House of Representatives

Explanatory Memorandum

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

NOTES ON CLAUSES

TAXATION LAWS AMENDMENT BILL (NO.2) 1987

PART I - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act (No.2) 1987.

Clause 2: Commencement

But for this clause, the amending Act would, by reason of subsection 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the day on which it receives the Royal Assent. The clause provides for various Parts of the amending Act to come into operation on other days.

By subclause 2(1), the amending Act (other than the Parts of the Act referred to in the following subclauses) is to come into operation on the day on which it receives the Royal Assent.

By subclause 2(2), Parts II and III of the amending Act - dealing with ACT tax on insurance business - are to be deemed to have come into operation on 1 January 1987.

Subclause 2(3) relates to the amendment, being proposed by clause 45 of the Bill, of new subsection (1AA) of existing section 221YDB of the Principal Act. That new subsection is being inserted in section 221YDB by the Taxation Laws Amendment Bill 1987 which, at the time of introduction into the Parliament of this Bill, had not come into operation. Subclause 2(3) provides for the possibility that this Bill may receive the Royal Assent before the Taxation Laws Amendment Bill 1987. In that event, clause 45 will come into operation when the Taxation Laws Amendment Bill 1987 commences - i.e., when it receives the Royal Assent.

Subclause 2(4) relates to the measures contained in clauses 36 to 43 of this Bill. Those clauses will amend sections contained in the new Part IIIAA that is proposed to be inserted in the Income Tax Assessment Act 1936 by the Taxation Laws Amendment (Company Distributions) Bill 1987 to give effect to the imputation arrangements that are to apply on and after 1 July 1987. By this subclause, sections 36 to 43 of the amending Act will come into operation immediately after the Taxation Laws Amendment (Company Distributions) Bill 1987 commences, i.e., when it receives the Royal Assent.

By subclause 2(5) Part V of the amending Act is to be deemed to have come into operation on 1 July 1986. In conjunction with clause 53, the effect will be to exempt from ACT pay-roll tax wages paid or payable on or after 1 July 1986 to first year apprentices and to trainees employed under the Australian Traineeship System.

Under subclause 2(6), Part VII of the amending Act (except the provisions of that Part that are referred to in subclause 2(7)) will come into operation on the date (to be proclaimed) of commencement of Part VIII of the Cheques and Payment Orders Act 1986 - proposed to be 1 July 1987. Part VIII of that Act provides for the creation of new payment instruments known as payment orders, which may be drawn on accounts with non-bank financial institutions - that is, building societies, credit unions and other institutions prescribed for the purposes of the Financial Corporations Act 1974 - and the relevant amendments being effected by Part VII of the Bill will bring debits made to payment order accounts within the scope of the debits tax legislation.

By subclause 2(7), subsection 57(1) and the amendments of the Bank Account Debits Tax Administration Act 1982 being made by Part VII of the Bill to deal with bulk debits and debits expressed in foreign currency (see later notes on Schedule 1 to the Bill amending subsection 3(1) of that Act and inserting new sections 3A and 3B into that Act) are to be deemed to have come into operation on the date of introduction of the Bill - that is, 6 May 1987.

Under subclause 2(8), the measures in Part VIII of the Bill will come into operation on a day, or respective days, to be fixed by Proclamation. Part VIII deals with the transfer of responsibility for administration of ACT stamp duty and tax (including pay-roll tax) laws from the Commissioner of Taxation to the proposed Commissioner for Australian Capital Territory Revenue Collections (see later notes on Part VIII). It is expected that 1 July 1987 will be proclaimed as the effective date for the amendments.

However, the subclause provides for the amendments relating to the transfer to commence on different days, should that be necessary.

PART II - AMENDMENT OF THE AUSTRALIAN CAPITAL TERRITORY TAXATION (ADMINISTRATION) ACT 1969

Clause 3: Principal Act

This clause facilitates references to the Australian Capital Territory Taxation (Administration) Act 1969 in Part II of the Bill - the Act is referred to as "the Principal Act".

Clause 4: Interpretation

Section 4 of the Principal Act contains definitions of terms used not only in that Act but also in other Acts dealing with ACT stamp duties and taxes. Those other Acts provide for the Principal Act to be incorporated and read as one with each other Act.

