House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

Notes on Clauses

INCOME TAX ASSESSMENT AMENDMENT BILL (NO. 5) 1979

Clause 1: Short title, etc

This clause provides formally for the citation of the amending Act and for the Income Tax Assessment Act 1936 to be referred to as the Principal Act.

Clause 2: Commencement

By section 5(1A) of the Acts Interpretation Act 1901 every Act is to come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent unless the contrary intention appears in the Act. By this clause, the amending Act, which will affect assessments for the 1978-79 income year, will come into operation on the day following the day upon which the Income Tax Assessment Amendment Bill (No. 4) 1979 receives the Royal Assent.

The adoption of this commencement date is made necessary by the fact that the provisions of the amending Act as they relate to the deductibility of carry-forward losses rely, in part, for their operation on amendments proposed by the (No. 4) Bill.

Clauses 3, 4 and 5:

Clause 3: Losses of previous years

Clause 4: Losses of previous years incurred in engaging in primary production

Clause 5: Arrangements to avoid the operation of sections 3 and 4

Introductory note:

Under section 80 of the Principal Act a taxpayer who incurs a loss in a year of income may, subject to certain stipulations, carry that loss forward as an allowable deduction against income of any of the next seven succeeding years of income. A loss incurred in engaging in primary production may, by virtue of section 80AA, be carried forward indefinitely. A loss is deemed to be incurred by a taxpayer in a year of income when the allowable deductions for that year exceed the sum of any assessable income and net exempt income derived in that year. In calculating a loss from engaging in primary production, only primary production income and related allowable deductions are taken into account.

Since April 1978, several amendments have been made or proposed to the income tax law to close off tax avoidance schemes that purport to create losses of an artificial or "paper" kind. On 7 April 1978 amendments, effective from that date, to section 36 of the Principal Act were introduced into the Parliament to counter tax avoidance schemes relying on the creation of artificial share trading losses by manipulation of transfers of trading stock consisting of shares and other securities. These amendments were enacted in the Income Tax Assessment Amendment Act 1978. Further amendments to deal with variations of these schemes are contained in the Income Tax Assessment Amendment Bill (No. 4) 1979 and, when enacted, will be effective in relation to transfers of all forms of trading stock occurring after 24 September 1978, when those amendments were foreshadowed by ministerial announcement.

The measures introduced on 7 April 1978 and contained in the Income Tax Assessment Amendment Act 1978 also inserted a new section - section 52A - into the Principal Act to enable the Commissioner of Taxation to reduce to commercially-realistic levels, deductions for expenditure on purchasing shares or other securities in the course of a tax avoidance scheme. The new provision applies to expenditure of the relevant kind incurred after 7 April 1978. It has been found appropriate to amend this new anti-avoidance provision to close off further schemes designed to circumvent it, and these amendments, also contained in the Income Tax Assessment Amendment Bill (No. 4) 1979, will apply to acquisitions of trading stock occurring after 24 September 1978, that being the day on which the intention to amend the law in this way was announced.

Further anti-avoidance measures recently enacted by the Parliament in the Income Tax Assessment Amendment Act 1979 deal with pre-paid interest, pre-paid rent and similar schemes. These amendments deny a deduction for "paper" losses or outgoings incurred after 19 April 1978 - the date of announcement of those measures - where the loss or outgoing is pre-paid as part of a tax avoidance scheme.

Amendments directed at "expenditure recoupment" schemes are also contained in the Income Tax Assessment Amendment Bill (No. 4) 1979 and will apply to expenditure incurred after 24 September 1978 in respect of interest or rent, the discharge of a mortgage, the borrowing of money used to produce assessable income and the purchase of trading stock. It is proposed that the legislation will apply to expenditure incurred as part of a tax avoidance scheme where, under the scheme, the taxpayer is to be effectively reimbursed for the expenditure by receiving a benefit the value of which, when added to the tax saving in respect of the deduction claimed, is equal to or greater than the amount of expenditure incurred.

The Income Tax Assessment Amendment Act 1978 introduced a provision - section 6BA - designed to close off tax avoidance through "paper" losses arising from the issue of bonus shares under schemes that have come to be known as "Curran" schemes. That provision applies to bonus shares allotted after 16 August 1977. Some tax avoidance promoters had claimed that this section is not completely effective against all variations of the "Curran" scheme, and amendments announced on 3 October 1978, and contained in the Income Tax Assessment Amendment Bill (No. 4) 1979, are directed at ensuring that no variations of the original "Curran" scheme escape the intended effect of the law. Any "Curran"-type schemes that may not be covered, if a technical defect in the law is found to exist, will be generally dealt with by the proposed amendment, but only in respect of bonus shares allotted after 3 October 1978.

