Senate

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

General outline and financial impact

Special depreciation on trading ships

Brings to an end the 20 per cent prime cost depreciation rate for trading ships.

Date of effect: Applies to ships for which construction or purchase contracts are signed on or after 1 May 1996 and which are delivered and registered in Australia on or after 1 July 1997.

Proposal announced: Announced on 1 May 1996 by the Minister for Transport and Regional Development when introducing the Shipping Grants Legislation Bill 1996.

Financial impact: Estimated revenue savings of $10 million in 1997-98 year, $15 million in 1998-99 and $15 million in 1999-2000.

Compliance cost impact: Nil.

Commonwealth education or training payments

Amends the PAYE, rebate and exemption provisions in the income tax law to define, in a generic way, Commonwealth education or training payments.

Date of effect: The proposed amendments to the PAYE provisions will apply to payments made after the 28th day after Royal Assent so as to not impose any retrospective PAYE obligations on the Commonwealth's paying agencies. The proposed amendments to the income tax exemption and rebate provisions will apply from 1 July 1996 so that they can operate to benefit taxpayers for a full year of income, avoiding the complications of pro rata entitlements.

Proposal announced: Legislation previously introduced by the former government (Taxation Laws Amendment Bill (No.5) 1995) which lapsed due to the 1996 election.

Financial impact: The proposed amendments are not expected to have any impact on revenue.

Compliance cost impact: Commonwealth paying agencies may be required to deduct and remit PAYE tax instalments from a broader range than at present. Those agencies already deduct PAYE instalments from some of their payments, such that the additional burden on them is not expected to be significant.

Commonwealth education or training payment recipients who have received an assessable benefit may be required to lodge an income tax return. This is not a new requirement but may be clearer because of the amendments.

Controlled foreign companies and foreign investment funds

Amends various provisions relating to the taxation of foreign source income to:

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ensure that exclusions from the section 47A deemed dividend rules operate correctly.

Date of effect: The amendments will apply from 3 June 1990 (ie. from the commencement of section 47A).

Proposal announced: Not previously announced.

Financial impact: No significant impact on revenue.

Compliance cost impact : Compliance costs will be reduced because the measure will provide greater certainty in the law.

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ensure that the 'gross turnover' of a controlled foreign company (CFC) for the purposes of the de minimis exemption in subsection 385(4) is not reduced by amounts excluded from the active income test under section 436.

Date of effect: The amendments will apply from the commencement of the CFC measures (ie. for statutory accounting periods of CFCs commencing on or after 1 July 1990).

Proposal announced: Not previously announced.

Financial impact: Negligible impact on revenue.

Compliance cost impact : Compliance costs will be reduced for CFCs which satisfy the de minimis exemption following the amendments.

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take account of changes to the Migration Act 1958 which:

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have the effect that temporary entry permits are now called temporary visas; and

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allow citizens of New Zealand to visit Australia without a temporary visa.

Date of effect: The amendments will apply from 1 September 1994.

Proposal announced: Not previously announced.

Financial impact: Negligible impact on revenue.

Compliance cost impact : Compliance costs will be reduced because it will be clear that the temporary visitor exemption is available to holders of temporary visas and to citizens of New Zealand who can visit Australia without a temporary visa.

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allow a notional deduction for a loss of a capital nature where a gain of a capital nature would be included in a foreign investment fund's (FIF's) calculated profit.

Date of effect: The amendments will apply from the commencement of the FIF measures (ie. from 1 January 1993).

Proposal announced: Not previously announced.

Financial impact: No significant impact on revenue.

Compliance cost impact : The measure will have no effect on compliance costs.

Dividend imputation

Amends Taxation Laws Amendment Act (No. 4) 1995 to allow companies the option of deferring conversion to the class C franking account after they are paid a class C franked dividend or a trust or partnership amount with class C franking credits attached. The Bill also eliminates an unintended dual liability to class A franking deficit tax or franking additional tax which may arise in certain situations.

Date of effect: The amendments will apply from 1 July 1995.

Proposal announced: The measures were announced by the Treasurer in a Press Release (No. 54) dated 31 July 1996.

Financial impact: The proposed amendments will prevent an unintended gain to the revenue. However, there is insufficient data available on which a reliable estimate of what this unintended gain could be made.

Compliance cost impact: The proposed amendments will not increase compliance costs for companies.

Employee share schemes

Amends the employee share scheme provisions of the Income Tax Assessment Act 1936 (the Act) to broaden access to benefits, to increase the benefits available in some cases and to make a number of minor amendments.

Date of effect: The amendments to Division 13A of the Act to broaden access to benefits and to increase the benefits available in some cases will apply from 1 July 1996. The minor amendments have various application dates.

Proposal announced: The amendments easing the participation requirements and increasing the benefits available under Division 13A were announced by the Treasurer in the Budget statement of 20 August 1996. While it was indicated in the Budget statement that there would be some technical amendments, the details of the other amendments in the Bill have not been previously announced.

Financial impact: The amendments to Division 13A to broaden access to benefits and to increase the benefits available in some cases will have a cost to the revenue of $15 million per annum from 1996-97 onwards. The cost to the revenue of the other amendments is expected to be negligible.

Compliance cost impact: Some measures may reduce compliance costs by creating greater certainty in the law. The remaining measures will not affect compliance costs.

