation of Part IVA just because the scheme also produces a tax rebate (see Taxation Ruling No. IT 2456 for examples).

There may be scope for abuse of the new rebate under new Subdivision AAC (see notes on clause 14) for certain personal superannuation contributions - for instance, where arrangements are entered into to split a superannuation scheme so as to reduce the average level of employee superannuation support in the scheme. If the concession provided by new Subdivision AAC was a deduction rather than a rebate, Part IVA would automatically apply to prevent abuse of the deduction. To prevent such abuse, the operation of Part IVA is being extended to cover schemes entered into or carried out for the sole or dominant purpose of enabling a taxpayer to obtain a rebate under section 159TL.

The amendments to be made by clauses 17-20 will extend the meaning of tax benefit in section 177C, to cover a section 159TL rebate to which a taxpayer is entitled under a scheme, being a rebate to which the taxpayer would not have been entitled if the scheme had not been entered into or carried out.

The amendments will apply to schemes entered into after the date of introduction of this Bill.

Clause 21: Interpretation

Introductory note

The Taxation Laws Amendment (Rates and Provisional Tax) Bill 1990 proposed to amend the Principal Act to allow provisional tax to be raised on salary or wages income where certain conditions are satisfied (section 221YAB of the Principal Act).

When that proposal was announced in the 1990-91 Budget, it was also announced that the Principal Act would be amended to impose additional tax, by way of penalty, where a taxpayer over-estimates the amount of tax instalment deductions from salary or wages in an application to vary provisional tax.

The provisional tax provisions in Division 3 of Part VI of the Principal Act already impose additional tax where a taxpayer varies the provisional tax otherwise payable, and it eventuates that the estimate of taxable income by the taxpayer is less than 90% of the taxpayer's actual taxable income for the year.

For "lump sum" provisional taxpayers (under subsections 221YDB(1) and (1A) of the Principal Act) the penalty is 20% of the amount by which the lesser of either :

(a)

the actual tax payable for the year; or

(b)

the amount that would have been the provisional tax payable for the year, if the taxpayer had not sought to vary,

exceeds

(c)

the provisional tax payable on the taxpayer's estimated taxable income for the year.

For instalment payers (under subsection 221YDB(1AA) of the Principal Act), a penalty of 20% per annum, broadly calculated in respect of the period between instalments, is payable on the difference in the level of an instalment as a consequence of the under-estimate of the taxable income.

Where a penalty is payable under the existing law, any over-estimate of the instalment deductions in the application to vary is effectively penalised as the amount on which the penalty is payable reflects the over-estimate. The consequence of this is that there is only a need to apply a further penalty where a taxpayer's estimate of taxable income does not trigger the existing penalties.

The proposed new penalty will apply in respect of provisional tax payable for the 1990-91 and all subsequent years of income where :

(a)

the existing provisional tax penalties, payable where a taxpayer under-estimates his or her taxable income in an application to vary, do not apply (i.e., the estimate of taxable income in the application to vary is not less than 90% of the actual taxable income for the year); and

(b)

in the preceding year, the taxpayer had tax payable on assessment of $3,000 or more, and the tax instalments deducted from the salary or wages were less by $3,000 or more than the tax that would have been assessed on that income, if it had been the only income derived during the year (i.e., the situation where in 1990-91 and subsequent years provisional tax is to be imposed on salary or wages).

The trigger for the penalty is to be that a taxpayer in an application to vary in respect of a year, has over-estimated by more than 10%, the tax instalment deductions actually made from salary or wages in the year. The penalty will apply in respect of "lump sum" and instalments of provisional tax.

The proposed penalty is not to exceed the amount of penalty that would have applied had the existing penalty structure, where a taxpayer has under-estimated the actual taxable income by more than 90%, been triggered in respect of the provisional tax paid by the relevant taxpayer. This will ensure that a taxpayer will not be liable for penalty on an amount which is greater than the actual tax effect of the application to vary.

Subsection 221YA(1) of the Principal Act defines certain terms used in Division 3 of Part VI of the Principal Act. Clause 21 proposes the insertion of the following definitions of terms used in the proposed amendments of the Division.

"estimated PAYE deductions" in relation to a year of income, is defined to mean the amount of tax instalment deductions to be made from the taxpayer's salary or wages during a year of income in accordance with sections 221C and 221D, as estimated by the taxpayer and shown in the taxpayer's application to vary provisional tax, furnished to the Commissioner of Taxation under section 221YDA.

"section 221YAB taxpayer" in relation to a year of income, means a taxpayer to whom section 221YAB of the Principal Act applies in relation to the year of income. This will occur where, in a preceding year:

(a)

the taxpayer had tax payable on assessment of $3,000 or more; and

(b)

the tax instalments deducted from the taxpayer's salary or wages were less by $3,000 or more than the tax that would have been assessed on that income, if it had been the only income derived during the year.

That is the situation where in 1990-91 and subsequent years provisional tax is to be imposed on salary or wages.

Clause 22: Certain employees to be subject to provisional tax

This clause proposes to amend subsection 221YAB(1) of the Principal Act and to omit subsections (2) and (3).

Where section 221YAB applies in relation to a year of income then subsections (2) and (3) operate for the purposes of the application of section 221YB of the Principal Act, so that so much of the assessable income as consists of salary or wages is taken to be assessable income other than salary or wages. Section 221YB, discussed later, determines when a taxpayer is liable to pay provisional tax.