The amendments proposed by clauses 3 and 4 are directed against taxpayers who had entered into the schemes referred to above before the operative dates of remedial legislation and had, if the schemes are found to be effective of their tax avoidance purpose, created losses with the object of carrying those losses forward for deduction against later years' income under the provisions of sections 80 and 80AA explained earlier.

In broad terms, the proposed amendments will mean that, in determining the amount deductible as a carry-forward loss in a year of income commencing on or after 1 July 1978, the loss so deductible is to exclude so much of it as would not arise if the relevant anti-tax avoidance amendment had applied before the generally operative date of the remedial legislation. The effect of that will be to deny a deduction for the carry-forward loss otherwise available as a result of participation in the particular scheme.

Clause 5 is a safeguarding provision designed to protect the operation of clauses 3 and 4 from arrangements that attempt to change the formal character of losses to which those clauses relate. Clause 5 is to the broad effect that where the taxpayer or an associate of the taxpayer incurs a loss or outgoing that would otherwise be deductible and that loss or outgoing is incurred under an arrangement entered into for the purpose of preventing the operation of clauses 3 and 4, that loss or outgoing will not be deductible.

Notes on the proposed provisions dealing with carry-forward of losses are set out below.

Clause 3: Losses of previous years

Clause 3 proposes an amendment to section 80 of the Principal Act to insert a new sub-section - sub-section (5) - so that, in calculating the amount of any deduction for a carry-forward loss related to non-primary production activities that would otherwise be allowable under sub-section 80(2) of the Principal Act, specified anti-tax avoidance measures enacted during 1978 and 1979 or proposed for enactment in the Income Tax Assessment Amendment Bill (No. 4) 1979 will be taken as having been applicable throughout the year of income in which the loss was incurred. The effect of this will be that where a taxpayer has at a time before the operative date of a specified anti-tax avoidance amendment entered into a scheme of a kind against which that amendment is directed, so much of any loss arising from the scheme as would otherwise be carried forward into the 1978-79 income year or a later income year, but which would on that basis be caught by the anti-avoidance measure, will be disregarded.

Paragraph (a) of clause 3 will amend sub-section 80(2) of the Principal Act which entitles a taxpayer to a deduction in respect of any carry-forward loss deemed to have been incurred by the taxpayer in any of the seven years preceding a year of income as has not previously been allowed as a deduction. The proposed amendment will mean that sub-section 80(2) will in future be read subject to the proposed new sub-section 80(5).

Paragraph (b) of clause 3 will insert the proposed new sub-section 80(5).

As explained earlier, new sub-section (5) will mean that, in ascertaining the amount of the deduction allowable to a taxpayer in respect of carry-forward losses against income of the 1978-79 income year or a subsequent income year, any losses created under specified tax avoidance schemes are to be disregarded. Each of the paragraphs of sub-section (5) explained below deals with a particular anti-tax avoidance amendment.

Paragraph (a) of proposed sub-section 80(5) deals with section 6BA which was inserted into the Principal Act by the Income Tax Assessment Act 1978 to counter the so-called "Curran" scheme. Amendments to section 6BA proposed by the Income Tax Assessment Amendment Bill (No. 4) 1979 will remove certain doubts cast on the intended operation of the section.

The general effect of section 6BA is that, in calculating the taxable profit or deductible loss on disposal of any shares or associated bonus shares, only the cost of the original shares plus any amount actually paid by the shareholder (e.g., on allotment, by way of a premium or for a call) in respect of the bonus shares is to be treated as the cost of the original shares and the bonus shares together. Thus, the bonus shares are not treated as having a cost represented by the "dividend" used to pay them up.

Section 6BA as originally enacted applies in relation to bonus shares allotted after 16 August 1977, while the section, as proposed to be amended, will apply in relation to bonus shares allotted after 3 October 1978. Paragraph (a) of sub-section 80(5) will mean that, for purposes of determining whether any deduction is allowable in respect of carry-forward losses created under "Curran"-type schemes to which section 6BA in either its original or amended form does not itself apply (because the shares were allotted before the relevant operative date), the section as proposed to be amended by the Income Tax Assessment Amendment Bill (No. 4) 1979 is to be taken to have had effect in relation to bonus shares allotted on or before 3 October 1978.

