Explanatory Memorandum
(Circulated by authority of the Treasurer,the Hon. Peter Costello, MP)General Outline
This package of Bills is the first instalment of the rewrite of the income tax law by the Tax Law Improvement Project. The package comprises:
- Income Tax Assessment Bill 1996
- Income Tax (Transitional Provisions) Bill 1996
- Income Tax (Consequential Amendments) Bill 1996
The Tax Law Improvement Project (TLIP) was established in December 1993 to restructure, renumber and rewrite in plain language Australia's income tax law. This was in response to a recommendation of the Joint Committee of Public Accounts that a task force be set up to rewrite the income tax law. The aim of the Project is to reduce compliance costs, and improve compliance, by making the law easier to use and understand.
In these Bills there are proposed a number of minor content changes to aid the rewriting. These changes will focus on reducing or eliminating unnecessary complexity and bringing the law into line with current administrative and commercial practice. The changes will generally have no direct impact on revenue outcomes.
The project intends that the new law be written and enacted progressively.
Income Tax Assessment Bill 1996
This Bill is the major part of the first instalment of the new law. It will establish the structure and framework of a new Income Tax Assessment Act, which will be built up progressively to replace the Income Tax Assessment Act 1936 as that Act is rewritten.
The new law will contain many improvements designed to make it easier for readers to read, use and apply the new law and, as a result, will lead to lower costs in complying with the law.
The Bill sets out a carefully designed structure for the Income Tax Assessment Act. The new structure focuses on the needs of readers; helping them to find what they are looking for, quickly and efficiently.
New structure is like a pyramid
The new structure will help readers by adopting a top down (or pyramid) approach to presenting information in regular patterns that promote familiarity with the location of material.
The most important provisions of the law, which deal at a broad level with how much income tax a person must pay, will be brought together at the start of the law.
After the core the new law will group those rules (explaining particular kinds of income, deductions and offsets) which apply to large sections of the community.
After these general provisions will follow special rules that are limited to specific groups of taxpayers, special types of tax and special tax obligations.
Collection and administrative provisions
After the specialist provisions come those sections that deal with collecting and recovering tax, and other administrative matters.
Finally, readers will be able to find in a dictionary the meanings of all defined terms and main concepts used in the law.
There will be a new, more flexible numbering system. It will replace the existing cumbersome system which has outlived its usefulness, is confusing and is incapable of readily accommodating new material.
All of the new law will be drafted in clear and plain language.
For those parts of the law directed at individual taxpayers, the new law will address the reader directly, in the second person.
Important parts of the law will be introduced by Guides containing explanatory material to orient unfamiliar readers to those areas.
The new law will incorporate a number of modern presentation techniques designed to introduce good communication principles and ideas.
Rewrite of parts of the existing law
The Bill will include rewrites of the following areas of the Income Tax Assessment Act 1936 :
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- the key provisions about income and deductions ( the core );
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- deductions for current and prior year losses and company group loss transfers;
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- the rules for calculating car expenses and substantiating work-related expenses;
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- the special capital expenditure write-offs for the petroleum mining, general mining and quarrying industries; and
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- capital allowances for buildings and other capital works.
Income Tax (Consequential Amendments) Bill 1996
This Bill will amend other Commonwealth Acts that contain references to the income tax law, to ensure that they reflect the amendments proposed by this package of Bills. It will also make amendments closing off the application of provisions in the existing law that have been rewritten in the Income Tax Assessment Bill 1996 .
Income Tax (Transitional Provisions) Bill 1996
This Bill will explain when and how the new law will commence to apply. As a general rule, the rewritten law will first apply for the 1996-97 income year.
B. Summary of Main Changes
In addition to the general improvements in structure, presentation and readability, the Bill will make a number of useful changes to the operation of the law. These are mainly changes which will facilitate a simpler and clearer expression of the law and less arduous compliance requirements.
