House of Representatives

Explanatory Memorandum

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

MAIN FEATURES

The main features of the Bill are as follows:

Amendment of the Income Tax Assessment Act 1936 (Part III)

Registration of tax agents (Subclause 2(4), clauses 3-7, 37, 39-53, and subclauses 55(15) - 55(25))

Under Part VIIA of the Income Tax Assessment Act 1936, a Tax Agents' Board in each State is responsible for the initial registration of tax agents and the annual renewal, cancellation and, in limited circumstances, suspension of registration. The Bill will make a number of amendments of Part VIIA to give effect to recommendations made by the Administrative Review Council and the Administrative Appeals Tribunal (AAT) and to generally modernise and improve the Part which has remained relatively unchanged since it was first introduced in 1943.

The existing law provides for the registration of a suitably qualified employee as a nominee of a company tax agent. A partnership, however, may only register suitably qualified partners as its nominees and sole practitioners may not register a nominee at all. The Bill will amend the law to permit partnership and individual tax agents to register suitably qualified employees as nominees.

The Bill will modify the existing subjective test for registration as a tax agent or as a nominee - that is, that the applicant be a fit and proper person to prepare income tax returns and to transact business on behalf of taxpayers in income tax matters. The effect of the modification is that an applicant will not satisfy the fit and proper person test unless the applicant:

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has such academic qualifications and practical experience as are prescribed;

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has not been convicted of a serious taxation offence within the preceding 5 years; and

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is otherwise a suitable person to be a registered tax agent.

The tax agent or nominee will be required to continue to meet the eligibility criteria in order to remain registered as a tax agent or nominee.

Under the existing law, a Board may only suspend registration of a tax agent convicted of a taxation offence of a serious nature - broadly, an offence relating to intentionally making a false statement, falsifying records or falsifying or concealing a person's identity or address. In other cases, the only disciplinary action that a Board may take is cancellation of registration. The Bill will amend the law to give Boards a general power of suspension of a tax agent's registration in accordance with a recommendation made by the Administrative Appeals Tribunal in the case of Chapman v Tax Agents' Board of South Australia. The power of suspension is to be subject to a right of review by the AAT.

The Bill will impose, on a company that applies for registration as a tax agent after the date of commencement of the amendments, a requirement that shares carrying not less than 25 per cent of the voting power in the company be beneficially owned by a director or directors qualified for registration as a tax agent. The present requirement in respect of company tax agents - that an employee of the company be suitably qualified - is open to abuse by companies which gain registration on the basis of the qualifications of a nominal employee who, in practice, simply signs tax returns and takes little part in their preparation.

Under the existing law, a partnership tax agent is required, subject to a maximum penalty on conviction of $500, to notify the Board forthwith of any change in the constitution of the partnership. However, a Board is generally unable to determine whether the change in constitution had the effect that the previous partnership was dissolved and a new partnership came into existence. If the change did have this effect, the new partnership would be required to apply for registration as a tax agent and would not be able to carry on business as a tax agent until registered. The Bill will provide a mechanism to enable continuity of the business of a partnership tax agent following a change in constitution irrespective of whether the change had the effect of dissolving the previous partnership.

The Bill also proposes that a decision of a Board to refuse registration as a tax agent or as a nominee or to cancel the registration of a nominee be subject to a right of review by the AAT.

The fee payable on application for registration as a tax agent or a nominee is to be increased from $2 to $80. The existing requirement that tax agents notify the Board by 7 April each year that they desire to remain registered is to be replaced with a requirement to re-register each 3 years. A re-registration fee of $40 plus $5 per nominee is to be introduced.

Each Tax Agents' Board is to be reconstituted and will consist of an officer of the Australian Taxation Office and 2 other persons appointed by the Minister. The Boards presently consist of senior officers of the Department of Finance and the Australian Audit Office and a person appointed by the Governor-General.

Amendments in the Bill will overcome a minor anomaly that arises where a company is a member of a partnership tax agent and reflect the fact that the age of legal capacity is now 18 years.

Special depreciation on trading ships (Subclause 2(3) and clause 15)

The Bill will also amend the special accelerated depreciation concession for eligible Australian trading ships (section 57AM) to restrict the concession to ships that satisfy the existing eligibility criteria of section 57AM (with some minor modifications, which are discussed below) and which also qualify for a grant under the Ships (Capital Grants) Act 1987. The proposal was announced on 2 April 1987.