Proposed paragraphs (b), (c), (d) and (e) of sub-section 80(5) relate to a series of anti-tax avoidance amendments made or being made to sections 36 and 36A of the Principal Act to counter avoidance schemes that relied on the manipulation of the provisions dealing with the transfer of trading stock otherwise than in the ordinary course of business (section 36), or upon the formation or dissolution of, or a variation in interests in, a partnership (section 36A).

These amendments were (by the Income Tax Assessment Amendment Act 1978) first made in relation to trading stock consisting of shares, debentures and other choses in action, with general effect after 7 April 1978. At that time, sub-sections 36(9) and (10) were inserted in the Principal Act. By the Income Tax Assessment Amendment Bill (No. 4) 1979 the anti-avoidance measures are being extended -

(a)

with general effect after 10 May 1979, to make it clear that the earlier amendments apply to trading stock in the form of any chose in action (proposed sub-section 36A(6));

(b)

with general effect after 24 September 1978, so that they apply to any form of trading stock (amended or revised sub-sections 36(9) and (10)); and

(c)

with general effect after 10 May 1979, to ensure that the amendments in (b) are fully effective (proposed sub-section 36A(7)).

The combined effect of paragraphs (b), (c), (d) and (e) of new sub-section 80(5) will be that, in calculating the amount of any deduction allowable in respect of carry-forward losses created under schemes that involve the transfer of trading stock otherwise than in the ordinary course of business, or that were created by transferring interests in trading stock upon the formation, dissolution or variation of a partnership, the amendments referred to in the preceding paragraph are to have effect as if they had applied at times prior to the relevant generally effective operative date.

Paragraphs (f), (g) and (h) of proposed sub-section 80(5) will apply in relation to tax avoidance schemes of the kind against which section 52A of the Principal Act is directed.

Section 52A was inserted into the Principal Act in 1978, with effect after 7 April 1978, to counter certain tax avoidance schemes that rely upon transactions in shares and other choses in action for the creation of artificial tax losses, using the general deduction provisions of the income tax law.

In essence, the section enables the Commissioner of Taxation to reduce the amount of a deduction for expenditure incurred in the course of a tax avoidance scheme involving shares, etc that would otherwise be an allowable deduction, or would otherwise be taken into account in calculating any taxable profit or deductible loss, to an amount that is commercially realistic in the light of such collateral arrangements as may effectively compensate the taxpayer or an associate for the tax loss generated under the scheme.

Amendments are proposed to section 52A by the Income Tax Assessment Amendment Bill (No. 4) 1979 to strengthen the provision in relation to schemes designed to circumvent the section as originally enacted. These amendments are to be effective after 24 September 1978.

The effect of paragraphs (f), (g) and (h) will be comparable with that of the other paragraphs of proposed sub-section 80(5). These three paragraphs will mean that, in determining the amount of any deduction for a carry-forward loss, losses created under tax avoidance schemes of the kind at which section 52A of the Principal Act is directed, but which were implemented before the relevant operative date, will be disregarded.

Paragraphs (j), (k) and (m) of proposed sub-section 80(5) will operate in relation to the provisions of Subdivision D of Division 3 of Part III of the Principal Act as they relate to the "pre-payment" and "expenditure recoupment" schemes of tax avoidance. (Amendments to that Subdivision to incorporate provisions designed to counter schemes of the "expenditure recoupment" type are proposed by the Income Tax Assessment Amendment Bill (No. 4) 1979.)

Section 82KJ and associated provisions of Subdivision D were included in the Principal Act by the Income Tax Assessment Amendment Act 1978 and apply to "pre-payment" schemes. They operate to deny a deduction for pre-paid outgoings incurred after 19 April 1978 as part of an arrangement entered into with the purpose of reducing a person's liability to income tax, where the effect of the pre-payment is to reduce the consideration payable in respect of property that is, as part of the overall arrangement, to be acquired by the taxpayer or an associate.

Proposed section 82KL (being inserted by the (No. 4) Bill of 1979) is directed at "expenditure recoupment" schemes of tax avoidance and will operate to deny a deduction for expenditure incurred by a taxpayer after 24 September 1978 as part of a tax avoidance arrangement entered into after that date that involves the receipt by the taxpayer (or an associate) of a benefit having a value which, together with the amount of the tax benefit sought in respect of the expenditure, is sufficient to recoup the total amount of the expenditure.

By virtue of paragraphs (j), (k) and (m), the amount of any deduction allowable in respect of a carry-forward loss will be determined as if the provisions of Subdivision D of Division 3 of Part III as they relate to the "pre-payment" and "expenditure recoupment" schemes of tax avoidance had applied on or before 19 April 1978 and 24 September 1978, respectively.