As a consequence of the amendment of the Australian Capital Territory Tax (Insurance Business) Act 1969 proposed by clause 6 of the Bill, clause 4 will insert in section 4 of the Principal Act a definition of the expression "international trade insurance". The amendment proposed by clause 6 will exempt from ACT tax premiums received in respect of such insurance. Clause 4 will also insert in section 4 definitions of terms used in the new definition of "international trade insurance". Each of the definitions in question is described hereunder.

"aircraft", a term used in the following definition of "international trade insurance", is defined to include aircraft in the ordinary sense of the word. The term means a machine or apparatus capable of support in the atmosphere derived either from air reactions or from buoyancy. An air-cushion vehicle is specifically excluded from this definition but is included in the later definition of a "ship".

"international trade insurance", the principal definition, is defined to mean insurance in any one of four different circumstances. By paragraph (a) of the definition, "international trade insurance" means the insurance of freight against loss or damage in connection with its "international transport" (also a defined term - see below).

Insurance against loss or damage of an "aircraft" or "ship" (both defined terms) may also be "international trade insurance", in terms of paragraphs (b), (c) or (d) of the definition. Such insurance falls within the scope of the definition where it is against loss or damage -

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while the aircraft or ship is under construction or undergoing refitting, maintenance or repairs provided that, when the insurance was effected, the owner intended to use the aircraft or ship wholly or principally, and for an indefinitely continuing period after completion of the construction, refitting, maintenance or repairs, for the international transport of freight (paragraph (b)); or

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in connection with a particular journey(s), or for a particular period, provided that, when the insurance was effected, the owner intended the journey(s), or the use of the aircraft or ship during the period, to be wholly or principally for the international transport of freight (paragraphs (c) and (d)).

"international transport", as used in the preceding definition means the transport of freight for trade or commerce from one country to another. It does not extend to intra-country freight transport or to the transport of freight to an offshore structure, such as an oil rig, located beyond the coastal sea of Australia. In the definition, an external Territory is distinguished from Australia because, in terms of section 17 of the Acts Interpretation Act 1901, "Australia" when used in the geographical sense does not include an external Territory.

"ship", also a term used in the definition of "international trade insurance", is widely defined to mean a vessel or boat, however described. Specifically included in the definition are air-cushion vehicles (such as hovercrafts) and floating structures. The term would also cover barges.

PART III - AMENDMENT OF THE AUSTRALIAN CAPITAL TERRITORY TAX (INSURANCE BUSINESS) ACT 1969

Clause 5: Principal Act

By this clause the Australian Capital Territory Tax (Insurance Business) Act 1969 is in Part III of the Bill referred to as "the Principal Act."

Clause 6: Exemptions

Section 6 of the Principal Act provides exemptions from the ACT tax on certain business insurance premiums - such as premiums in respect of life insurance and third party insurance. By the insertion of a new paragraph (b) in section 6, this clause will exempt from the tax premiums received by an insurer in respect of "international trade insurance". As explained in the earlier notes on clause 4 of the Bill, that expression is being defined comprehensively in section 4 of the Australian Capital Territory Tax (Administration) Act 1969 to mean, broadly the insurance of freight carried in international trade and the insurance of aircraft or ships engaged in the international transport of freight.

Clause 7: Application

This clause, which will not amend the Principal Act, provides that the amendment being made by the preceding clause (to exempt from ACT tax premiums for international trade insurance) is to apply to premiums in respect of insurance effected on or after the date of commencement of the clause. By subclause 2(2), that date is to be 1 January 1987.

PART IV - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 8: Principal Act

This clause facilitates references to the Income Tax Assessment Act 1936 in Part IV of the Bill. In that Part, the Act is referred to as "the Principal Act".

Clause 9: Dividends

Subsection 44(2) of the Principal Act excludes from assessable income of a shareholder dividends paid wholly and exclusively out of profits arising from the sale or revaluation of assets not acquired for the purposes of resale at a profit, or paid out of profits from the issue at a premium of convertible notes the interest on which is not deductible to the company, if the dividends paid from such profits are satisfied by the issue of non-redeemable shares. The exemption does not apply to bonus shares paid up out of profits which are assessable income of the company by reason of section 26AAA (disposal of assets within 12 months of acquisition) or section 26AAB (disposal of a previously leased vehicle). Subsection 44(2D) of the Principal Act defines what shares issued by a company are deemed to be redeemable shares for these purposes.