The effect of the amendment will be that, with one exception, eligibility under section 57AM will be restricted to ships that are, on 22 December 1986, the subject of either a current manning notice issued under that section or an outstanding application for such a notice. The one exception will be for new ships in respect of which a grant is payable under the Ships (Capital Grants) Act. For this latter class of ship, provided that the existing eligibility criteria in section 57AM are met, the special depreciation concession will continue to apply. However, the criteria that ships be manned only by residents of Australia and in accordance with the terms of a manning notice issued under section 57AM will not apply to Grants Act ships as there are similar eligibility criteria in that Act.

A grant is not payable under the Ships (Capital Grants) Act unless the construction or purchase of the ship has been arranged by the taxpayer on or after 22 December 1986 and the ship has been delivered to the taxpayer and first registered in Australia on or after 1 July 1987 and before 1 July 1992.

Grants under the Ships (Capital Grants) Act may become repayable, either in whole or in part, in certain circumstances. Special provisions to be inserted in section 57AM will clawback a corresponding amount of the accelerated depreciation in these circumstances.

Cash Bidding (Clauses 20 and 21)

The Bill will also give effect to the proposal announced on 17 September 1986 to extend the application of the income tax deductions presently allowable for cash bids paid for offshore petroleum exploration permits under the `new' Commonwealth cash bidding system, to include cash bids paid under Commonwealth 'old' cash bidding systems for the grant of offshore petroleum exploration permits and production licences. The Bill will also provide for income tax deductibility for cash bids paid under equivalent State and Northern Territory 'old' and 'new' cash bidding systems.

Under the Petroleum (Submerged Lands) Act 1967, there are 'new' and 'old' systems of cash bidding, and both systems continue to apply. The 'old' cash bidding systems provide for cash bids to be made for exploration permits or production licences in respect of blocks that have already been the subject of either a permit or a production licence which has been effectively discontinued. Each of the States and the Northern Territory has an equivalent 'old system' for cash bidding under their corresponding Petroleum (Submerged Lands) Acts. The 'new' system, which was introduced in 1985, provides a cash bidding system for the grant of petroleum exploration permits only. New South Wales also has a system of cash bidding complementary to the Commonwealth's 'new' system, and it is expected that other States will also introduce complementary systems.

As is presently the case for cash bids paid under the Commonwealth's 'new' system, the amount of any successful cash bid will, in effect, be treated as development expenditure for the purposes of the petroleum mining provisions of the Principal Act, and the bid will be deductible over the lesser of 10 years and the life of the producing field to which the cash bid relates. Consistent with the existing law, the amount of any bid will not commence to be deductible until the year in which a production licence is granted. In the case of a cash bid for the grant of an exploration permit, this will require the subsequent grant of a production licence in relation to the whole or any part of the area to which the permit relates.

Provision will also be made to extend deductibility to expenditure incurred by the purchaser of an interest in an exploration permit or production licence, on the same basis as presently applies in the income tax law in relation to the 'new' cash bidding system.

The amendments will apply in respect of relevant cash bids paid on or after 15 January 1986, which was the date of the original announcement to allow tax deductibility of cash bids under the Commonwealth's 'new' cash bidding system.

Foreign tax credit system (Clauses 8, 13, 14, 16, 17, 30, 31, 32, 33, 34, 35, 62, and 63)

Particular amendments proposed by the Bill and described below will modify the practical operation of the foreign tax credit system and correct some technical deficiencies in the legislation. Under that system foreign source income - apart from certain salary or wages income - derived by Australian residents is subject to Australian income tax and a credit, up to the amount of Australian income tax payable on the foreign income, is allowed for the foreign tax paid in respect of that income. Except as indicated in the notes that follow, the amendments will apply to assessments in respect of income of the year of income that commenced on 1 July 1987 and of all subsequent years of income.

Foreign income and foreign tax (Clause 8)

Foreign taxes for which credit is allowed are those taxes on income (and gains) which are basically similar in nature to the Australian income tax. An amendment proposed by the Bill will ensure that credit is not available to the extent that liability for the foreign tax paid is dependent upon the availability of a credit for that tax against income tax liability in Australia. This amendment is to apply to assessments in respect of income of the year of income commencing on 1 July 1988 and of all subsequent years of income. This amendment is designed to preclude another country taking advantage of the Australian foreign tax credit system for the benefit of its own Treasury.