The core will:
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- bring together, for the first time, the principal working rules of the income tax law. This will significantly help readers to understand quickly the overall income tax scheme. This is not possible under the present law because the structure has become buried, over the years, under the weight of added material;
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- classify assessable income into 2 distinct categories that are implied, but not specified, in the existing law - ordinary income and statutory income . This will highlight differences in the way the income tax law treats these 2 income types;
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- state a rule against double counting of income amounts. This is not stated in the existing law but has been read into it over the years; and
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- include check lists of the operative provisions (such as those dealing with the treatment of income and deduction items). These will work like an index, taking readers to the parts of the law that will be relevant to their circumstances. The check lists will also function in the short term as an important link between the old law and the new.
The Bill will:
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- bring together the rules about prior year and current year losses. This will allow much of the law to be standardised for the 2 types of loss. In particular, the tests a company needs to satisfy to deduct a loss - the same business test and the continuity of beneficial ownership test - need only be stated once;
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- distinguish 'anti-avoidance' provisions from the main operative provisions, and clearly identify them as anti-avoidance provisions;
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- place at the front of the law the tests that prevent a company being denied a deduction for a loss, so that readers will discover quickly whether the rest of the provisions need to be read; and
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- substantially simplify the calculations that have to be made.
The Bill will also make the following specific changes to the losses provisions.
1 Certain deductions cannot contribute to carry forward losses
Change: Allow an exception to the rule that amounts deductible under specified provisions of the law cannot contribute to a carry-forward loss. In future, if an amount that is deductible under a specified provision can also be deducted under a more general provision, then the amount can contribute to a carry forward loss. This will bring the law into line with administrative practice.
Existing law: Broadly, deductions allowable under specified provisions cannot ordinarily contribute to a carry-forward loss. However, some expenses are deductible under a specified and a general provision of the law. It is established practice to allow these deductions to contribute to a loss.
2 Development allowance of a leasing company cannot contribute to carry-forward losses
Change: Standardise the rules about deductions that cannot contribute to a carry-forward loss, by including with them the rule (presently located elsewhere) that a leasing company's development allowance cannot add to a loss.
Existing law: The rule applying to leasing companies is similar to the general rule that gifts and certain other deductions cannot contribute to a loss.
3 Treatment of tax avoidance losses
Change: Certain anti-avoidance provisions against schemes entered into between May 1977 and May 1981 will be limited to schemes that give rise to primary production losses.
Existing law: These measures stop deductions for losses arising as a result of avoidance schemes. Their current scope is limited to primary production losses arising from schemes entered into between 1977 and 1981.
Change: Clarify that prior year losses must be offset:
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- first , against exempt income remaining after allowing current year deductions;
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- then , against any assessable income remaining after all other deductions are allowed.
This will align the law with administrative practice.
Existing law: It could be argued that:
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- current year deductions, and a prior year loss, must be offset against the same net exempt income; and
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- it is not clear that prior year losses are only deductible from assessable income remaining after all other deductions.
5 Income from employment fringe benefits
Change: Omit the requirement that fringe benefits, assessable for fringe benefits tax, must be offset against losses.
Existing law: To prevent effective double taxation, specified amounts do not have to be offset against losses (for example, exempted foreign source income already taxed overseas). This exception does not extend to fringe benefits even though they are assessable to fringe benefits tax.
Company Losses
1. Current year loss companies: composition of taxable income
Change: Allow current year loss companies to calculate the composition of their taxable income in the same way as other companies.
Existing law: Current year loss companies alone must make a very detailed, and largely unnecessary, calculation of the various components of their taxable income.
2. Current year losses - accounting requirements
Change: Adopt simple pro rata rules for apportioning the income and deductions of a company in a year in which its ownership or control changes and it does not carry on the same business.
Existing law: There are excessively detailed rules for calculating the income and deductions in these circumstances.
