Senate

Explanatory Memorandum

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

General outline and financial impact

Income Tax deductions: constitutional convention

Amends the Income Tax Assessment Act 1997 to provide for the tax deductibility of expenses incurred in contesting an election for delegates to the Constitutional Convention.

Date of effect: The amendment will apply to expenses incurred in the 1997-98 year of income.

Proposal announced: 1997-98 Budget.

Financial impact: Revenue forgone of up to $400,000 in the 1998-99 year of income is expected from the measure.

Compliance cost impact: The compliance cost will be negligible. People will need to maintain records to claim the deduction up to $1000.

Income Tax deductions: National Nurses' Memorial Trust

Amends the income tax law to allow income tax deductions for gifts made to the National Nurses' Memorial Trust.

Date of effect: The amendment will allow deductibility of gifts to the National Nurses' Memorial Trust (the Trust) made after 3 September 1997 and before 4 September 1999.

Proposal announced: Deductibility for donations to the Trust was announced as part of the 1997-98 Budget on 13 May 1997. The Treasurer announced on 4 September 1997 that donations to the Trust would be deductible for a period of two years.

Financial impact: No significant impact on revenue.

Compliance cost impact: There are no compliance cost impacts.

Sales tax: Malaysian Visiting Force

This measure will exempt certain goods from sales tax so as to give effect to the Status of Forces Agreement between the Government of Australia and the Government of Malaysia which was entered into on 3 February 1997.

Date of effect: Any dealing after the date of the Royal Assent.

Proposal announced: Not previously announced.

Financial impact: Negligible.

Compliance cost impact: The compliance costs will be negligible.

Charitable trusts

Amend Income Tax Assessment Act 1997 to ensure that the rewrite of the income tax law reflects recent changes to the exempt entities provisions.

Date of effect: Applies to income derived on or after 1 July 1997.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: Nil.

Payments of RPS, PAYE and PPS deductions to Commissioner

Inserts new Division 1AAA to provide for the rationalisation of the withholding arrangements for Pay-As-You-Earn (PAYE), Prescribed Payments (PPS) and Reportable Payments (RPS).

Date of effect: 1 July 1998.

Proposal announced: 1997-98 Budget, 13 May 1997.

Financial Impact: The estimated revenue gain from the measure will be $330 million in 1998-99.

Compliance cost impact: The Compliance Cost Impact Statement is incorporated into the Regulation Impact Statement which appears at the end of Chapter 4 of the Explanatory Memorandum.

Choice of superannuation funds

Amends the Superannuation Guarantee (Administration) Act 1992 (SGAA) to:

•

require employers to make superannuation contributions on behalf of an employee to a complying superannuation fund or scheme or retirement savings account (RSA) in compliance with the choice of fund requirements; and

•

increase the amount of Superannuation Guarantee Charge (SGC) payable by the employer (if any) where these contributions do not comply with the choice of fund requirements.

Date of effect: The amendments will apply from the date of Royal Assent. To avoid having to pay any increase in SGC, employers will be required to provide superannuation support in compliance with the choice of fund requirements:

•

from 1 July 1998 - for all employees who commence employment after this date (ie.new employees); and

•

from 1 July 2000 - for all employees who were employed by the employer immediately before 1 July 1998 and who continue to be employed by the employer (ie.existing employees).

Proposal announced : This measure was announced in the 1997/98 Budget as part of a number of changes designed to encourage private saving and improve Australias retirement income system. Enhancements to the original proposal were announced on 25 November 1997. Further amendments to the provisions were made during passage of the Bill through the House of Representatives.

Financial impact: None

Compliance cost impact : The compliance cost impact for groups affected by the measure is set out in the table below:

The costs for employees are not available due to difficulties in predicting how they will react to the measure.

Technical amendments: quasi-ownership of plant

Technical amendments are being made to provisions of the Income Tax Assessment Act 1997 to ensure that depreciation rules relating to ownership of lessors' fixtures operate appropriately and properly reflect connecting provisions in the Income Tax Assessment Act 1936 .

Date of effect: Applies to 1997-98 and later income years.

Proposal announced: Not applicable.

Financial impact: Nil.

Compliance cost impact: Nil.

CGT asset register

Amends the Income Tax Assessment Act 1936 to allow taxpayers to use an asset register instead of source documents for capital gains tax (CGT) record keeping purposes.

Date of effect: The amendments will apply to all assets, whether acquired before or after the commencement of the new rules. The measure will only apply to entries made in an asset register that is certified on or after 1 January 1998.

Proposal announced: Statement by the Prime Minister on 24 March 1997 - the Government's response to the Report of the Small Business Deregulation Taskforce : "More Time for Business" - House of Representatives, Canberra.

Financial impact: The proposed amendments are not expected to have a significant revenue impact.