Proposed paragraph (a) is a drafting measure and re-states the opening words of subsection 221YAB(1) of the Principal Act so that the section is to be taken, in the relevant circumstances, to apply to a taxpayer in relation to a year of income.

Proposed paragraph (b) omits subsections (2) and (3) of section 221YAB as they are no longer necessary by virtue of the proposed amendments by the Bill of section 221YB and subsections 221YDB(1) and (1AA) of the Principal Act (see notes on clauses 22 and 23). In effect, the changes are of a drafting nature.

Subclause (2) of clause 22 will amend the definition of qualifying rebates in paragraph 221YAB(1)(b), to simply add the new rebate available under section 159TK (see notes on clause 14) to the list of qualifying rebates for the purpose of section 221YAB.

Clause 23: Liability to provisional tax

Clause 23 proposes an amendment of a drafting nature to subsection 221YB(1) of the Principal Act which determines the conditions to be satisfied in order for a taxpayer to be liable to pay provisional tax. Subsection 221YB(1) will be amended to specify that, for the purposes of collecting income tax during a financial year for which income is levied, a person will be liable to pay provisional tax in accordance with Division 3 of Part VI of the Principal Act if either of the following conditions are satisfied:

(a)

the person is a section 221YAB taxpayer in relation to the year of income concerned (see notes on clause 21 and the insertion of the definition of "section 221YAB taxpayer");

(b)

the taxpayer derives assessable income, not being salary or wages.

This amendment is consequential on the insertion of the new definition "section 221YAB taxpayer" in section 221YA and the drafting change made to section 221YAB (refer clause 22), and divides taxpayers liable to pay provisional tax into taxpayers to whom section 221YAB applies and other taxpayers who derive assessable income, not being salary or wages.

The first group are the taxpayers who, because they satisfy the two conditions specified in section 221YAB of the Principal Act in relation to a year of income, are to be required to pay provisional tax in relation to the following year of income (being 1990-91 or a subsequent year) even though their income consists wholly of salary or wages. The other group are the taxpayers who have always been liable to pay provisional tax. That is, their assessable income includes income other than salary or wages.

As already indicated the change is of a drafting nature and does not change materially the present operation of the Principal Act.

The amendment applies in relation to provisional tax (including instalments) payable for 1990-91 and all subsequent years of income.

Clause 24: Provisional tax on estimated income

A person who receives an assessment that includes provisional tax or a provisional tax instalment notice may apply to have the amount of provisional tax varied. This would be appropriate where the person expects the amount of income (like investment income or income from a business) that caused provisional tax to be payable, to be smaller than in the previous year of income.

Section 221YDA sets down the information to be provided by a person who applies to have an amount of provisional tax varied. One of the items to be provided is an estimate of certain rebates (listed in paragraph 221YDA(1)(da) that the person expects to be entitled to in the relevant year of income. Clause 24 will simply add the new rebate available under Subdivision AAC (see notes on clause 14) to the list of rebates in paragraph 221YDA(1)(da).

Clause 25: Additional tax where income under-estimated or where PAYE deductions over-estimated

This clause will amend section 221YDB of the Principal Act, under which additional tax, by way of penalty, is imposed on a taxpayer who substantially under-estimates his or her taxable income in an application to vary provisional tax under section 221YDA. Additional tax is payable where the taxpayer's estimated taxable income is found on assessment to be less than 90% of the taxpayer's taxable income. For "lump sum" provisional taxpayers the additional tax is, broadly, a flat 20% of the amount by which the provisional tax on the estimated taxable income falls short of the lesser of the tax payable on the taxable income and the provisional tax originally notified as payable. For instalment payers, the additional tax is 20% per annum of the amount by which the instalment liability calculated in reliance on the taxpayer's estimate falls short of the hypothetical instalment that would have been payable had the taxpayer not made an application to vary, calculated over the "penalty period" as defined in section 221YA.

The amendment proposed by clause 25 will not effect the above calculation of additional tax but will extend the law to provide a basis for the imposition of additional tax where certain taxpayers over-estimate tax instalment deductions, by more than 10%, in an application to vary the provisional tax.

Subject to the operation of the transitional provisions in clause 32 of the Bill the amendments apply in relation to provisional tax (including instalments) payable for 1990-91 and all subsequent years of income.

Paragraph (a) of clause 25 proposes to omit subsection 221YDB(1) of the Principal Act and to insert new subsections (1) and (1AAA).

The change to substitute the new subsection 221YDB(1) is of a drafting nature only, consequential on the omission of subsection 221YAB(2) of the Principal Act by clause 22 of the Bill. In effect, the opening words of subsection 221YDB(1) have been re-drafted to take account of the fact that the test to trigger additional tax is applied differently where a taxpayer is a "section 221YAB taxpayer" (refer clause 21). This operation was achieved previously by subsection 221YAB(2) which is now to be omitted by paragraph 22(1)(b) of the Bill.

New paragraph 221YDB(1)(b) ensures that additional tax under subsection 221YDB(1) is not payable in respect of a year of income where the taxpayer is liable to pay instalments of provisional tax. The balance of the subsection continues to have its existing affect.