Exemption of income earned in overseas employment (Clause 13)

Under the foreign tax credit system salary or wages income earned overseas by an individual Australian resident that is subject to tax in the country of source is fully exempt from Australian income tax if it is derived in performing services overseas for a continuous period of at least 12 months. A proportionate exemption applies where there is a continuous period of overseas service of between 3 and 12 months. Amendments proposed will allow short breaks in continuity of overseas service to be disregarded and enable the raising of assessments on the basis of prospective overseas service.

The exemption from Australian tax provided in respect of overseas employment income operates on an 'exemption with progression basis' - that is, the exempt salary or wages is taken into account in determining the Australian tax payable on any other income. However, the application of exemption with progression can in some circumstances result in the payment of more Australian tax than would have been payable under the general foreign tax credit system. An amendment proposed by the Bill will permit the latter system to apply in those circumstances.

Losses and outgoings Limitation on deductions from foreign income (Clauses 14 and 16)

A further feature of the foreign tax credit system is that a foreign loss incurred by a taxpayer in relation to derivation of a class of income from a foreign source can only be offset against income of the same class derived from the same foreign source. To facilitate this foreign loss quarantining measure it is necessary to limit the amount of current year deductions allowable against the relevant foreign income to the amount of income of that class derived by the taxpayer in that year of income from the same foreign source. The existing law does not fully achieve this result, because it refers only to the application to the general deduction provisions of section 51 of the Income Tax Assessment Act 1936. Amendments proposed by the Bill will remedy this defect by bringing within the scope of the current year foreign loss quarantining provisions other allowable deduction provisions of the income tax law. The amendments are to apply to assessments in respect of income of the year of income commencing on 1 July 1988 and of all subsequent years of income.

Credits in respect of foreign tax (Clause 30)

Overseas employment income which under the foreign tax credit system does not qualify for exemption from tax in Australia (see the notes in relation to clause 13 above) is subject to the general operation of that system. Where only a part of income earned in overseas employment is exempt from Australian tax and the remainder is subject to Australian tax, credit is allowed only for the relevant proportion of the foreign tax paid. Amendments proposed by this Bill will correct a minor technical deficiency in the existing law which could have the unintended effect of applying a partial foreign tax credit to other foreign income derived by the taxpayer.

Certain dividends deemed to be interest income (Clause 31)

Under the existing law certain foreign interest income is dealt with as a separate class of income, with a separate foreign tax credit limit applying to it. It is possible, however, to alter the character of foreign interest income by incorporating a foreign company to receive the interest income and then effectively converting it to dividends paid to the Australian taxpayer. To overcome this potential for avoidance of the quarantining of foreign interest income, dividends of this kind are in certain circumstances deemed to be interest income. An amendment is proposed by the Bill to remove a possible ambiguity and thus clarify the operation of the relevant provisions of the existing law.

Foreign underlying tax (Clause 32)

The Bill will amend the definition of 'accounting period' in relation to a foreign company. That definition is relevant in determining the profits out of which a dividend is paid and in calculating credit for underlying tax. The amendment will take into account that some foreign countries do not impose tax by reason of residency but rather on the basis of domicile or place of management and control.

Losses of previous years (Clause 33)

Under the existing law foreign losses of previous years may be offset only against income of the same class derived from the same foreign source. An amendment is proposed by the Bill to remedy a technical defect in the provisions of the existing law which supply the basis for ascertaining the amount of a previous year foreign loss.

The Bill will also amend the definition of "foreign source", which is relevant to the treatment of foreign losses under the foreign tax credit system.

Transfer of excess credit within company group (Clause 34)

Amendments to be made by the Bill will ensure parallel application of the requirements to be met before excess credits can be transferred within group companies, and those to be met in respect of the transfer of group losses.

Amendment of determinations (Clause 35)

Another amendment will enable a determination made by the Commissioner of Taxation as to whether a foreign tax credit is allowable, and as to the amount of the credit, to be amended in certain circumstances to correct an error of law. The amendment is to apply to assessments in respect of the income of the year of income commencing on 1 July 1988 and of all subsequent years of income.

Amendment of Division 16F - thin capitalisation rules (Clauses 23 to 27)

The Bill will effect minor amendments to the thin capitalisation rules contained in Division 16F of the Income Tax Assessment Act 1936 which replaced the rules applied administratively under foreign investment policy until 30 June 1987. The statutory rules ensure that foreign investors having an interest of at least 15% in an Australian business maintain an appropriate balance between the debt the business owes to them and their equity in that business.

