House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. P.J. Keating, M.P.)

GENERAL OUTLINE

Taxation Laws Amendment Bill (No. 2) 1986

This Bill will amend -

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the Income Tax Assessment Act 1936 -

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to tax each year the income accruing to resident investors from discounted and other deferred interest securities, including capital indexed securities, issued after 16 December 1984, and to generally allow, on a parallel basis, a deduction for the discount or "interest" component to issuers of such securities (proposal announced on 16 December 1984 and modified rules on 20 December 1985);

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to strengthen the application of the interest withholding tax provisions in relation to discounted debt obligations, capital indexed or deferred interest securities, certain payments made in relation to bank accepted bills and financing by way of hire purchase and similar arrangements (proposal announced on 14 December 1984);

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to make it clear that certain actions taken or statements made by persons affected by the above amendments are to be regarded, for additional tax purposes, as having been taken or made for a purpose in connection with the operation of the income tax law;

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to remedy a technical defect in the rebate provisions that effectively limit the rate of tax payable on certain employment termination payments (proposal announced on 11 March 1986);

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to allow income tax deductions for gifts to the Pearl Watson Foundation Limited;

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to permit the Commissioner of Taxation to communicate relevant information to certain persons for purposes connected with the supervision or regulation of superannuation funds, approved deposit funds or similar funds;

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to exempt from income tax those parts of the Commonwealth Formal Training Allowance that correspond to exempt social security allowances;

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to remove the need for the signing of receipts, invoices or similar documentary evidence that will be required after 30 June 1986 to substantiate deductions claimed for employment-related expenses and certain car and travel expenses.

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the Taxation Administration Act 1953 -

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to make it clear that certain actions taken or statements made by persons affected by the proposed amendments of the Income Tax Assessment Act are to be regarded, for prosecution purposes, as having been taken or made for a purpose in connection with the operation of a taxation law.

This Bill will also make a number of technical amendments of the Taxation Laws Amendment Act (No. 4) 1985 to ensure that various references to particular Repatriation statutes are correctly cited in the income tax law. The amendments will not affect the practical operation of the income tax law.

Income Tax (Securities and Agreements)(Withholding Tax Recoupment) Bill 1986

This Bill will impose on a resident a liability to pay an amount of tax, referred to in the Bill as the "avoided withholding tax amount", in two situations. The Bill operates in conjunction with proposed section 128NA of the Assessment Act, which is contained in the Taxation Laws Amendment Bill (No. 2) 1986. That section contains anti-avoidance measures to cover arrangements designed to circumvent the new withholding tax measures in that Bill.

The first situation where this Bill has effect is where a resident buys a qualifying security from a non-resident and the Commissioner of Taxation is satisfied that the resident and the non- resident were not dealing with each other at arm's length and the amount of the withholding tax arising from the sale is less than the amount that would have arisen if the parties were dealing with each other in an arm's length manner. In this situation, the resident will be liable for the extra withholding tax.

The other case where this Bill will impose a liability for avoided withholding tax arises as the changes to the interest withholding tax provisions contained in the Taxation Laws Amendment Bill (No. 2) are only to affect payments made after the date the amendments come into operation Parties to agreements affected by the amendments may pre-pay, during this intervening period, interest that could otherwise have been payable after the commencement of the amendments. If this loading of payments or pre-paying of interest is done for the sole or dominant purpose of avoiding withholding tax, proposed sub-section 128NA(2) provides that there is to be taken to be an avoided withholding tax amount in relation to the person making the payment. This Bill will impose a liability on that person to pay that avoided withholding tax amount.