A new subsection 221YDB(1AAA) imposing additional tax, by way of penalty, is to be inserted in the Principal Act by paragraph 25(a) of the Bill. This additional tax applies where a taxpayer who pays "lump sum" provisional tax over-estimates by more than 10% the tax instalment deductions to be made from his or her salary or wages, in an application to vary provisional tax.

The subsection will apply to a taxpayer in relation to a year of income where the following four conditions are satisfied:

(a)

the taxpayer is a "section 221YAB taxpayer" in relation to the year of income - the term "section 221YAB taxpayer" is defined in section 221YA (refer notes on clause 21) (paragraph (a));

(b)

the taxpayer is not liable to pay instalments of provisional tax in relation to the year (refer section 221YBA of the Principal Act) (paragraph (b));

(c)

the taxpayer's estimate of taxable income, made in an application to vary provisional tax for the year, is not less than 90% of the taxable income for the year (the situation where subsection 221YDB(1) does not apply (Paragraph (c)); and

(d)

the taxpayer's estimate of the tax instalment deductions to be made from his or her salary or wages during the year, shown in the application to vary, exceeds 110% of the deductions actually made (in accordance with sections 221C and 221D of the Principal Act) (paragraph (d)).

Where the four conditions outlined above are satisfied the amount of the additional tax is to be calculated as 20% of the lesser of :

(a)

the amount by which the actual tax instalment deductions made during the year in accordance with sections 221C and 221D of the Principal Act is less than whichever of the following amounts is the least :

(i)

the taxpayer's estimated tax instalment deductions - a defined term in section 221YA (refer clause 21) (i.e., the estimated tax instalment deductions shown by the taxpayer in his or her application to vary); or

(ii)

so much of the tax instalment deductions estimated by the taxpayer in the application to vary as the Commissioner estimates will be deducted - (i.e., the amount where the Commissioner overrides the taxpayer's estimate in accordance with paragraph 221YDA(2)(b))

(b)

the amount by which the tax payable for the year of income exceeds the provisional tax payable based on the taxpayer's estimated taxable income;

(c)

the amount by which the provisional tax payable if the taxpayer had not applied to vary exceeds the provisional tax payable based on the taxpayer's estimated taxable income.

In effect, the calculation of the additional tax (penalty) is based on one extra component than the existing penalty imposed by subsection 221YDB(1) on "lump sum" payers - the amount by which the actual tax instalment deductions are less than the taxpayer's estimate of those deductions as calculated under paragraph (1AAA)(e).

The proposed subsection 221YDB(1AAA) will ensure that the additional tax, by way of penalty, where a taxpayer over-estimates tax instalment deductions in an application to vary will not exceed the amount of penalty that would have applied had the existing penalty structure in subsection 221YDB(1) of the Principal Act been triggered in respect of the provisional tax paid by the taxpayer for the relevant year of income. This will ensure that a taxpayer is not liable for penalty on an amount which is greater than the actual tax effect of the application to vary. This is to say, where a taxpayer over-estimates tax instalment deductions by greater than 10% in an application to vary and other factors reduce the tax effect of the taxpayer's estimate (e.g., an unexpected reduction of income), the tax effect is built into the penalty calculation so as to limit the taxpayer's liability to penalty on the actual tax effect of the variation.

Paragraph (b) of clause 25 is a consequential drafting amendment inserting a reference to proposed new subsection 221YDB(1AAA) in subsection 221YDB(1A) of the Principal Act. Subsection 221YDB(1A) ascribes a particular meaning to the term "provisional tax payable in respect of estimated taxable income" in subsection 221YDB(1) and provides that the term includes the amount of tax instalment deductions made in respect of any salary or wages included in the taxpayer's taxable income.

Paragraph (c) of clause 25 is also a consequential drafting amendment to omit from paragraph 221YDB(1A)(b) of the Principal Act the redundant reference to paragraph (1)(a), and to substitute references in paragraphs 221YDB(1)(c) and (1AAA)(f). This follows the redrafting of subsection (1) and the insertion of a new subsection (1AAA).

Paragraph (d) proposes to omit paragraph 221YDB(1AA)(b) of the Principal Act and substitute a new paragraph. Subsection 221YDB(1AA) imposes additional tax, by way of penalty, where provisional tax is payable by instalments.

New paragraph 221YDB(1AA)(b) will re-draft the existing paragraph (b) and, having regard to the operation of subsection 221YAB(2) now to be omitted by clause 22 of the Bill, will not change the affect of the provision.

Paragraph (e) of clause 25 proposes the insertion of new subsection 221YDB(1ABA) in the Principal Act.

The proposed new subsection (1ABA) will impose additional tax, by way of penalty, in cases where the taxpayer pays instalments of provisional tax and in an application to vary over-estimates by more than 10% the tax instalment deductions made from his or her salary or wages in the year of income.

For subsection 221YDB(1ABA) to apply, four conditions must be satisfied in relation to a year of income.

Paragraph (a) requires the taxpayer to be a section 221YAB taxpayer in relation to the year of income (see the definition of the term in section 221YA and notes on clause 21). That is, the taxpayer satisfies two conditions in respect of the year preceding the relevant year of income :

(a)

the taxpayer has tax payable of $3,000 or more; and

(b)

the tax instalments deducted from the taxpayer's salary or wages during the year are less than by $3,000 or more the tax that would have been assessed on that income, if it had been the only income derived during the year.

