House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Denial of certain capital losses

Inserts new section 160ZPA into the Income Tax Assessment Act 1936 to limit certain capital losses incurred by corporate groups to the groups' economic loss. The measure also amends the anti avoidance provisions contained in Part IVA of the Act to enable those provisions to apply to schemes which artificially create capital losses in the year in which the losses are created.

Date of effect: New section 160ZPA applies to capital losses created by arrangements entered into before 3 pm on 29 April 1997 which have not been offset against a capital gain in the 1995-96 or an earlier year of income, or have not been offset in an income tax return for the 1996-97 year of income, lodged before 3 pm on 29 April 1997. The amendments to Part IVA apply to capital losses created under a scheme entered into after 3 pm on 29 April 1997.

Proposal announced: The amendments were announced in the Treasurer's Press Release No. 35 of 29 April 1997.

Financial impact: The measures will protect approximately $100 million in revenue per year, starting in 1997-98.

Fringe benefits tax

Amends the Fringe Benefits Tax Assessment Act 1986 , the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 to implement the Government's response to the recommendations concerning fringe benefits tax made by the Small Business Deregulation Task Force in November 1996 by:

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extending and simplifying the existing exemption for taxi travel;

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exempting car parking benefits provided by certain small businesses unless the car parking is provided in commercial car parks;

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simplifying the 'arranger' provisions; and

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exempting certain employers from keeping records for fringe benefits tax (FBT) purposes and, providing certain conditions are met, allowing those employers to calculate their FBT liability for an FBT year on the basis of fringe benefits provided in a previous FBT year.

Additionally, certain benefits consisting of places in approved student exchange programs are to be exempt from FBT.

Date of effect: The changes to the exemption for taxi travel and the exemption for car parking provided by small business employers will apply for the FBT year commencing 1 April 1997 and all later FBT years.

The changes to the arranger provisions will apply for the FBT year commencing 1 April 1998 and all later FBT years.

Employers eligible for the record keeping exemption will have their FBT liability for the 1998-99 FBT year and later FBT years calculated by reference to a base year. The exemption from keeping FBT records for eligible employers will apply to benefits provided from the day that Royal Assent is received. A special transitional provision is also proposed to enable employers to use either the 1996-97 or 1997-98 FBT year as their first base year.

The exemption relating to student exchange programs will apply for the FBT year commencing on 1 April 1996 and all later FBT years.

Proposal announced: Prime Ministers statement More Time for Business on 24 March 1997, in response to recommendations made by the Small Business Deregulation Task Force. The FBT exemption relating to student exchange programs was not previously announced.

Financial Impact: The exemption for car parking provided by small business employers is expected to have an on-going revenue cost of around $35 million per year from 1997-98.

The financial impact of the changes to the exemption for taxi travel and to the arranger provisions cannot be quantified but is not expected to be large.

The record keeping exemption arrangements (RKEA) are expected to result in a loss to revenue of $5 million in the 1998-99 financial year, $25 million in 1999-2000 and $20 million in 2000-2001 and 2001-2002. The cost to the revenue of the exemption relating to student exchange programs is not expected to be significant.

Compliance cost impact: The Compliance Cost Impact Statements are incorporated into the Regulation Impact Statements which appear at the end of Chapter 3 of the Explanatory Memorandum.

Summary of regulation impact statement

Taxi travel and carparking measures

Impact: Low

Main points:

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The exemption for certain car parking benefits will affect employers, other than government bodies or listed public companies and their subsidiaries, whose ordinary income for the relevant year of income is less than $10 million and who provide car parking for employees other than in a commercial car park.

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The change to the exemption for benefits arising from taxi travel will affect all employers who provide taxi travel arriving at or leaving from the work place for their employees.

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These measures will not have a significant impact on the Government, the Australian Taxation Office, tax agents or accountants.

Policy objective: The policy objective of these measures is to reduce the cost of record keeping by small business. First, by simplifying the existing exemption for taxi travel, and second, by exempting benefits arising from car parking provided by small business employers.

Arranger provisions

Impact: This measure will affect employers whose employees receive benefits from third parties where there is not an agreement between the employer and third party.

Main Points:

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This measure will make it significantly easier for employers, whose employees receive benefits from third parties where there is not an agreement between the employer and third party, to determine whether they are liable to pay FBT for such benefits.

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This measure will significantly reduce the compliance costs of employers in determining whether they are liable to pay FBT.

Policy objective: The proposed changes to the arranger provisions aim to reduce the compliance problems for employers arising from the arranger provisions.

Record keeping exemption arrangements

Impact: This measure will affect employers, other than government bodies and tax exempt bodies, who provide fringe benefits with an aggregate fringe benefits amount not greater than the threshold amount in a particular FBT year and maintain a similar level of benefits in later years.

Main Points:

Those employers who are eligible for the RKEA will be able to elect not to keep most FBT records in later years provided there is not a material change in the value of benefits provided. Employers would still have to retain records which they receive from associates in respect of benefits provided to their employees by those associates.