Clause 9 proposes the repeal of subsections 44(2) and (2D). As a result, dividends paid out of profits of the kinds described above and satisfied by the issue of bonus shares will no longer be exempt from income tax in the hands of shareholders. In the same way as any other dividends paid by resident companies, the relevant dividends will be subject to the imputation arrangements contained in new Part IIIAA that is proposed to be inserted in the Principal Act by the Taxation Laws Amendment (Company Distributions) Bill 1987 - see the Explanatory Memorandum on that Bill. In combination with those arrangements, dividends satisfied by the issue of bonus shares will, to the extent that they are franked with an imputation credit, entitle resident individual shareholders to a rebate of tax and resident companies to a franking credit, and will be exempt from withholding tax when derived by a non-resident.

Amendments to other sections of the Principal Act as a consequence of the repeal of subsections 44(2) and (2D) are proposed by clauses 12, 13 and 35 and paragraph (a) of clause 25 of the Bill - see notes on those clauses.

By subclause 47(1) of the Bill, the amendment proposed by clause 9 will apply to dividends satisfied by shares issued on or after 1 July 1987.

Clause 10: Rebate on dividends

Clause 10 will amend in two major respects section 46 of the Principal Act which allows a rebate of tax on intercorporate dividends. First, it will insert a new subsection - subsection (1AA) - that will have the effect of narrowing the scope of the provisions of section 46 that deal with private company dividends.

Subparagraph 46(2)(a)(i) of the Principal Act is related to the private company undistributed profits tax provisions of Division 7 of Part III of that Act. It allows a rebate of tax to a private company in respect of private company dividends included in its taxable income. The amount of the rebate is calculated by applying the average rate of tax payable by the company to one-half of the private company dividends included in its taxable income. However, subsection 46(3) requires the Commissioner of Taxation to allow a further rebate in respect of private company dividends where he is satisfied that the dividends will be distributed to individual or public company shareholders, or will become liable to undistributed profits tax, within a period of 10 months (or 22 months in some cases) of the end of the year of income in which they were received by the private company.

Because of the new imputation arrangements that are to apply from 1 July 1987, the undistributed profits tax payable in accordance with Division 7 where a private company does not distribute sufficient of its taxable income is to last apply to income derived by private companies in the 1985-86 income year. Under amendments to be made by clause 27 of the Bill (see later notes on that clause), transitional arrangements will therefore continue the practical application of the undistributed profits tax only in relation to income derived by private companies in the 1985-86 and earlier income years. Sufficient distributions made in accordance with the modified provisions of Division 7 will be known as "phasing-out dividends". The rules for determining the amount of phasing-out dividends included in the distributable income of a private company are set out in clause 27 of the Bill and are also explained in the later notes on that clause.

Consistent with the above change, section 46 is to be modified by paragraph (a) of this clause so that, in relation to the 1986-87 income year or any later year, it will operate to limit the rebate allowable to a private company in respect of private company dividends received, to so much only of those dividends as are "phasing-out dividends". This will be achieved by new subsection 46(1AA) which will treat references in section 46 to private company dividends -

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that are paid to a shareholder in 1986-87 or a subsequent year of income (paragraph (a)); and

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that otherwise would be private company dividends for purposes of the section (paragraph (b)),

as being references to only that part of those dividends that represents the amount of phasing-out dividends that are included in the distributable income of the shareholder of the year of income for the purposes of Division 7.

The other change to be made to section 46 of the Principal Act is contained in paragraph (b) of clause 10, which proposes the replacement of subsection 46(7). That subsection prescribes the basis for ascertaining the part of any dividend that is included in the taxable income of a company for the purpose of calculating the entitlement of the company to a rebate under subsection 46(2) of the Principal Act, or a further rebate to which it may be entitled under subsection 46(3).