3. Tests for continuity of beneficial ownership and same business
Change: Adopt uniform continuity of beneficial ownership and same business tests for the prior year loss and current year loss rules.
Existing law: These rules contain separate, but virtually identical, tests for continuity of beneficial ownership and same business. The tests decide whether a company can deduct these particular losses and outgoings.
Change: Collocate, and rationalise, various anti-avoidance provisions applying to prior year and current year losses.
Existing law: Various separate anti-avoidance provisions supplement the continuity of beneficial ownership test, by denying a deduction if its benefit accrues to someone other than the continuing beneficial owners of the company.
5. Time limit for the completion of loss transfer agreements
Change: Allow a company to make a loss transfer agreement at any time on or before the date on which the transferee company lodges its return.
Existing law: An agreement must be made before the return is lodged.
6 Applicability of the current year loss provisions
Change: The current year loss provisions will stop a company transferring a loss in the loss year only if the loss company is not allowed to deduct the loss.
This will align the law with administrative practice.
Existing law: The law is ambiguous. A company cannot transfer a loss in the year in which it occurs, if the current year loss provisions apply. On a strict interpretation, the current year loss provisions could deny a transfer even if the current year loss provisions did not operate to deny deductibility to the transferor.
Change: Make subvention payments unconditionally non-assessable to the payee on the same basis as they are unconditionally non-deductible to the payer. (A subvention payment is a payment for the transfer of a right to a deduction for a loss.)
Existing law: The payer cannot deduct the payment, but the payment is only precluded from being income of the payee if the payee is a shareholder in the payer.
Capital allowances
The Bill will extract ideas common to the many areas of the law that allow a deduction for capital expenditure (eg. depreciation, mining and film investment). Writing these as 'common rules' will avoid replicating them in each capital allowance provision.
The Bill also contains a table providing an overall summary of the main features of all the capital allowances available under the law.
Mining
The Bill will make major structural improvements to the mining provisions by:
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- combining the present 4 divisions about deductions for mining and quarrying expenditure into one division. The consequent removal of duplicated rules will significantly reduce the length of the existing law;
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- incorporating all the other provisions about mining so that the mining legislation is more easily accessed; and
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- making major structural improvements to the way the mining division appears, putting the rules in the same order as the mining process, and standardising the diversely expressed provisions (but retaining essential differences).
1. Treatment of expenditure incurred before 19 July 1982
Change: Allow undeducted allowable capital expenditure, incurred before 19 July 1982, to be written off on the same basis as expenditure incurred after that date.
Existing law: Mining expenditure incurred before 19 July 1982 is written off under the diminishing value method - ie. in decreasing amounts over an undefinable number of years. More recent expenditure is written off over a maximum of 10 years, in equal annual instalments.
Revenue impact: The estimated impact of the proposal is:
| 1996-97 | 1997-98 | 1998-99 | 1999-00 | 2000-01 |
| $10m gain | $5m gain | nil | $4m cost | $7m cost |
Compliance Impact: The change will reduce the complexity and volume of records required to be kept.
2. Mining rights or information
Change: Allow any mine owner to write off, over 10 years, undeducted expenditure for which deduction rights are transferred under an agreement to purchase a mining right or information.
Existing law: A taxpayer can acquire deductible expenditure by purchasing a mining right or information. On a strict reading of the law, the taxpayer must:
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- own the particular mine to which the right or information relates; and
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- deduct the expenditure over the shorter of 10 years or the life of that mine.
In practice, the Commissioner allows the deduction to the transferee as long as it is a mine owner, even if it does not own the mine to which the right or information relates. In these cases, the expenditure is written off over 10 years.
3. Welfare facilities (contributions to government)
Change: Widen the deduction for expenditure on welfare facilities, by removing the requirement that a taxpayer must bear directly the cost of the facilities.
Existing law: A deduction is allowed for the cost of employee welfare facilities provided by an employer. The deduction does not extend to contributions made by a taxpayer to the cost of facilities provided by government.