Clause 4: Losses of previous years incurred in engaging in primary production

Clause 4 proposes an amendment to section 80AA of the Principal Act to insert a new sub-section - sub-section (9) - which will complement the amendment to section 80 of the Principal Act proposed by clause 3.

As explained in the notes on clause 3, the amount of any deduction allowable in respect of a loss incurred in a previous year, other than a loss from engaging in primary production, is to be determined for the 1978-79 and subsequent years of income as if the specified anti-avoidance measures were taken to be applicable throughout the year of income in which the loss was incurred. Proposed sub-section 80AA(9) will ensure that the amount of the deduction allowable under sub-section 80AA(4) of the Principal Act in respect of losses incurred in engaging in primary production is determined on the same basis.

Clause 5: Arrangements to avoid the operation of clauses 3 and 4

Clause 5, which will not amend the Principal Act, contains safeguarding provisions designed to ensure that the amendments proposed by clauses 3 and 4 are not frustrated by arrangements designed to convert proscribed tax avoidance losses into other losses or outgoings that, formally, have a different character.

One such arrangement, for example, could involve an amount of income, equal to the tax avoidance loss, being paid by an associate, before the end of the 1978-79 income year, to the individual or partnership that had created the tax avoidance loss. At that point the individual or partnership would, in 1978-79, have matched the tax avoidance loss against the diverted or manufactured income, the object also having been to give the income payment the character of a deductible expense in the hands of the associated entity. That expense, not being formally a loss of the proscribed kind, could then be sought to be applied against income of the associate. In other words, the arrangement would be designed so as to formally transfer to the associated entity the tax benefit that would otherwise have been denied by the operation of the "no carry-forward loss" provisions being inserted by clauses 3 and 4.

Sub-clause (1) of clause 5 is directed against the possible use of this kind of method of circumventing the amendments proposed by clauses 3 and 4 and will ensure that amounts incurred under arrangements of this type do not qualify for deduction under any provision of the income tax law.

For sub-clause (1) to apply, an amount must be included in the assessable income of a recipient taxpayer of the 1978-79 income year (paragraph (a)), and must in whole or in part represent an otherwise allowable deduction to another taxpayer - referred to as an "associated taxpayer" (paragraphs (b) and (c)). A key test (contained in paragraph (f)) is that the amount, or a part of it, was incurred by the associated taxpayer to the recipient taxpayer for a purpose of wholly or partly preventing the operation of clause 3 or 4 of the Bill in relation to the taxpayer, or, where the recipient taxpayer is a partnership, a partner in the partnership, i.e., of frustrating the intention to deny deductions for the carry-forward of the particular tax avoidance losses to which clauses 3 and 4 are applicable.

Paragraphs (d) and (e) of sub-clause (1) contain tests that further define the scope of the sub-clause. Under paragraph (d) it must be the case that, if the amount had not been included in assessable income of the recipient taxpayer, that taxpayer would be deemed to have incurred a loss for the year. Paragraph (e) imposes the contrasting test that if both the amount were not so included, and the various anti-avoidance provisions identified in proposed sub-section 80(5) had been in effect prior to their generally effective operative date, this loss would not have been deemed to be incurred, or would have been smaller in amount. In other words, the paragraphs together make it necessary that the case be one where but for the arrangement sub-section 80(5) would have been applicable.

By reason of sub-clause (4) the loss referred to in paragraphs (d) and (e) is, if the recipient taxpayer is a partnership, a partnership loss for the year, and in other cases, a carry-forward loss under section 80 or section 80AA.

Where all the tests of paragraphs (a) to (f) of sub-clause (1) are satisfied, the sub-clause will operate so that a deduction is not allowable to the associated taxpayer for so much of the relevant expenditure, paid under the arrangement designed to prevent the operation of clauses 3 or 4, as is paid with that purpose in mind.

Sub-clause (2) is directed at a related method of circumventing the operation of clauses 3 and 4 that is made possible by the ability of a taxpayer to value his trading stock at either cost, replacement cost or market value.

But for sub-clause (2), a taxpayer who would otherwise have a loss that would be subject to the operation of clause 3 or 4 could value his trading stock at the highest value possible under the income tax law with the object of increasing his trading profit in 1978-79 by an amount sufficient to absorb the carry-forward loss. The effect of this arrangement would be to substitute the corresponding reduction in the taxpayer's 1979-80 trading profit for the 1978-79 loss that would otherwise have been subject to the operation of clause 3 or 4.