Under present subsection 46(7), the part of any dividends that is included in the taxable income of a company is the amount remaining after deducting from the dividends included in the assessable income of the company, the deductions allowable to it under the Principal Act from income from dividends and, in the case of private company dividends derived by a private company, the deductions that relate directly to those dividends, and so much of any other deductions from dividends that in the opinion of the Commissioner of Taxation may appropriately be so related.

At the time of announcement of the new imputation system that is to apply from 1 July 1987, it was indicated that the section 46 rebate would continue to be the mechanism used for freeing from company tax dividend income of resident companies from other resident companies. However, it was also indicated that, consistent with imputation concepts, the rebate would be calculated on the basis of the full amount of dividends received undiminished by any allowable deductions.

Reflecting this, new subsection (7) is to the effect that the part of any dividends that is included in the taxable income of a shareholder, being a company, for the purpose of calculating its entitlement to a rebate under section 46, will be -

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the whole of the taxable income where that amount is equal to or less than the amount of the dividends included in the shareholder's assessable income (paragraph (a)); or

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the amount of the dividends included in the assessable income of the shareholder (paragraph (b)).

In conjunction with the above change to the method of calculating the section 46 rebate from a net to a gross basis, clause 31 of the Bill proposes the repeal of section 116AA of the Principal Act. As indicated in later notes on that clause, the amount of dividends on which the section 46 rebate is calculated for life assurance companies is, by section 116AA, reduced by a proportion of two special deductions that are allowable to such companies for general management expenses and for calculated liabilities. Paragraph (c) of clause 10 therefore proposes the repeal of subsection 46(9) which makes section 46 of the Principal Act subject to section 116AA.

By subclause 47(2) of the Bill, the amendments proposed by paragraphs (b) and (c) of clause 10 will apply to assessments in respect of the year of income commencing on 1 July 1987 and to all subsequent years of income.

Clause 11: Rebate on dividends paid as part of dividend stripping operation

Clause 11 proposes an amendment to section 46A of the Principal Act that is to the same effect as the amendment proposed by paragraph (a) of clause 10 - see notes on that clause.

Section 46A overrides section 46 in the case of a shareholder, being a company, which is a sharetrader or is engaged in a profit-making scheme or undertaking involving shares, and which derives a dividend as part of a dividend stripping operation. It ensures that, for the purpose of calculating the intercorporate dividend rebate in such cases, the cost of the shares is to be offset against the dividend received, with the rebate being calculated on any balance only. In its practical application, the section generally results in the benefit of the dividend rebate being lost in dividend stripping arrangements. To the extent that it applies to private company dividends received by a private company in a dividend stripping operation, section 46A, like section 46, requires the rebate to be calculated on only one-half of the amount of those dividends unless tests similar to those contained in section 46 as described in the notes on clause 10 are met.

Clause 11 proposes the insertion of a new subsection - subsection (1A) - in section 46A which, like the amendments proposed by paragraph (a) of clause 10, will ensure that where a private company receives dividends during 1986-87 or a later year of income from another private company in which it is a shareholder, only such part of those dividends as represents an amount of phasing-out dividends will be subject to the more limited rebate provisions explained in the notes on paragraph (a) of clause 10.

Clause 12: Distributions by liquidator

Section 47 of the Principal Act operates to treat as dividends, distributions to shareholders of a company made by a liquidator in the course of winding up the company, to the extent to which such distributions represent income derived by the company other than income which has been properly applied to replace a loss of the company's paid up capital. For these purposes, subsection 47(3) of the Principal Act excludes from the meaning of paid-up capital of a company, the paid-up value of shares issued by the company in satisfaction of dividends which have been paid out of profits arising from the revaluation of assets not acquired for the purpose of resale at a profit.

Under the present income tax law, if certain other conditions are satisfied, such bonus shares are tax exempt income in the hands of the shareholder. Clause 9 of the Bill proposes to remove that exemption in relation to dividends satisfied by the issue of bonus shares after 30 June 1987 - see earlier notes on that clause. In consequence of that amendment, clause 12 will remove from the meaning of paid-up capital of a company, in subsection 47(3), the present exclusion of the paid-up value of the bonus shares. This change will ensure that, because the dividends paid by a company and satisfied by the issue of such shares will themselves become taxable, any income applied by a liquidator to replace a loss in the paid-up value of such shares will not be taxed to a shareholder on distribution in the course of winding up the company.