Some employers who would be eligible for the RKEA may continue to keep records because they may not be certain that the value of benefits will fall within the limits of the exemption. Other eligible employers who currently do not lodge FBT returns may continue to keep records because they do not wish to start lodging FBT returns.

Policy objective: The policy objective of this measure is to reduce the compliance costs of record keeping for small business by exempting employers from the requirement to keep records for fringe benefits tax (FBT) purposes in certain circumstances.

Effect of bankruptcy on carrying forward tax offsets

Proposes new provisions preventing a taxpayer who has become bankrupt from carrying forward unused tax offset amounts (rebates) from an earlier income year prior to the bankruptcy, in the same way as losses arising from the alternative deductions are treated.

Date of effect: The item 1 of Schedule 4 applies to assessments for the 1997-98 income year and later income years.

Amendments announced: Not previously announced.

Financial Impact: Cannot be measured.

Compliance cost impact: Nil

Payments of tax by small companies

Amends the company tax instalment provisions contained in Division 1C of Part VI of the Income Tax Assessment Act 1936 to allow instalment taxpayers classified as small to pay their likely tax on 15 December following their income year and the balance, if any, of their tax liability on the following 15 March. Consequential changes to the date for determining classification as small, medium or large, and some minor clarificatory amendments, will also be made.

Date of effect: The proposed amendments to the instalment payment schedule are to take effect from the 1996-97 income year. The proposed amendments to the classification system are to take effect from the 1997-98 income year.

Proposal announced: The amendments were announced on 24 March 1997 in the Government's More Time For Business response to the report of the Small Business Deregulation Task Force and in Treasurer's Press Release No. 101 of 29 August 1997.

Financial Impact: The proposed amendments to the instalment payment schedule will defer collection of a small amount of tax, resulting in an insignificant interest cost to the revenue. The proposed amendments to the classification system are expected to bring forward the collection of a small amount of tax, resulting in an insignificant interest gain to the revenue.

Compliance cost impact: There will be no increase in compliance costs for taxpayers.

Summary of Regulation Impact Statement

Impact: Low

Main Points:

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Companies, corporate unit trusts, public trading trusts, superannuation funds, approved deposit funds and pooled superannuation trusts who are classified as small for the purposes of the company tax instalment system will receive cash flow benefits from the amendments.

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Tax professionals who help the above taxpayers meet their tax obligations will also benefit from the certainty provided by the amendments.

Policy objective: To assist entities classified as small in managing their cash flow by extending the time in which they can meet their tax obligations.

Dividend imputation and RSAs

Amends the Income Tax Assessment Act 1936 to prevent franking credits or debits arising from the payment or refund of tax where those amounts are attributable to the Retirement Savings Account (RSA) business of a life assurance company.

Date of effect: The amendments are to apply to franking credits and debits arising for life assurance companies after the date of introduction of the Bill.

Proposal announced: Not previously announced.

Financial Impact: The proposed amendments will not have any revenue impact.

Compliance cost impact: The proposed amendments will not impose additional compliance costs for life assurance companies.

Deductible expenditure and CGT cost bases

Amends Part IIIA of the Income Tax Assessment 1936 and Division 110 of the Income Tax Assessment Act 1997 to ensure that taxpayers reduce the cost base or indexed cost base of an asset by cost base elements to the extent to which they are deductible and are not subject to an assessable recoupment on disposal. Cost base reductions will also apply where a heritage conservation rebate or a landcare and water facility tax offset is obtained in respect of the expenditure as an alternative to claiming a deduction.

Date of effect: The amendments, which were announced by the Treasurer in the 1997-98 Budget, will generally apply to assets acquired after 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 1997. Expenditure incurred before 1 July 1999 in respect of underlying land or buildings acquired on or before 13 May 1997 will not be subject to the measure.

Moreover, CGT cost base or indexed cost base will be reduced by a heritage conservation rebate or a landcare and water facility tax offset taken as an alternative to the deduction only where the relevant expenditure is incurred on or after this Bill is introduced into Parliament.

Proposal announced: Treasurer's Press Release Numbers 62 of 13 May 1997 and 117 of 2 November 1997.

Financial Impact: The expected gain to the revenue is $20 million in 1998-99; $50 million in 1999-2000; $125 million in 2000-01 and $130 million in 2001-02.

Compliance cost impact: The Compliance Cost Impact Statements are incorporated into the Regulation Impact Statement which appear at the end of Chapter 6 of the Explanatory Memorandum.

Summary of Regulation Impact Statement

Impact: Low

Main point:

The amendments will align the rules for dealing with net revenue deductions for cost base and indexed cost base of an asset with the existing rules for reduced cost base of an asset.

Policy objective: As part of the 1997-98 Budget, the Government announced that amounts of expenditure include in the cost base of assets for capital gains tax (CGT) purposes would be adjusted to take into account net revenue deductions allowable in respect of the exependiture.

The principle underlying this measure is that expenditure should be either deductible for income tax purposes, or included in the CGT cost base of an asset, but not both.

Generally, the amendments are to apply to the disposal of assets acquired after the Budget at 7.30 pm AEST on 13 May 1997.