By virtue of sub-clause (2), the tests for which match those of sub-clause (1), where a taxpayer values his trading stock under arrangements of this type with a purpose of preventing the operation of clause 3 or 4, the value of that trading stock will at base be taken to be the lowest value at which the trading stock could be taken into account for income tax purposes (paragraph (e)). A higher value will, however, be adopted where the taxpayer satisfies the Commissioner of Taxation that that higher value might reasonably be expected to have been adopted if his trading stock had not been valued with a purpose of preventing the operation of clause 3 or 4.

Sub-clause (3) is a drafting measure under which a reference in sub-clause (2) to the valuation of trading stock by a taxpayer is a reference to the making of an election under section 31 of the Principal Act as to which of the previously-mentioned bases of valuation is to be applied in relation to that trading stock. An election as to the basis of valuation of trading stock on hand at the end of a year of income is available under section 31 in respect of trading stock other than live stock. In the case of livestock, section 33 of the Act contains controls on variations in the basis of valuation of such stock.

Sub-clause (4) is a measure that will ensure that the safeguarding provisions operate in circumstances where arrangements of the kind described in sub-clause (1) and (2) are entered into by a partnership. It reflects the fact that tax avoidance losses of the kind to which proposed sub-section 80(5) is to apply are commonly sought to be created through a partnership of taxpayers.

By virtue of section 90 of the Principal Act a partnership loss is calculated as if the partnership were a taxpayer. A partnership loss is not itself treated as a loss for the purposes of section 80 or 80AA of the Principal Act. Rather, each partner in the partnership is entitled to a deduction under section 92 of the Act in respect of his share of the loss incurred by the partnership. That deduction may form the basis for a carry-forward loss for the partner.

Against this background, sub-clause (4) enables the object of sub-clauses (1) and (2) to be achieved by specifying that a reference in sub-clauses (1) or (2) to a loss incurred is both a reference to a loss for the purposes of section 80 or 80AA of the Principal Act and to a partnership loss for the purposes of section 92.

Sub-clause (5) will make clear the power of the Commissioner to amend assessments for the purposes of giving effect to the safeguarding provisions of sub-clauses (1) and (2). By virtue of sub-clause (5) the Commissioner will be authorised to amend an assessment to give effect to those provisions within 3 years after the date on which the tax became due and payable under that assessment, should facts emerge to justify such a course.

Clause 6: Deduction in respect of new plant installed on or after 1 January 1976

This clause proposes an amendment to section 82AB of the Principal Act to alter the existing arrangements for the transition from the 40 per cent to the 20 per cent phase of the investment allowance.

Section 82AB authorises an income tax deduction for eligible capital expenditure incurred by a taxpayer in acquiring or constructing an eligible unit of property and specifies the rate at which the allowance is to be calculated.

In the investment allowance's first phase, new plant ordered by a taxpayer, or plant on which construction was commenced by the taxpayer, on or after 1 January 1976 and before 1 July 1978, may qualify for the 40 per cent rate of allowance provided it was first used for the purpose of producing assessable income, or was installed ready for use for that purpose and held in reserve, before 1 July 1979.

In its second phase, new plant not eligible for the 40 per cent rate of allowance that was ordered, or the construction of which was commenced by the taxpayer, on or after 1 January 1976 and before 1 July 1985 may qualify for the 20 per cent rate of allowance if it is first used, or is installed ready for use and held in reserve, not later than 30 June 1986.

The amendment proposed by clause 6 will not affect eligibility for the 40 per cent rate of allowance for plant ordered by 30 June 1978, or the construction of which was commenced by the taxpayer by that date, and which was first used or installed ready for use by 30 June 1979. The amendment will, however, effectively extend the 40 per cent phase of the allowance to some part of the cost of plant where that plant would not qualify for the 40 per cent deduction under the present law on account of not being brought into use by 30 June 1979.

Under the amendment, the 40 per cent rate of allowance will apply to so much of eligible expenditure incurred on or before 3 June 1979 that is attributable to so much of the plant as had been installed in its operating position as at that date. This expenditure will include capital costs of items of plant so installed and such part of the expenditure as is attributable to the installation work done on that plant as at 3 June 1979.