Paragraph (b) is a forward-referencing provision describing the two applications of section 221YDA by which an instalment of provisional tax that might attract the operation of the subsection could be calculated - viz., subsection 221YDA(2) (subparagraph (b)(i)) and subsection 221YDA(4) (subparagraph (b)(ii)). It does not matter whether the instalment estimate referred to in those subparagraphs is made in respect of that instalment or an earlier instalment.

Paragraph (c) ensures that additional tax is not imposed under new subsection (1ABA) if the taxable income estimated by the taxpayer in the application to vary is not less than 90% of the taxpayer's actual taxable income for that year. That is, no additional tax is payable under the subsection if additional tax is to be imposed under subsection 221YDB(1AA) of the Principal Act because the taxpayer's estimated taxable income for the year was less than 90% of the taxpayer's actual taxable income for the year.

Paragraph (d) ensures that additional tax is not imposed unless the amount of the taxpayer's "estimated PAYE deductions" (refer to notes on clause 21) in an application to vary exceeds 110% of the actual deductions made from the salary or wages during that year in accordance with sections 221C and 221D of the Principal Act. Paragraph (c) effectively makes this a subordinate test in that the subsection will not apply where the "trigger" test in subsection 221YDB(1AA) applies.

Where the tests in paragraphs (a), (b), (c) and (d) of subsection 221YDB(1ABA) are satisfied, additional tax will be imposed at the rate of 20% per annum over the "penalty period" on the amount by which an instalment falls short of the lesser of the amounts specified in paragraphs (e) and (f).

The term "penalty period" is defined in section 221YA of the Principal Act. By paragraph (a) of the definition, the penalty period for an instalment other than the final instalment for a year is the time from the due date for payment of the relevant instalment to the due date of payment of the next instalment. In the case of a final instalment, paragraph (b) of the definition provides that the penalty period is the time from the due date for payment of that final instalment to the due date for payment of tax payable on assessment in respect of the taxable income of the year of income.

The amount calculated under Paragraph (e) is the amount by which an instalment is less than the amount that would have been the instalment if:

(a)

the "estimated PAYE deductions" (i.e., the taxpayer's estimate of the tax instalment deductions shown in the application to vary - refer to notes on clause 21) had been equal to the deductions which were made from the taxpayer's salary or wages during that year of income in accordance with sections 221C and 221D (subparagraph (e)(i)); and

(b)

the Commissioner had accepted the estimate referred to in subparagraph (e)(i) for the purposes of paragraph 221YDA(2)(b) of the Principal Act.

The amount calculated using paragraph (f) is the amount that is calculated under existing subsection 221YDB(1AA) of the Principal Act where additional tax is payable by an instalment payer because the estimate of taxable income is less than 90% of the actual taxable income of the relevant year of income. By paragraph (f) the amount is to be ascertained in accordance with the following formula :

[Relevant amount * Relevant percentage] - Previous instalment


The "Relevant amount" is the lesser of the amount that would have been used as the 'applicable provisional tax amount' (refer to definition in subsection 221YA(1) of the Principal Act) in the calculation under section 221YCA of the instalment if the taxpayer had not made an application to vary for that year (subparagraph (f)(i)), and the actual amount of tax payable on assessment (subparagraph (f)(ii)), as reduced by any source deductions from salary or wages (subparagraph (ii)(A)) or prescribed payments (subparagraph (ii)(B)) or both (subparagraph (ii)(C)).

The component "Relevant percentage" is defined in subsection 221YA(1) of the Principal Act and measures for successive instalment calculations in a year so that the sum of the amounts of instalments to that stage of the year equals the relevant percentage of the applicable provisional tax amount at that stage of the year.

The "Previous instalment" is the total of any instalments for the year that became due and payable before the due date of the instalment attracting penalty.

Subclauses (g)-(j) are consequential drafting amendments following the inclusion of subsections 221YDB(1AAA) and (1ABA) in the Principal Act.

Subclause (k) proposes to omit the existing subsection 221YDB(4) of the Principal Act dealing with the power of the Commissioner of Taxation to remit additional tax, by way of penalty, imposed under subsections 221YDB(1) or (1AA) where a taxpayer's estimate of taxable income in respect of a year of income is less than 90% of the actual taxable income for the year. The new subsection (4) to be substituted will give the Commissioner power to remit any additional tax in the circumstances outlined above, and in the new situations under subsections (1AAA) and (1ABA) applying where the taxpayer's estimate of tax instalment deductions in an application to vary is more than 110% of the actual deductions made during the year.

As in the present law, the Commissioner will have the power to remit the whole or a part of any additional tax where the Commissioner is satisfied that the tax became payable because of circumstances, where both the following conditions are satisfied:

(a)

the circumstances affected the taxpayer's taxable income of the year or the amount of the tax instalment deductions made during the year; and

(b)

the taxpayer was not aware of the circumstances earlier than the time he or she was required or permitted to furnish a statement of estimated taxable income in an application to vary.

The Commissioner of Taxation has issued Taxation Ruling No. IT2212 giving guidelines in the terms of the existing law, of matters to be considered in dealing with requests for remissions of additional tax under subsection 221YDB(4) of the Principal Act.