The maximum permissible ratio of debt to equity is generally 3:1. That is, for every 3 dollars the foreign investor lends to the Australian business that person is required to have at least one dollar of equity. For banks and non-bank financial intermediaries the ratio is 6:1.

The Bill will amend Division 16F of the Income Tax Assessment Act 1936:

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to ensure that the thin capitalisation rules apply to foreign investment through partnerships and trusts regardless of whether the foreign investors actually receive assessable income from the partnership or trust;

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to restrict the scope of the requirement to maintain a level of equity for a period of two years after the year of its introduction;

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to make minor adjustments to the definition of 'Australian-owned non-resident company' in section 159GZD, and to the definition of 'associates' in section 159GZC; and

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to remove uncertainty from the provision which measures foreign equity of resident companies.

Exemption of certain allowances for disabled persons (Clause 12)

The provisions of the Social Security Act 1947 dealing with the provision of rehabilitation services by the Commonwealth, other than the provisions relating to payment of rehabilitation allowance, have been repealed and are substantially reproduced in Part III of the Disability Services Act 1986. This Bill will maintain the income tax exemption for the training and living-away-from-home allowances previously paid under the Social Security Act and now paid under Part III of the Disability Services Act. The amendment will apply from the date that the Disability Services Act came into operation - that is, 5 June 1987.

Taxing certain educational assistance (Clauses 10 and 38)

By this Bill, amounts received under the Aboriginal Secondary Assistance Scheme (ABSEC) for a student 16 years of age or more or under the Aboriginal Study Assistance Scheme (ABSTUDY) for a student of any age are to be made subject to income tax from 1 January 1988. Exemption from tax will, however, be retained for ABSTUDY payments for dependent children of the student receiving assistance, consistent with the present income tax exemption for payments for dependent children under the AUSTUDY educational assistance scheme.

Assessable income from ABSEC or ABSTUDY will be subject to tax instalment deductions under the pay-as-you-earn system for collecting income tax.

Beneficiary rebates for certain payments (Clause 29)

The Bill will extend the availability of the beneficiary rebates, for the 1988-89 and subsequent income years, to students with assessable income from the Aboriginal Secondary Assistance Scheme or the Aboriginal Study Assistance Scheme. This is consistent with the availability of the rebate for recipients of assessable educational allowances paid under AUSTUDY, the Assistance for Isolated Children Scheme and the Veterans' Children Education Scheme.

This Bill will also extend the availability of the beneficiary rebates to unemployed people receiving the Formal Training Allowance. This will bring the income tax treatment of that Allowance into line with that for unemployment benefits and certain educational allowances. The rebates will be available for the 1987-88 and subsequent years of income.

Excluding certain social security payments from "separate net income" (Clause 28)

The family income supplement and handicapped child's allowance payable under the Social Security Act 1947 have been replaced by allowances known as family allowance supplement and child disability allowance. This Bill will ensure that the exclusion of the previous allowances from the definition of "separate net income" for the purposes of calculating the amount of the rebate to which a taxpayer is entitled for a dependant is continued for the replacement allowances. The amendments will apply to family allowance supplement payments that fall due on or after 17 December 1987 and child disability allowance payments that fall due on or after 15 November 1987 - that is, on or after the date on which each of those allowances replaced family income supplement and handicapped child's allowance.

Taxing certain carer's pensions (Clause 12)

Since 1 February 1988, the carer's pension payable under the Social Security Act 1947 has been available not only to a relative but also to a non-relative caring for a severely handicapped age or invalid pensioner. Under the Income Tax Assessment Act 1936, the carer's pension is exempt from tax where both the carer and the pensioner are below age pension age. When either the carer or the handicapped pensioner is of age pension age, the carer's pension is taxable if the carer is a relative of the pensioner. If the carer is not a relative, the carer's pension is not taxable where the carer is below age pension age and the handicapped pensioner is of age pension age.

To ensure consistent treatment of related and non-related carers, this Bill will remove the exemption from income tax of the carer's pension where a non-relative below age pension age cares for a handicapped pensioner of age pension age. The carer's pension will then be taxable when either the carer or the handicapped pensioner (or both) are of age pension age, whether or not the carer is a relative of the handicapped pensioner.