The 20 per cent rate of allowance will apply to the balance of the eligible expenditure incurred in respect of such plant, i.e., expenditure incurred after 3 June 1979 and to so much of expenditure incurred as at 3 June 1979 as is attributable to -

(a)

the cost of installation work done after 3 June 1979 in relation to plant only partly installed at 3 June 1979; and

(b)

the capital and installation costs of plant on which installation work did not commence until after 3 June 1979.

Paragraph (a) of clause 6 is a technical measure. The total amount of investment allowance available in respect of plant to which the amendments under clause 6 apply, at both the 40 per cent and the 20 per cent rate, is being provided for under the new sub-section (6A). Plant to which the normal 20 per cent rate of allowance applies falls for consideration under sub-section 82AB(4). Paragraph (a) of clause 6 will ensure that plant eligible for the modified investment allowance deduction in accordance with the new sub-section (6A) will not also qualify for the normal 20 per cent rate of allowance in relation to its total cost by reason of satisfying the conditions of sub-section (4).

Paragraph (b) of clause 6 will insert two new sub-sections - sub-sections (6A) and (6B) - in section 82AB.

Sub-section (6A) sets out the conditions under which the new arrangements for the transition from the 40 per cent to the 20 per cent phase of the investment allowance scheme will apply, and prescribes a formula for calculating the relevant deduction for plant that qualifies under the amendment.

Sub-section 82AB(2) sets out the conditions under which the normal 40 per cent rate of investment allowance applies to eligible property. The new sub-section (6A) is expressed to apply in a case to which sub-section 82AB(2) does not apply. This will ensure that plant partly completed at 3 June 1979 but completed and in use by 30 June 1979 and thus eligible for the normal 40 per cent rate of allowance will not also qualify for the modified allowance deduction provided under the new sub-section (6A).

Paragraph (a) of sub-section (6A) restricts the application of the modified investment allowance deduction to eligible expenditure in respect of a unit of property that was either -

•

acquired by the taxpayer under a contract entered into before 1 July 1978; or

•

constructed by the taxpayer and the construction of which commenced before 1 July 1978.

These are the conditions that must be satisfied under paragraphs (a) and (b) of sub-section 82AB(2) in respect of a unit of eligible property that qualifies for the 40 per cent rate of allowance. It is necessary also however for such plant to be in use or installed ready for use by 30 June 1979. This latter condition will not be satisfied by plant to which the modified investment allowance deduction applies.

Paragraph (b) of sub-section (6A) will require that, for the new arrangements to apply, the relevant unit of property or a part of that unit of property must have been positioned for use as at 3 June 1979. As explained in the notes on the proposed new sub-section (6B), "positioned for use" in this context means permanently located in the fixed position from which the property is to be used or, in the case of movable plant, located at the place, on the premises, or in the position from which it is to be used.

Paragraph (c) of sub-section (6A) contains another essential condition for the application of the new arrangements that the whole or some part of the eligible expenditure in respect of the relevant unit of property that was positioned for use as at 3 June 1979 was incurred on or before that date.

Paragraph (d) of sub-section (6A) limits the amount of expenditure incurred in respect of a unit of property as at 3 June 1979 to which the modified investment allowance deduction may apply to "qualifying eligible expenditure".

Where the whole of the eligible expenditure in respect of the relevant unit of property was incurred on or before 3 June 1979 (paragraph (c)), qualifying eligible expenditure in relation to that unit of property is, by virtue of paragraph (d), the whole or such part of that eligible expenditure as is attributable to the capital cost of the unit of property or such of its components as were positioned for use as at 3 June 1979 and the work done as at 3 June 1979 in so positioning that unit of property or those components of that unit of property (sub-paragraph (d)(i)).

Where only a part of the eligible expenditure in respect of the relevant unit of property was incurred on or before 3 June 1979 (paragraph (c)), qualifying eligible expenditure in relation to that unit of property is, by virtue of paragraph (d), the whole or such part of that part of the eligible expenditure so incurred as is attributable to the capital cost of the unit of property or such of its components as were positioned for use as at 3 June 1979 and the work done as at 3 June 1979 in so positioning that unit of property or those components of that unit of property (sub-paragraph (d)(i)).

Sub-paragraph (d)(ii) will ensure that the qualifying eligible expenditure to which the modified investment allowance deduction applies will not include the cost of any installation work done after 3 June 1979.