By subclause 47(1) of the Bill, the amendment proposed by clause 12 will apply only to dividends satisfied by shares issued on or after 1 July 1987.

Clause 13: Domestic losses of previous years

The amendment proposed by this clause is also consequential on the repeal of subsection 44(2) of the Principal Act proposed by clause 9 of the Bill - see earlier notes on that clause.

Subject to time limits and the meeting of other conditions, a loss incurred by a taxpayer in one year of income may be carried forward and deducted for the purpose of ascertaining the taxpayer's taxable income in a succeeding year. For these purposes, a loss is incurred in an income year if, in broad terms, a taxpayer's allowable deductions exceed the sum of the assessable income and net exempt income of that year. The term "net exempt income" is defined in subsection 80(3) of the Principal Act and, by subsection 80(3A), excludes exempt income that is a dividend paid wholly and exclusively out of profits referred to in subsection 44(2) of the Principal Act. As subsection 44(2) is to be removed with the result that the relevant dividends will no longer be exempt income, subsection 80(3A) no longer serves any purpose and is also to be repealed.

By subclause 47(1) of the Bill, the amendment proposed by clause 13 will apply only to dividends satisfied by shares issued on or after 1 July 1987.

Clauses 14 to 22 : Substantiation requirements : car rules

Under the present law, certain substantiation requirements must be satisfied before deductions may be allowed for car expenses incurred by employees and self-employed people in using their cars for income producing purposes.

For car expenses claims may be made under one of a number of alternative methods. Where the business kilometres in a year exceed 5,000 one of the following 3 methods can be used:

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actual business expenses ("log book") method - under which deductions are based on the business percentage of the actual car expenses. For this purpose documentary evidence (e.g., receipts) of those expenses and daily log books recording business trips must be maintained;

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1/3 of all actual business expenses method - under which a taxpayer is entitled to a deduction equal to 1/3 of all car expenses which must be evidenced by receipts, etc; A log book is not required under this method; and

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12% of the cost price of the car - this method does not require the maintenance of any documentary evidence or log books.

Where the business kilometres in a year are 5,000 or less a deduction is available either on the actual business expenses method or on the basis of a set rate of cents per business kilometre.

The amendments proposed by the Bill will -

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enable car fuel and oil expenses to be verified by a record of total kilometres travelled during the year rather than by actual receipts, etc;

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remove the requirement for substantiation records for cars which are unregistered throughout the whole year of income and used principally for business purposes; and

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relax the present log book requirements under the actual business expenses method of deduction.

The relaxed log book requirements will mean that it will no longer be necessary to record details of business trips throughout the whole year of income. Instead, taxpayers will be entitled to establish the percentage of business use of the car by making log book entries in a continuous twelve week log book period. Provided the actual percentage of business use does not vary substantially (i.e., by more than 10 percentage points) from that established by reference to the log book records, that established percentage continues to be the basis for deduction for the particular car or a car that replaces it. The revised log book method will apply as follows.

The first year of business use

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For the first year in which car expenses are claimed under the log book method, a log book recording business journeys will need to be kept for a minimum continuous period of 12 weeks at any time in the year. For cars already in use on 1 July 1986, the 1986/87 income tax year will be treated as the "first year". Details of the odometer reading at the start and end of the 12 week period must also be recorded.

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Having kept the log book records for 12 weeks, the taxpayer is entitled to nominate a deductible business proportion for the year which is a reasonable estimate having regard to the business percentage established during the log book period and any variations in other parts of the year that would affect the full year's business use, e.g., holidays and seasonal fluctuations. The nominated proportion of business use must not be greater than the proportion established in the log book period.

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Where expenses in respect of more than one car are being claimed under the log book method, log books will need to be kept for each car for a concurrent 12 week period.

The preceding rules apply in a case where the car is used or for use for income producing purposes throughout the whole year of income. The operation of the rules in circumstances where the car is first used for business purposes part way through the year of income (for example where a person commences the business in which the car is to be used part way through the year of income) are discussed later in these notes.

Subsequent years

The nominated business proportion established in a log book year will be treated as the deductible proportion for subsequent years provided there has not been a substantial reduction in the proportion of business use.