The amendment will apply to payments of carer's pension for a fortnightly period that commences on or after the day on which this Bill receives the Royal Assent.

Omission of paragraphs 23(x) and (y) (Clauses 10, 18, 19, 22 and 36)

Income Tax Regulation 4AB prescribes, for the purpose of the application of paragraphs 23(x) and (y) of the Income Tax Assessment Act 1936, those organizations which are to be exempted from Australian income tax and the extent to which officials of such organizations are also to be exempt from Australian income tax on their official salaries and emoluments.

In 1985, Australia agreed, without reservation, to the Convention on the Privileges and Immunities of the Specialized Agencies. Australia also accepted, without reservation, the Agreement on the Privileges and Immunities of the International Atomic Energy Agency. Regulations under the International Organizations (Privileges and Immunities) Act 1963 were made in April 1986 to give full effect to Australia's obligations under the two agreements. Those Regulations provide, inter alia, for the exemption from Australian income tax of income of prescribed organizations and of the official salaries and emoluments of officials employed by such organizations.

Paragraphs 23(x) and (y) of the Income Tax Assessment Act are therefore no longer necessary. Various changes in the Bill will accordingly remove those paragraphs from that Act and make necessary consequential changes to other provisions of the Act.

Renumbering of the Social Security Act 1947 (Clause 54 and the Schedule)

The provisions of the Social Security Act 1947 were renumbered and re-lettered, with effect from 2 July 1987, by the Social Security Amendment Act 1987. The latter Act also preserved the effect of provisions in Commonwealth laws that refer to provisions of the Social Security Act before the renumbering and re-lettering. However, to remove the need to refer to a comparative renumbering table, this Bill appropriately updates references to provisions of the Social Security Act that are contained in the Income Tax Assessment Act 1936 and the Income Tax Rates Act 1986.

Amendment of the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 (Clauses 62 and 63)

Amendments proposed by the Bill will correct minor technical defects in the transitional provisions of the Taxation Laws Amendment (Foreign Tax Credits) Act 1986. The amendments are to apply from 22 July 1986, the day on which that Act came into operation.

Amendment of the Taxation Laws Amendment (Fringe Benefits and Substantiation) Act 1987 (Clause 65)

The Bill will also correct a minor drafting defect in the Taxation Laws Amendment (Fringe Benefits and Substantiation) Act 1987.

Amendment of the Sales Tax (Exemptions and Classifications) Act 1935

Redundant sales tax exemption items (Clauses 59 and 60)

The First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 lists various goods or classes of goods as items that are exempt from sales tax. This Bill will remove sales tax exemption items 74F, 74H, 74HA and 74HB which are now redundant.

Items 74H, 74HA and 74HB had provided exemption from sales tax for goods for use but not for sale by:

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the United Nations;

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the Specialized Agencies;

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the International Atomic Energy Agency;

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the South Pacific Commission; and

certain officials of those organisations and their families.

Following the acceptance by Australia of two agreements on the privileges and immunities of International organisations, namely:

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the Convention of the Privileges and Immunities of the Specialized Agencies; and

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the Agreement on the Privileges and Immunities of the International Atomic Energy Agency,

regulations effective from 24 April 1986 were made under the International Organizations (Privileges and Immunities) Act 1963 to give effect to the agreements within Australia.

The regulations are:

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the United Nations (Privileges and Immunities) Regulations (Statutory Rules 1986, No.66);

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the Specialized Agencies (Privileges and Immunities) Regulations (Statutory Rules 1986, No.67); and

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the International Atomic Energy Agency (Privileges and Immunities) Regulations (Statutory Rules 1971, No.30, as amended by 1986, No.68).

These regulations have made sales tax exemption items 74H, 74HA and 74HB redundant to the extent that they apply to the United Nations, the Specialized Agencies and the International Atomic Energy Agency.

In the case of the South Pacific Commission, these items have not had application since 1970 when the South Pacific Commission (Privileges and Immunities) Regulations (Statutory Rules 1970, No. 171) were made under the International Organizations (Privileges and Immunities) Act 1963.

Item 74F provides a sales tax exemption for goods for use and not for sale by the United Nations Relief and Rehabilitation Administration. This organisation no longer exists, its functions having been taken over by other organisations, and a sales tax exemption is no longer relevant.

A more detailed explanation of the provisions of the Bill is contained in the following notes.