The amount of the modified investment allowance deduction in respect of the amount of qualifying eligible expenditure determined in accordance with paragraphs (a) to (d) of sub-section (6A) is to be calculated in accordance with the formula

((A*B) + D * (C - B))/(C)


where -

A

is the investment allowance deduction that would be available if the property had qualified under the 40 per cent phase of the allowance;

B

is the amount of qualifying eligible expenditure as defined in paragraph (d) of sub-section (6A);

C

is the amount of the eligible expenditure (i.e., the whole of the capital expenditure incurred by the taxpayer in respect of the acquisition or construction of the eligible unit of property); and

D

is the investment allowance deduction that would be available if the property qualified solely under the 20 per cent phase of the allowance.

The effect of applying the formula is that the investment allowance in respect of property that qualifies under the new transition arrangements is to be calculated at the rate of 40 per cent for "qualifying eligible expenditure" - i.e., expenditure incurred by 3 June 1979 that is attributable to property installed or partly installed at that date - and at the rate of 20 per cent for the balance of the eligible expenditure.

The following examples show the application of the formula -

EXAMPLE 1

A unit of property was ordered before 1 July 1978 for a total installed contract price of $10,000. By 3 June 1979, the unit was 75 per cent installed, and the taxpayer had incurred eligible expenditure of $6,000, the whole of which, being attributable to the part of the property installed by that date, is qualifying eligible expenditure. The relevant components of the formula would be -

A. $4,000, i.e., 40 per cent of $10,000

B. $6,000

C. $10,000

D. $2,000, i.e., 20 per cent of $10,000.

The amount of the modified investment allowance deduction in respect of the unit of property would be calculated by the formula -

$((4,000 * 6,000) + 2,000 * (10,000 - 6,000)) / (10,000) = $3,200


which, in effect, is an investment allowance deduction based on -

EXAMPLE 2

A unit of property was ordered before 1 July 1978 for a total installed contract price of $10,000. By 3 June 1979, the unit was 75 per cent installed and the taxpayer had incurred the whole of the eligible expenditure of $10,000. The relevant components of the formula would be -

A.

$4,000, i.e., 40 per cent of $10,000

B.

$7,500, i.e., the part of the amount incurred by 3 June 1979 attributable to the part of the property installed at that date

C.

$10,000

D.

$2,000, i.e., 20 per cent of $10,000.

The amount of the modified investment allowance deduction in respect of the unit of property would be calculated by the formula -

$((4,000 * 7,500) + 2,000 * (10,000 - 7,500)) / (10,000) = $3,500


which, in effect, is an investment allowance deduction based on -

EXAMPLE 3

A unit of property was ordered before 1 July 1978 for a contract price of $8,000. A separate contract for $2,000 was let for its installation. By 3 June 1979, the unit had been delivered and assembled on site, and the full $8,000 had been incurred. Fifty per cent of the installation contract price had been incurred, all of which was attributable to installation work done by 3 June 1979. The relevant components of the formula would be -

A.

$4,000, i.e., 40 per cent of $10,000 ($8,000 + $2,000)

B.

$9,000, i.e., the part of the amount incurred by 3 June 1979 attributable to the part of the unit installed at that date ($8,000 + $1,000)

C.

$10,000

D.

$2,000, i.e., 20 per cent of $10,000.

The amount of the investment allowance deduction in respect of the unit of property would be calculated by the formula -

$((4,000 * 9,000) + 2,000 * (10,000 - 9,000)) / (10,000) = $3,800


which, in effect, is an investment allowance deduction based on -

Sub-section (6B) specifies for the purposes of sub-section (6A), the circumstances under which a unit of property, or a part of a unit of property, is to be taken to have been positioned for use at 3 June 1979.

The investment allowance deduction is available in the income tax assessment for the year of income in which the relevant unit of property is first used or is installed ready for use and held in reserve for the purpose of producing assessable income. Under paragraph (a) of sub-section (6A), where a unit of property is permanently located in a fixed position at the time it is first used or installed ready for use, that unit or a part of that unit, as the case may be, is to be treated as positioned for use at 3 June 1979 if, at that date, it was permanently located in that position, i.e., in its ultimate operating position.

Paragraph (b) of sub-section (6A) deals with units of property not operated in a fixed position, that is, movable or portable plant. Under paragraph (b), such completed or partly completed plant will be treated as having been positioned for use at 3 June 1979 if, at that date, the relevant unit of property or the partly completed unit of property was located at the place, on the premises or in the position from which it was first used or installed ready for use and held in reserve for the purpose of producing assessable income. For example, a motor vehicle in respect of which an investment allowance deduction would be available but which is on the manufacturer's production line at 3 June 1979 would not qualify under the modified investment allowance deduction provisions. On the other hand, the modified deduction could apply in relation to a vehicle which had been delivered by 3 June 1979 in a cab/chassis form to the business premises of the taxpayer from which it is first used in circumstances under which, for example, the construction by the taxpayer of a tray on the cab/chassis delayed first use of the vehicle until after 30 June 1979.