Clause 26: Keeping of records

Clause 26 will amend section 262A of the Principal Act to require trustees of superannuation schemes to retain for five years any election made under new Subdivision AAC. Relevant elections may be made under new sections 159TB and l59TC (see notes on those sections), being inserted by clause 14 of the Bill.

Clause 27: Taxable contributions

Clause 27 will make amendments to section 274 of the Principal Act that are consequential on the amendments being made by clauses 12 and 13 (see notes on those clauses).

Section 274 determines which contributions to a superannuation fund are taxable contributions. One type of contributions that are, prima facie, taxable contributions are those made by the members of a fund. But these type of contributions by a member are not taxable if an approved person gives the trustee of the fund a notice under subsection 274(4). The notice must state that the approved person is satisfied, apart from subsection 82AAS(3), that the person or persons covered by the notice would not be an eligible person. Subsection 82AAS(3) provides a discretion for the Commissioner to treat someone as an eligible person even though the person does not otherwise qualify as an eligible person. Because of this discretion, an approved person could not be satisfied that a fund member is not an eligible person without making the qualification in a subsection 274(4) notice.

Paragraph (a) of clause 27 will remove the reference in subsection 274(4) to subsection 82AAS(3). This is because subsection 82AAS(3) is being repealed by clause 12. Since that qualification will no longer be necessary in giving a subsection 274(4) notice, an approved person may now be satisfied that a fund member is not an eligible person. That is the reason for the minor amendment proposed by Paragraph (b) of clause 27.

Paragraph (c) of clause 27 will omit subsection 274(6). By subsection 274(6), member contributions to a superannuation fund in excess of the present personal superannuation contribution deduction limit in subsection 82AAT(2), are not taxable contributions. The present limit is a flat dollar amount of $3,000 for all eligible persons. Clause 13 (see notes on that clause) will put in place a new deduction limit that can vary from person to person. For that reason it is no longer possible to have a provision like subsection 274(6).

Clause 28: Application of amendments

This clause which will not amend the Principal Act, contains application provisions relevant to certain of the amendments to be made by the Bill.

By subclause (1) of clause 28 the Income Tax Assessment Act 1936 as amended by this Bill is in clause 28 referred to as the "amended Act".

Subclause (2) provides that amendments made by clauses 7 and 11 apply to operational service on or after 2 August 1990.

Subclause (3) provides that the amendments made by clauses 8 and 9 apply to payments made on or after 1 July 1990.

By the operation of subclause (4), proposed subparagraph 78(1)(a)(cvi) will authorise deductions for gifts to The Friends of the Duke of Edinburgh's Award in Australia Incorporated made on or after 20 September 1990.

By subclause (5) the amendments affecting superannuation contributions (clauses 12, 13, 14 and 27 of the Bill) apply to superannuation contributions made on or after 1 July 1990.

By subclause (6), the amendments made by clause 16, which extends the availability of the principal residence exemption for capital gains tax purposes during a taxpayer's absence, apply to assessments in respect of the 1985-86 and all subsequent income years.

By subclause (7), the amendments made in relation to Part IVA and the rebate for certain superannuation contributions, apply in relation to schemes entered into after the date of introduction of this Bill.

Subclause (8) of this clause provides that the amendments made by clauses 21, subclause 22(1) and clauses 23 and 25 of the Bill apply in relation to provisional tax (including instalments) payable for 1990-91 and all subsequent years of income.

Clause 29: Transitional - section 23AC and subsection 79B(3A) of the Principal Act

This clause relates to the amendments (proposed by clause 7) to section 23AC of the Income Tax Assessment Act, which exempts the pay and allowances of Australian Defence Force personnel on operational service in Namibia. Those amendments will cease the application of that provision in relation to Namibia. The purpose of this clause is to allow the clause to continue to apply.-

•

in relation to prior year assessments; and

•

to periods of hospital treatment, of a kind referred to in subsection 23AC(3), provided after the date the section generally ceased to apply.

Clause 30: Transitional - section 82AAT of the amended Act

Clause 30 will allow the regulations to be made for the purposes of subsection 82AAT(2) (see notes on clause 13) to apply for the 1990-91 year of income even though the regulations will not be notified until part way through the year.

Clause 31: Transitional - applicable date for superannuation schemes

For a superannuation scheme to qualify as an eligible scheme for the purposes of new subsection 159TE in new Subdivision AAC of Division 17 of Part III of the Principal Act, certain notices must be given before deadlines specified in new paragraph 159TE(f).

As a transitional measure, where the relevant deadline has passed before the Bill commences, clause 31 will allow the notices to be given within 90 days of Royal Assent to the Bill or such later time as the Commissioner allows.

Clause 32: Transitional - penalties under section 221YDB of the amended Act

By subclause (1) the term "amended Act" in clause 32 means the Income Tax Assessment Act 1936 as amended by this Bill.

Subclause (2) is relevant to the application of subparagraphs 221YDB(1)(a)(i) and (1AA)(b)(i) to be inserted in the Principal Act by clause 25 of the Bill. The subclause will ensure that those subparagraphs will not apply to the calculation of the tax payable on an estimate for the 1990-91 year of income, if that application was furnished before the day on which the Taxation Laws Amendment (Rates and Provisional Tax) Act 1990 received the Royal Assent. This will maintain the existing operation of the law as it applies where the taxpayer is a "section 221YAB taxpayer" and provisional tax is raised on salary or wages where certain conditions are met.