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For this purpose a substantial reduction is more than 10 percentage points, e.g., if the nominated business proportion is 70%, that proportion can continue to be used in subsequent years provided the business proportion during the subsequent year, based on a reasonable estimate, does not fall below 60%.

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In any subsequent year in which the nominated proportion is being used, it will be a requirement for deduction that a record of total kilometres travelled in the car during the year be maintained. For this purpose odometer readings at the beginning and end of the year must be recorded.

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If the car ceases to be used for business purposes during a subsequent year, the deduction for car expenses will be determined by applying the nominated proportion to car expenses relevant to the period up until that time. In these cases the odometer readings required will be those at the start of the year and at the time the car ceases to be used for business purposes.

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To prevent exploitation of rules that are designed for high business use cars, the 10 percentage points margin will not apply on the same basis for cars which have a business usage of 5,000 or fewer kilometres per annum. For these, log books need not be kept in any subsequent year where any reduction in business use does not exceed 10 percentage points. However deductions in these years are to be based on a reasonable estimate of the actual proportion of business use in the year rather than the prior year's nominated proportion.

Substantial falls in business use

If in a year subsequent to a nominated business proportion being adopted by a taxpayer there is a substantial fall in business use of the car (i.e., by more than 10 percentage points), the following rules will apply. (Whether or not a substantial fall has occurred is to be on the basis of a reasonable estimate of the actual proportion of business use during the year.)

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The taxpayer must adopt the lower actual business use percentage for the purpose of determining deductions for that year.

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Alternatively, the taxpayer may claim deductions for car expenses under one of the arbitrary bases mentioned earlier.

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If in the year following the substantial fall in business use a taxpayer wishes to claim deductions under the log book method, he or she will need to establish a new nominated business proportion by maintaining log books for a minimum 12 week period.

Increase in business use

If a taxpayer wishes to increase the nominated proportion of business travel in any year, he or she can do so by maintaining a log book for a further minimum continuous period of 12 weeks.

Replacement cars

If a car for which log books have been maintained and a nominated business proportion established is replaced, the nominated business proportion may continue to be used for the replacement car provided there is not a substantial fall in the proportion of business use.

First business use of a car during the year of income

The following rules apply where a taxpayer commences a business or field of employment during a year of income in which he or she commences to use a car for income producing purposes. The car may be one that was purchased or leased at that time for this purpose or may be the taxpayer's private car which he or she commences to use for business purposes at that time. The rules vary according to whether or not business use commences in the last 12 weeks in the year of income.

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Where commencement of business use is within the last 12 weeks, log books need not be kept for that year. Deductions are to be based on a reasonable estimate of the proportion of business use during the period. Log book records must however be kept in the following year of income on the basis of which the taxpayer will be entitled to nominate the business proportion for that next year which, provided there is no substantial reduction in business use, will also apply for subsequent years of income.

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Where commencement of business use occurs more than 12 weeks before the end of the year the normal rules apply. That is, the taxpayer must keep log book records for a minimum 12 week period after the commencement of business use. On the basis of those records and any variation in business use during the period to the end of the year of income the taxpayer is to nominate a business proportion which, provided there is no substantial reduction in business use, will apply for subsequent years of income.

Variation in the number of business cars during the year of income

Where the number of cars on which deductions are being sought under the log book method increase in a year of income the following rules apply.

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Where the increase occurs within the last 12 weeks log books need not be kept in that year. However, the taxpayer must nominate for each car a reasonable estimate of the proportion of business use during the period the car was held for business use which takes account of the increase in the number of cars used. Concurrent log books must then be kept in the following year, on the basis of which the taxpayer will be entitled to nominate the business proportion for each car for the next year which, provided there is no substantial reduction in business use, will also apply for subsequent years of income. That nominated proportion cannot exceed the business proportion established during the log book period.

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Where the increase in the number of cars occurs at least 12 weeks before the year of income the taxpayer must keep concurrent log books for a minimum 12 week period after the date of increase. Having regard to those records and to any variations in business use (including through the change in the number of cars) the taxpayer is to nominate the business proportion for each car for that year of income. The nominated proportion may exceed the business proportion established in the log book period. The log book records may also be used to nominate the business proportion for the following year. In this case the nominated proportion is subject to the ceiling established in the log book period. That nominated proportion may then be used for subsequent years provided there is not a substantial reduction in business use.