Clause 7: Interpretation

Clause 7 proposes an amendment to section 82KH of the Principal Act to insert a new sub-section - sub-section (1BA) - that is associated with the amendments proposed by clauses 3 and 4.

As mentioned in the notes on clause 3, amendments are proposed by the Income Tax Assessment Amendment Bill (No. 4) 1979 to counter "expenditure recoupment" schemes of tax avoidance. Those amendments (proposed section 82KL and associated provisions to be inserted in section 82KH) will operate to deny a deduction where, in relation to particular expenditure being incurred under a tax avoidance arrangement, the taxpayer or an associate receives a benefit having a value which, together with the expected tax saving, is sufficient to recoup the total amount of the expenditure.

Proposed sub-section 82KH(1BA) is concerned with the calculation of the amount of the expected tax saving in a case where a taxpayer has entered into a scheme of the kind to which section 82KL is to apply and that scheme has resulted in the taxpayer having a carry-forward loss that (apart from the effect of clause 3 or clause 4) is deductible under section 80 or section 80AA.

As section 82KL and these "carry-forward loss" provisions, as affected by clauses 3 and 4, impinge on each other, it is necessary to provide a rule that in such a case enables them to be applied in an ordered way. To this end, sub-section 82KH(1BA) will apply for purposes of proposed sub-section 82KH(1B), which governs the calculation of tax saving amounts for purposes of section 82KL.

Sub-section (1BA) is to the effect that in determining whether there is a tax saving amount in relation to expenditure within the scope of section 82KL in a case where allowance of a deduction for that expenditure would result in a carry-forward loss under section 80 or section 80AA, those latter sections are to be applied on the basis that the expenditure is not covered by section 82KL.

That will result in a tax saving amount being produced, thus enabling section 82KL to apply either of its own force or, under clause 3 or 4, in determining whether a carry-forward loss arising from an expenditure recoupment scheme carried out before 24 September 1978 is to be allowed as a deduction.

Clause 8: Deductions in respect of Income Equalization Deposits

Section 159GC of the Principal Act which is being amended by this clause authorises income tax deductions in relation to deposits made pursuant to the Loan (Income Equalization Deposits) Act 1976. The deduction allowable to a taxpayer under this section in any year of income is limited by sub-section (4) to 40 per cent of the "gross receipts from primary production", as defined in sub-section (1). By sub-section (5) the deduction in respect of a year of income is further limited to the lesser of $100,000 or the amount by which $100,000 exceeds the sum of any unrecouped deductions that have been allowed under the section or under section 159A in relation to purchases of drought bonds.

Sub-clause (1)(a) of clause 8 proposes to raise from 40 per cent to 60 per cent of the gross receipts derived from primary production in a particular income year, the maximum amount that, by virtue of sub-section (4), can be claimed as income tax deductions in respect of amounts deposited under the Income Equalization Deposits scheme in the relevant period in relation to that income year.

Sub-clause (1)(b) of clause 8 proposes that the further upper limit on deductions under the scheme, under sub-section (5), be increased from $100,000 to $250,000.

By sub-clause (2) of clause 8 the increased limits are to apply to assessments in respect of the 1978-79 income year and subsequent years.

LOAN (INCOME EQUALIZATION DEPOSITS) AMENDMENT BILL 1979

Clause 1: Short title, etc.

This clause provides formally for the citation of the amending Act and for the Loan (Income Equalization Deposits) Act 1976 to be referred to in this Bill as the Principal Act.

Clause 2: Commencement

This Bill is associated with the Income Tax Assessment Amendment Bill (No. 5) 1979 and will come into operation on the day on which that Bill receives the Royal Assent.

Clause 3: Repayment of excess deposits

Part III of the Loan (Income Equalization Deposits) Act 1976 governs the terms on which deposits may be withdrawn. Under section 19 of that Act a person who holds deposits (or in respect of whom a trustee has made deposits) or who holds drought bond stock, the aggregate of which exceeds $100,000, may make a request for repayment of the excess Income Equalization Deposits.

Consistent with the increase proposed by clause 8 of the first Bill, in the maximum that may be claimed as income tax deductions under the Income Equalization Deposits scheme, this clause proposes that the present figure of $100,000 in section 19 be increased to $250,000 as the limit by reference to which requests for repayment of excess deposits may be made.