Subclause (3) is relevant to the application of subsections 221YDB(1AAA) and (1ABA) (imposing additional tax where in an application to vary provisional tax a taxpayer over-estimates the tax instalment deductions to be made from salary or wages) to be inserted in the Principal Act by clause 25 of this Bill. This subclause will ensure that new subsections 221YDB(1AAA) and (1ABA) will not apply to calculate additional tax payable on an estimate of taxable income in an application to vary provisional tax for the 1990-91 year of income, if that application was furnished on or before the date of introduction of this Bill. As such the subclause will ensure that subsections 221YDB(1AAA) and (1ABA), as they apply to impose additional tax where a taxpayer has over-estimated tax instalment deductions, do not have retrospective effect in respect of applications to vary furnished on or before the date of the introduction of the Bill.

Clause 33: Amendment of assessments

Clause 33 of the Bill authorises the Commissioner of Taxation to re-open an income tax assessment made before the Bill becomes law should this be necessary for the purposes of giving effect to amendments proposed by the Bill.

PART 4 - AMENDMENT OF THE OCCUPATIONAL SUPERANNUATION STANDARDS ACT 1987

Clause 34: Prinicpal Act

This clause provides that the Occupational Superannuation Standards Act 1987 is referred to in this part as the "Principal Act".

Clause 35: Interpretation

Subsection 15E(1) of the Principal Act defines a payer as an approved deposit fund, a superannuation fund, an employer, a life assurance company or a registered organisation that makes an eligible termination payment, a payment of a superannuation pension or a payment of an annuity. That is, a body does not become a payer until a payment has been made. However, under the proposed amendment to subsection 15H(2), a person is to be able to quote his or her tax file number to a payer at the time at which entitlement to the payment arises, that is, before a payment is actually made to the person.

Clause 35 amends the definition of payer to extend the definition to a body which is liable to make an eligible termination payment or payments of a superannuation pension or annuity. A body can therefore become a payer before a payment is made, but not before liability to make the payment arises.

Clause 36: Quotation etc. of tax file numbers

Subsection 15H(2) of the Principal Act currently allows a person to quote his or her tax file number to a payer where a payer makes an eligible termination payment or commences to make payments of a superannuation pension or annuity to a person. A payer is not able to request a person to quote his or her tax file number on an Insurance and Superannuation Commission form until the payment has been made to the person. Where a payer makes a request for the quotation of the tax file number prior to the payment being made, the payer would be guilty of an offence under the Taxation Administration Act 1953 for which there is a fine of $10,000 or imprisonment for 2 years, or both.

The proposed amendment to subsection 15H(2) will allow a person to quote his or her tax file number to a payer at the point at which the person becomes entitled to receive an eligible termination payment, the first payment of a superannuation pension or the first payment of an annuity. This will allow a payer of an eligible termination payment, superannuation pension or annuity to request a person to quote his or her tax file number at the time at which a person becomes entitled to receive a benefit and before a payment has been made to a person. A payer will not be able to request a person to quote his or her tax file number once the payment has been made.

The amendment to subsection 15H(2) will therefore allow a person to quote his or her tax file number to a payer at the point at which the person gives notification of termination of employment where the payer is a superannuation fund or employer or when the person gives notice that he or she wishes to make a withdrawal from an approved deposit fund or deferred annuity fund.

The amendment to subsection 15H(2) brings the quotation of tax file numbers on Insurance and Superannuation Commission forms into line with the quotation of tax file number on Australian Taxation Office forms. This will simplify procedures for the provision of superannuation and similar benefits, one of which involves the allocation of tax file numbers for the payers of those benefits.

The quotation of tax file numbers on Insurance and Superannuation Commission forms will remain optional.

PART 5 - AMENDMENTS RELATING TO SEX DISCRIMINATION

Clause 37: Amendments of Acts

This clause provides for the Acts specified in the Schedule to the Bill to be amended in accordance with the Schedule. The Acts to be amended are the Income Tax Assessment Act 1936, the Fringe Benefits Tax Assessment Act 1986, the Medicare Levy Act 1986 and the Taxation (Unpaid Company Tax) Assessment Act 1982.

Clause 38: Application of amendments

By subclause (1) of clause 38 the amendments of the Income Tax Assessment Act 1936 (the Assessment Act) by Part 1 of the Schedule are to apply in respect of assessments for the 1991-92 and subsequent years of income.

Subclause (2) of clause 38 applies in respect of the definition of "spouse" to be inserted in subsection 6(1) of the Assessment Act by Part 1 of the Schedule. As a result, the definition will apply in determining whether a person is an associate of a taxpayer for the purposes of section 221YBA (liability for instalments of provisional tax) and Subdivision B of Division 3 of Part VI (provisional tax avoidance schemes) of the Assessment Act in ascertaining the provisional tax payable by the taxpayer for the 1991-92 and subsequent years of income. The subclause does not change in any way the existing operation of the Assessment Act and is consequential on the insertion of the definition of "spouse" in subsection 6(1).

Subclause (3) of clause 38 states that the amendments of the Assessment Act by Part 3 of the Schedule dealing with the exclusion of certain children from the application of Division 6AA of Part III (unearned income of children) on the basis of marital status, are to apply to assessments of income for the 1993-94 and subsequent years of income.