4. Housing and welfare (catering facilities)
Change: Widen the deduction for expenditure on housing and welfare facilities, by extending the deduction for employee catering facilities to facilities that are operated for profit.
Existing law: Expenditure on employee welfare facilities is not deductible if they are run for profit.
5. Housing and welfare facilities (contractors' employees)
Change: Allow a deduction for expenditure on housing and welfare facilities for the employees of a contractor to a taxpayer.
Existing law: Taken strictly, mining employers can deduct expenditure only on welfare and housing facilities for their own employees and dependants. The Commissioner, however, recognises deductions for facilities for employees of contractors.
Change: Widen the deduction for expenditure on the rehabilitation of a mining site, to include the cost of constructing levees and dams as part of the rehabilitation process.
Existing law: A deduction is allowed for expenditure incurred in rehabilitating sites of mining operations. However, a deduction is not allowed for the cost of building, or rebuilding, any structure (including levees and dams) during the rehabilitation process.
7. Balancing adjustments and joint ventures
Change: Limit balancing adjustments, on the change of an interest in a joint venture, to the party disposing of the interest.
Existing law: If an undivided fractional interest in property is disposed of, the balancing charge provisions operate as if there has been a sale of the property by all the original owners to all the new owners. There has been some doubt about the application of this to joint ventures. Administrative practice is to apply the provisions only to the party disposing of the interest.
Change: Allow deductions for feasibility studies undertaken to determine whether mining should proceed.
Existing law: The law is silent on the deductibility of such feasibility studies, but it is the Commissioner's practice to allow the deductions.
Deductions for Capital Works (buildings etc.)
The Bill will enhance the structure and content of the rules about writing-off buildings and other capital works by merging the two existing divisions which deal separately (but in similar terms) with different types of buildings. This will enable the text to be halved and will make the law clearer.
The Bill will make the following specific changes.
Change: Widen eligibility for the building write-off concession,by removing the requirement that a building's first intended use must have been for specified purposes.
Existing law: To be eligible for capital write-off, a building must satisfy two use tests. First, the building must be currently used for eligible purposes. Second, the original owner of the building must also have intended to use it for eligible purposes.
Change: Extend the building write-off concession to buildings used as display homes.
Existing law: The concession does not apply to buildings that commenced as display homes.
Revenue Impact: A revenue cost of $2 million each year, starting in 1997-98.
C. Finding Tables
This Explanatory Memorandum contains finding tables which cross-reference the existing and rewritten provisions to make it easier to find your way from the existing law to the new law, and vice versa.
D. Revenue Impact
The new law will be mainly revenue neutral. Most measures will have no direct impact on revenue outcomes. Some proposals will result in insignificant, but hard to quantify, revenue costs.
Only 2 proposed changes can be quantified.
The proposal to allow an accelerated write-off for mining expenditure incurred before July 1982 will initially be revenue positive ($10m and $5m in the first 2 full years), but will become a cost to revenue over time (proposal 1, page 10).
The proposal to allow display homes to be written off under the special concessions for buildings will have an annual cost of $2m (proposal 2, page 12).
E. Compliance Impact
The Bill should achieve a noticeable reduction in compliance costs for those using the parts of the income law it deals with. That reduction will not occur because of any single significant change but from the accumulation and combined impact of many small improvements.
The law will be shorter, clearer and simpler. Together, through provision after provision, these things will produce a significant effect.
There will also be some particular measures aimed at reducing compliance costs:
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- unnecessary requirements of the existing law will be removed;
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- the number of complex calculations will be cut back;
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- rules that have essentially the same effect will be standardised;
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- record keeping obligations will be reduced; and
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- the law will be brought into line with practical administrative positions.
F. Date of Effect
All measures in the package of Bills will apply from (and including) the 1996-97 income year. For some measures, special transitional arrangements will apply. These are explained in the notes describing those measures.