Compliance cost impact: The Compliance Cost Impact Statement is incorporated into the Regulation Impact Statement which appears at the end of Chapter7 of the Explanatory Memorandum.

Franking of dividends and other distributions

Amends the Income Tax Assessment Act 1936 by introducing a general anti-avoidance provision that applies to franking credit trading and dividend streaming schemes where one of the purposes (other than an incidental purpose) of the scheme is to obtain a franking credit benefit.

The amendments will also prevent dividend streaming by:

•

introducing into the Act a specific anti-streaming rule which will apply where a company streams dividends so as to provide franking credit benefits to shareholders who benefit most in preference to others; and

•

modifying the definition of what constitutes a class of shares within the dividend imputation provisions.

Date of effect: Subject to the transitional measure below:

•

the general anti-avoidance and specific anti-streaming rules will apply to dividends and other distributions paid on or after 7.30 pm AEST, 13 May 1997; and

•

the amendment to the definition of what constitutes a class of shares will apply to franking years commencing after 7.30 pm AEST, 13 May 1997.

As a transitional measure, these measures will not apply to dividends declared, but not paid, by publicly listed companies before 7.30 pm AEST on 13 May 1997, and to distributions made after that time that relate to such dividends.

Proposal announced: 1997-98 Budget.

Financial impact: The amendments are part of a package of measures targeting franking credit trading and dividend streaming that will protect the revenue base. In the absence of the measures, to the extent that the revenue base would not be protected, there would be a significant revenue loss. The measures will result in unquantifiable revenue gains to the extent of existing tax minimisation.

Compliance cost impact: There is unlikely to be any significant compliance costs associated with the proposed measures. The general anti-avoidance provision and anti-streaming rule will not affect taxpayers unless they are engaged in franking credit trading schemes or dividend streaming. Some costs may be incurred by companies determining whether shares have substantially the same rights. However, these costs would not be significant and would only be incurred once.

Distributions from private companies

Amends the Income Tax Assessment Act 1936 to ensure that all advances, loans and other credits (unless they come within a defined class of exclusions) by private companies to shareholders and their associates are deemed to be dividends to the extent that there are realised or unrealised profits in the company. Ensures that debts owed by shareholders or their associates which are forgiven by private companies are treated as dividends.

Date of effect: Amendments relating to loan guarantees given by private companies and certain loans by trusts with private company beneficiaries will apply only after 4.00 pm, by legal time in the Australian Capital Territory, on 27 March 1998. All other amendments will apply from 4 December 1997.

Proposal announced: 1997-98 Federal Budget, 13 May 1997. Amendments to the provisions as introduced into the Parliament were announced in Assistant Treasurers Press Releases No. 6 of 9 March 1998 and No. 11 of 27 March 1998.

Financial impact: The amendments are expected to prevent revenue losses of $2 million in 1997-98; $50 million in 1998-99; $30 million in 1999-2000; $30 million in 2000-2001.

Compliance cost impact: The amendments are expected to result in total additional compliance costs of approximately $2 million in 1997-98.

Savings tax offset (Savings rebate)

Inserts new Subdivision 61-A in the Income Tax Assessment Act 1997 to provide a new tax offset (commonly known as the savings rebate ). The offset will apply at a rate of 15% (7.5% in 1998-99 assessments) to undeducted superannuation contributions made by employees and the self-employed and net personal income from savings and investment (including net business income) up to an annual cap of $3,000.

Date of effect: 1 July 1998.

Proposal announced: 1997-98 Budget.

Financial impact: The measure will cost the revenue $350 million in 1998-99, $1370 million in 1999-2000 and $2040 million in 2000-01.

Compliance cost impact: A taxpayer's entitlement to the offset will be calculated by the ATO from information contained in the taxpayer's income tax return. The only additional information required from taxpayers for the purpose of calculating the offset will be details of their undeducted superannuation contributions. Taxpayers will therefore need to either keep records of their personal superannuation contributions or obtain the information from their superannuation funds.

The offset will also be included in the calculation of provisional tax and may be taken into account in the amount of tax instalments deducted from salary or wages income.

•

Taxpayers who wish to increase the amount of the offset included in their provisional tax calculation will need to lodge provisional tax variations.

•

PAYE taxpayers who wish to have the amount of tax instalments deducted from their salary or wages reduced by their entitlement to the offset will have to complete and lodge a new employment declaration with their employer.

The lodgement of employment declarations imposes costs on employers, who will have to keep extra records, make calculations and modify payroll systems. The estimated total initial cost for all employers with annual group tax remittances of $100,000 and over is $4 million, with the estimated recurrent costs totalling $2 million per annum.

Superannuation funds will also incur costs in responding to requests by taxpayers for details of superannuation contributions received before annual statements are sent to contributors.