As a consequence of subclause (4), the definition of "spouse" to be inserted in subsection 6(1) of the Assessment Act will apply to the provisions of the Assessment Act as amended by the Taxation Laws Amendment (Foreign Income) Bill 1990, from the time that Bill becomes law. This will ensure that the consequential adjustments made by Part 4 of the Schedule will not adversely affect the operation of the foreign income measures.

Clause 39: Amendment of assessments

This clause authorises the Commissioner of Taxation to re-open an income tax assessment made before Parts 1, 3 and 4 of the Schedule become law for the purpose of giving effect to the amendments proposed by those Parts.

NOTES ON SCHEDULE

AMENDMENTS RELATING TO SEX DISCRIMINATION

An explanation of the amendments of the various Acts listed in the Schedule is contained in the following notes.

PART 1: INCOME TAX ASSESSMENT ACT 1936

Interpretation (section 6)

Subsection 6(1) is the general interpretation section of the Income Tax Assessment Act 1936 (the Assessment Act). The definitions of terms contained in that subsection apply throughout the Assessment Act unless the contrary intention appears.

Subsection 6(1) will be amended by omitting the definition of "daughter". This definition will become unnecessary as a consequence of the omission of the daughter-housekeeper rebate, allowable under section 159J of the Assessment Act and the insertion of a child-housekeeper rebate under the same section, proposed later in the Schedule.

The Schedule will also insert a definition of "spouse", to include a de facto spouse, in subsection 6(1). With the exception of those provisions in the Assessment Act in which a de facto spouse is specifically included within the meaning of spouse of a person, the term "spouse" takes its common law meaning of a partner in a legal marriage. The insertion of a definition of "spouse" to include a de facto spouse will remove, as far as possible, discrimination between legally married spouses and de facto spouses where the latter would otherwise be treated as single.

The meaning of the term "spouse" is directly relevant to the definitions of the terms "associate", "associated person", "dependant", "relative", "resident" and "resident of Australia". The last two terms are also used in Australia's comprehensive double taxation agreements contained in the Schedules to the Income Tax (International Agreements) Act 1953.

The insertion of a definition of "spouse" in subsection 6(1) will necessitate consequential adjustments to a number of other provisions of the Assessment Act. Accordingly, Part 1 of the Schedule will make consequential amendments of paragraphs 23(1), 51AE(7)(a), 51AE(7)(b), 51AE(7)(c), 82KV(5)(c), 159J(3)(c) and subsections 27A(1), 51AE(1), 51AF(1), 51AG(1), 51AG(2), 65(2), 73B(1A), 82KT(1), 108(4), 109(3), 124ZF(1), 158B(2), 159GZC(2), 159GZZZC(2), 159H(3), 159L(4), 159ZA(1), 159ZR(2), 160K(2), 221YBA(11), 221YHAAA(2) and 251R(2).

Payments to Relatives (section 65)

Section 65 of the Assessment Act authorises the disallowance of a deduction, in whole or in part, for an amount otherwise allowable and incurred or paid by a taxpayer in respect of an associated person if the amount is excessive. Under subsection 65(2), however, no deduction is allowable in respect of expenditure incurred, and payments becoming due, by a taxpayer in a year of income in or for the maintenance of the taxpayer's spouse or of any member of the taxpayer's family under the age of 16 years, whether or not the expenditure was incurred in the production of assessable income.

Subsection 65(2) applies, therefore, to deny a deduction to a taxpayer in respect of expenditure in or for the maintenance of a person who is his or her legally married spouse even though they live apart. It does not deny a deduction in respect of a former de facto spouse. As such it effectively treats a taxpayer in the former circumstance as still married while treating a taxpayer in the latter circumstance as single.

To remedy this discrimination, Part 1 of the Schedule proposes to insert a new subsection (3) in section 65 so that subsection 65(2) does not operate to deny a deduction to a taxpayer for maintenance in respect of a spouse where the parties are living separately and apart on a permanent basis.

Revocable Trusts (section 102)

Where a settlor has created a trust under which:

(a)

the settlor has a power to revoke or alter so as to acquire a beneficial interest; and

(b)

the income is payable to, or accumulated or applicable for the benefit of, the settlor's unmarried children under the age of 21 years,

the Commissioner of Taxation may assess the trustee to pay tax under section 102 of the Assessment Act.

Part 1 of the Schedule provides for the age limit referred to in paragraphs 102(1)(b) and 102(2)(c) to be reduced from 21 years to 18 years to comply with the legal age of adulthood. Part 3 of the Schedule, as explained later in these notes, will further amend paragraphs 102(1)(b) and 102(2)(c).

Daughter-Housekeeper Rebate (section 159J)

Where, during a year of income, a widowed taxpayer who is a resident contributes to the maintenance of his or her daughter, being a daughter who is a resident and wholly engaged in keeping house for the taxpayer, the taxpayer is entitled to a rebate of tax. The maximum rebate allowable in 1990-91 of $1080 ($1296 where there is a dependent child) reduces by $1 for every $4 by which the daughter's separate net income exceeds $282.