Passive income of insurance companies

Replaces the formulae used to determine the passive income of the controlled foreign companies of life and general insurance companies.

Date of effect: Applies to the passive income derived by an insurance company on or after 1 July 1997.

Proposal announced: Announced on 13 May 1997 in the 1997-98 Budget.

Financial Impact: Estimated revenue savings of $10 million in each of the 1998-99, 1999-2000 and 2000-01 financial years.

Compliance cost impact: There will be some increase in compliance costs, particularly for general insurance companies, as there are more elements in the proposed replacement formulae.

Average calculated liabilities of life assurance companies

Amends Division 8 of the Income Tax Assessment Act 1936 to require life companies to use average calculated liabilities, rather than calculated liabilities at the end of the year of income, as the basis for determining:

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the amount of income that relates to immediate annuity policies;

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the amount of income that is attributable to policies issued by overseas branches; and

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the amount of income and capital gains to be allocated to each class of assessable income.

Date of effect: The amendments apply from the first year of income that commences on or after 29 April 1997. However, the amendments will apply to the preceding year of income if a significant event occurred in one of the insurance funds of a life company in the period from 29 April 1997 to the end of that year of income.

Proposal announced: The use of average calculated liabilities as the basis for calculating exempt income that relates to immediate annuity business and apportioning income and capital gains was announced in Treasurer's Press Release No. 34 of 29 April 1997. The use of average calculated liabilities as the basis for calculating the amount of exempt income that is attributable to policies issued by overseas branches was announced when Taxation Laws Amendment Bill (No. 6) 1997 was introduced on 29 October 1997.

The use of average calculated liabilities as the basis for calculating the amount of exempt income that is attributable to policies issued by overseas branches has not previously been announced.

Financial Impact: The amendments are expected to protect revenue in the order of $100 million.

Compliance cost impact: The Compliance Cost Impact Statements are incorporated into the Regulation Impact Statements which appear at the end of Chapter 8 of the Explanatory Memorandum.

Summary of Regulation Impact Statement

Impact: Low

Main Points:

The proposed measure will have minimal regulation impact on life companies. The measure requires life insurers to value calculated iabilities annually except where there is a significant event which substantially alters the value of calculated liabliities. If a significant event occurs, the life insureer will be required to do an additioanl valuation of calculated liablities at that time. Performance of actuarial valuations is time consurming, costly and inconvenient. However, because of the small number of life insurers affected, and because a calculation of calculated liablitites is likely to be required for prudential and accounting purposes, the cost of compliance of the proposal is expected to be small.

Policy objective: The policy objective is to remove distortions in calculating a life company's calculated liabilities for the purposes of the Income Tax Assessment Act 1936 (the Tax Act). Amendments to the Tax Act will require life companies to use average calculated liabilities for life insurance policies held during the income year, rather than calculated liabilities at the end of the year of income, as the basis for determining:

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the amount of income that relates to immediate annuity policies;

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the amount of income that is attributable to policies issued by overseas branches; and

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the amount of income and capital gains to be allocated to each class of assessable income.

Depreciation

Inserts new section 61A into the Income TaxAssessment Act 1936 (the Act) to ensure that, for tax exempt entities which became subject to taxation before 3 July 1995, depreciation deductions and balancing adjustments are based on the notional written down values of their depreciable assets as if the entity had always been subject to taxation. The calculation of those notional written down values includes any loadings that would have applied under the former section 57AG of the Act if the entity had always been subject to taxation.

Date of effect: Applies to tax exempt entities which became subject to taxation in the period commencing at the start of the year of income in which 1 July 1988 occurred and ending on 2 July 1995. (Schedule 2D, Division 57 of the Act applies to exempt entities which become taxable after that date)

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

Financial Impact: No additional revenue is expected. However, failure to implement this measure poses a potentially significant threat to the revenue.

Compliance cost impact: The amendment gives effect to the ATO's long standing interpretation of existing law. That interpretation has generally been accepted. It is therefore anticipated that there will be no compliance costs associated with the amendment.

Company tax instalments

Amends the Income Tax Assessment Act 1936 by excluding superannuation funds, approved deposit funds and pooled superannuation trusts from the grouping provisions contained in the company tax instalment system.

Date of effect: The amendments will apply from the 1995-96 income year.

Proposal announced: Assistant Treasurers Press Release (No. 1) of 27 February 1997.

Financial Impact:: The amendments may result in a deferral of revenue which cannot be quantified but is expected to be insignificant.

Compliance cost impact: Compliance costs for affected taxpayers will be reduced.

Summary of Regulation Impact Statement

Impact Low

Main Points:

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Compliance costs for superannuation funds, approved deposit funds and pooled superannuation trusts will reduce because they will not have to consider whether the grouping provisions contained in the company tax instalment system apply.

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Furthermore, companies will not have to consider whether the grouping provisions apply to superannuation funds, approved deposit funds or pooled superannuation trusts that they control.

Policy objective: Implement the Governments announcement to exclude superannuation funds, approved deposit funds, and pooled superannuation trusts from the application of the grouping provisions contained within the company tax instalment system.