Capital gains tax - majority underlying interests in assets

The capital gains tax (CGT) provisions of the Income Tax Assessment Act 1936 (the Act) generally only apply to assets acquired by a taxpayer on or after 20 September 1985. Section 160ZZS of the Act determines when assets acquired by a taxpayer before 20 September 1985 lose their pre-CGT status as a result of a change in majority underlying interests held by natural persons. Majority underlying interests refers to more than one-half of the beneficial interests held by natural persons in the asset and income from the asset, regardless of how those interests are held. Section 160ZZS currently requires taxpayers (including public entities) to determine whether their majority underlying interests in assets has changed and, if so, the date on which that change occurred in order to determine the time when the pre-CGT assets became post-CGT. They must then value the affected assets as at the date of the change.

The amendments contained in Schedule 4 of the Bill (the amendments) will require public entities (public companies, publicly traded unit trusts and mutual insurance organisations) to periodically test, on prescribed dates, whether there has been a change in majority underlying interests in the entity's assets between the testing time and immediately before 20 September 1985. The amendments will also provide streamlined methods for testing whether there has been a change in majority underlying interests.

Date of effect: The amendments take effect from 20 January 1997 and apply for the 1996-97 year of income and subsequent years of income.

Proposal announced: 1996-97 Budget, 20 August 1996 and Assistant Treasurer's press release of 20 September 1996.

Financial impact: A small bring forward of tax revenue will be produced as public entities will be aware of the post-CGT status of assets earlier than they may have under the existing law. The estimated increase in revenue will be $15 million in 1997-98, 1998-99 and 1999-2000.

Compliance cost impact: Some increase in immediate compliance costs will arise where companies which do not have to test under the current law, or have to test earlier than they would otherwise have had to, are required to test under the new rules or value assets. There will be a reduction in compliance costs due to the introduction of simplified methods of tracing underlying interests.

Capital gains tax - disposals of small business assets

Inserts new Division 17A into Part IIIA of the Income Tax Assessment Act 1936 to allow rollover relief for the disposal of some or all of the active assets of a small business, where replacement active assets are acquired.

Date of effect: This measure will apply to disposals of assets from 1 July 1997.

Proposal announced: Foreshadowed in the Government's policy document 'Capital Gains and Fringe Benefits Tax Reform' of 18 February 1996. Design details were announced in the 1996-97 Budget on 20 August 1996 and in the Treasurer's press release of 3 December 1996.

Financial impact: This measure will have no revenue impact in 1997-98. A cost to revenue of $200 million in 1998-99 and $215 million in 1999-2000 is expected.

Compliance cost impact: It will be necessary for small business taxpayers electing for rollover relief to keep records of capital gains to be deferred, to calculate the amount to be applied in reduction of cost bases of new assets and to nominate the assets whose cost bases are to be reduced.

These requirements result in compliance costs additional to those already incurred in complying with the existing law. More specifically, the additional compliance cost is in being aware of these changes in the law and ensuring that the cost bases of new assets are appropriately reduced and the reductions properly recorded.

Forgiveness of commercial debts

Amends the provisions relating to the forgiveness of commercial debts contained in the Income Tax Assessment Act 1936 ('the Act') as proposed to be amended by the Taxation Laws Amendment Bill (No. 2) 1996, to ensure the following:

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the definition of 'commercial debt' excludes taxation debts due to the Commonwealth;

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the exception to the general rule for valuing a debt contained in proposed subsection 245-55(4) does not apply where the creditor is a non-resident unless the debt was a taxable Australian asset of the creditor;

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the rule that treats the amount of consideration in respect of forgiveness as equal to the market value of the debt does not apply where the creditor is a non-resident unless the debt was a taxable Australian asset of the creditor;

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the table of deductible expenditure includes expenditure incurred on research and development under section 73B of the Act and capital expenditure incurred in establishing horticultural plants under Division 10F of Part III of the Act;

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the reduced cost base of an asset nominated by the debtor is calculated as if the asset had been disposed of at its market value at the time of deemed disposal;

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a gross forgiven amount in respect of a debt be apportioned between commercial debtors on the basis of the number of commercial debtors who are jointly and/or severally liable for the particular debt;

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the special rule - that applies in certain circumstances to treat a company that was not under common ownership with the debtor company as a company within the group for the purposes of the apportionment of a net forgiven amount - applies to a company which, at the relevant times, controls or is controlled by the debtor company; and

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a loss incurred by a debtor company in respect of the forgiveness year of income that is transferred to a group company is prevented from qualifying as a deductible revenue loss of the group company (by virtue of paragraph 80G(6)(f) of the Act) for the purposes of allocating a net forgiven amount of the debtor company.

Date of effect: 27 June 1996.

Proposal announced: Not previously announced.

Financial impact: These amendments ensure that the provisions operate as intended. There is no discernible financial impact.

Compliance cost: None.

Tax file numbers

Amends the Superannuation Industry (Supervision) Act 1993 to allow eligible superannuation entities more time (30 days rather than the proposed 7 days) in which to request the tax file numbers of new beneficiaries of the entity (if they do not already have them).

Date of effect: The amendment will apply from the 60th day after Royal Assent to Taxation Laws Amendment Bill (No. 2) 1996.

Proposal announced: Not previously announced.

Financial impact: No impact on revenue is expected.

Compliance cost impact: The amendment will reduce compliance costs by allowing eligible superannuation entities more time to process new beneficiaries and a greater opportunity to coincide tax file number requests with other mailouts.

Equity investments in small-medium enterprises

Amends the provisions relating to equity investments in small and medium enterprises (SMEs) which are set out in Item 14 of Schedule 1 to the Taxation Laws Amendment Bill (No. 3) 1996 to clarify the operation of those provisions. The amendments ensure that a subsidiary company of a taxpayer which was engaged in a business of lending money can receive capital gains tax treatment on any gain or loss made from an eligible equity investment in small and medium enterprises.

Date of effect: The amendments apply to eligible equity investments made on or after 1 July 1996.

Amendment announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: None.