The provision of such a rebate solely to widowed taxpayers is discriminatory. The requirement that the dependant be the taxpayer's daughter as opposed to his or her son who is so maintained etc., while being discriminatory according to present social mores, is not strictly discriminatory in terms of the Sex Discrimination Act 1984.

Part 1 of the Schedule provides for subsections 159J(2), 159J(5D), 159J(6) and paragraphs 159J(3)(d), 159K(1)(a) and 159K(1)(b) of the Assessment Act to be amended to allow a rebate for a "child-housekeeper", the term meaning the child of a taxpayer who is wholly engaged in keeping house for the taxpayer. The qualification for the taxpayer claiming the rebate to be widowed is to be removed.

MEDICARE LEVY ACT 1986

Subsection 251R(2) of the Income Tax Assessment Act 1936 currently provides that a "legally married" person in the Medicare Levy Act 1986 will be taken to include a de facto spouse. By an amendment of subsection 251R(2) of the Income Tax Assessment Act by Part 1 of the Schedule, the term "legally married" is to be replaced by the term "married". This is a presentational change so that the style and approach will be consistent with other provisions of the Income Tax Assessment Act.

Part 1 of the Schedule will make consequential amendments of sections 3 and 8 of the Medicare Levy Act also to replace the term "legally married" by the term "married". This change will not affect the substantive operation of subsection 251R(2) or the Medicare Levy Act.

By subclause 38(1) of the Bill the amendments by Part 1 of the Schedule apply in respect of assessments for the 1991-92 and subsequent income years.

PART 2: FRINGE BENEFITS TAX ASSESSMENT ACT 1986

Subsection 159(1) of the Fringe Benefits Tax Assessment Act 1986 states that, for the purposes of deciding whether a person is an "associate" or "relative" of another person within the meaning of the Act, the Income Tax Assessment Act 1936 applies as if a reference in that Act to a spouse included a de facto spouse.

Part 1 of the Schedule proposes that a definition of "spouse", to include a de facto spouse, be inserted in subsection 6(1) of the Income Tax Assessment Act. As a consequence of that amendment, Part 2 of the Schedule will omit subsection 159(1) from the Fringe Benefits Tax Assessment Act.

The amendment by this Part will apply from Royal Assent.

TAXATION (UNPAID COMPANY TAX) ASSESSMENT ACT 1982

Subsection 4(1) of the Taxation (Unpaid Company Tax) Assessment Act 1982 provides for certain definitions of terms in the Income Tax Assessment Act 1936 to be carried over for use in the Act. Included among these terms are the definitions made by section 6 of the Income Tax Assessment Act. The definition of "spouse" to be inserted into subsection 6(1) of the Income Tax Assessment Act by Part 1 of the Schedule is not to be carried over to the Taxation (Unpaid Company Tax) Assessment Act. Assessing action under the Act is near completion and a change to the law now may place those persons assessed after the application date of the amendment in a different position than those persons assessed earlier.

Part 2 of the Schedule provides that the new definition of "spouse" in the Income Tax Assessment Act will not have effect for the purposes of the Taxation (Unpaid Company Tax) Assessment Act.

PART 3: INCOME TAX ASSESSMENT ACT 1936

Revocable Trusts (section 102)

Where a settlor has created a trust under which:

(a)

the settlor has a power to revoke or alter so as to acquire a beneficial interest; and

(b)

the income is payable to, or accumulated or applicable for the benefit of, the settlor's unmarried children under the age of 21 years,

the Commissioner may assess the trustee to pay tax under section 102 of the Income Tax Assessment Act 1936 (the Assessment Act). The provisions thereby discriminate against unmarried children.

Part 3 of the Schedule amends Paragraphs 102(1)(b) and 102(2)(c) of the Assessment Act so that section 102 applies equally whether the children referred to therein are married or not. Part 1 of the Schedule, as explained in the notes above, will reduce the age limit for the operation of the section from 21 years to 18 years.

Income of Children (Division 6AA)

By paragraph 102AC(2)(a) of the Assessment Act the special rules of Division 6AA of the Assessment Act, taxing the unearned income of certain minors under 18 years at a special rate (currently 47 %), do not apply to a minor who is a married person on the last day of the year of income. The Division was introduced mainly to discourage income splitting by means of diversion of income to children. Part 3 of the Schedule proposes to omit paragraph 102AC(2)(a) to remove discrimination on the grounds of marital status.

To ensure an equitable result, the removal of the marital status limitations in sections 102 and 102AC of the Assessment Act will not take effect for two years after the commencement of the amendment reducing the age limit (refer to Part 1 of the Schedule). Married women under 18 years of age would otherwise be disadvantaged by this amendment because the Marriage Act 1961 allows women to marry at age 16 while men cannot marry until they are 18 years of age. Accordingly, by subclause 38(3) of this Bill the amendments made by Part 3 of the Schedule apply to assessments in respect of the 1993-94 and subsequent income years.

PART 4: INCOME TAX ASSESSMENT ACT 1936

This Part of the Schedule will make amendments to the provisions of the Income Tax Assessment Act 1936 as amended by the Taxation Laws Amendment (Foreign Income) Bill 1990 when that Bill becomes law. The amendments made to the proposed section 102AAB and subsection 318(7) of the Income Tax Assessment Act are a consequence of the amendment made by Part 1 of the Schedule to insert a definition of "spouse", to include a de facto spouse, into subsection 6(1) of that Act.