Where the number of cars decreases in the year of income the taxpayer can continue to claim deductions for the remaining car on the basis of a previously established nominated business use where that remains appropriate. However, if because of the reduction in the number of cars, the taxpayer wishes to increase the business proportion of the remaining car the rules outlined above for increases in the number of cars will apply on an equivalent basis.

Inaccurate claims

Provisions contained in the Bill will enable the Commissioner of Taxation to reduce a taxpayer's deduction for car expenses where they are found to be inaccurate. Those provisions will have the following effect.

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Where a taxpayer nominates an inaccurate business deduction percentage in the year in which log books are maintained the Commissioner will be entitled to adjust the deductible percentage. Where this percentage has been used as the nominated percentage for subsequent years of income, deductions in those years will similarly be adjusted to reflect the corrected nominated percentage. That corrected percentage will form the basis of deductions for subsequent years provided the actual business use is not substantially less (i.e., by more than 10 percentage points).

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Where the nominated business proportion has been accurately determined in the log book year but is used in a subsequent year in which there has, in fact, been a substantial reduction in business use (i.e., by more than 10 percentage points), the Commissioner will be entitled to adjust the claim in that subsequent year to reflect the true business proportion.

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If any adjusted deductions based on the corrected nominated business proportion are less than what the taxpayer would be otherwise entitled to under one of the arbitrary formula approaches the taxpayer will be entitled to deductions on the basis which gives the highest deduction.

The normal penalty rules will apply to inaccurate claims.

Switching from one method of deduction to another

Under the present law, a taxpayer is generally prohibited from switching from one deduction method to another in respect of the same car, i.e., if the log book method is chosen in one year, the taxpayer cannot elect one of the arbitrary bases of deduction in a subsequent year, and vice versa. Provisions in the Bill remove that restriction so that a taxpayer may move from one basis of deduction to another year by year. Where a taxpayer takes advantage of that option by switching from an arbitrary basis of deduction to the log book method, it will be necessary to keep log book records for a minimum continuous period of 12 weeks to establish the nominated deductible business proportion of car expenses. This will be the case whether or not the log book method has previously been used to claim car expenses for the car.

Retention of log books and odometer records

The existing substantiation rules require taxpayers to retain car log books and odometer records that relate to a particular year for a minimum period of time. That period is 3 1/2 years from the date of lodgment of the return of the relevant year of income or, if the car was used by the taxpayer in deriving income other than salary or wages, 7 years from that date. If there is an undetermined objection, appeal or request for amendment at the expiry of the retention period, the period is extended until the matter is finalised.

In recognition that car log books kept in earlier years will continue to be evidentiary documents for the purpose of car expense deductions as long as there is not a substantial fall in the proportion of business use of the car or of replacement cars, provisions in the Bill extend the 3 1/2 and 7 year retention periods from the date of lodgment of the latest return of income in which a deduction for car expenses is based on the log book records.

Application of the new rules

By the operation of subclause 47(3), the changes to the substantiation requirements relating to car expenses contained in clauses 14 to 22 and 46 apply for the 1986/87 income year and to subsequent years (i.e., from the date of commencement of the substantiation requirements).

Scheme of operation of new provisions

The following is a description of the broad scheme of operation of the new provisions for determining deductions under the actual business expense ("log book") method.

The first step is to determine whether the particular year of income is a log book year of income for the car (e.g., because it is the first year in which deductions are being sought on the log book method or because it is a year following a substantial fall in the percentage of business use). The circumstances in which a year will be treated as a log book year of income are detailed in proposed new section 82KTG.

The conditions that need to be satisfied if deductions are to be allowable under the log book method in a log book year of income are detailed in proposed new sections 82KUA and 82KUB. Where one of those conditions is that log books be kept during a minimum 12 week period, the period during which those records must be maintained are detailed in the definition of applicable log book period which is proposed to be inserted in section 82KT of the Principal Act by clause 14. This definition includes the requirement that concurrent log books be maintained where there are 2 or more cars being used for income producing purposes for which deductions are being sought on the log book method.

Proposed new sections 82KUA and 82KUC specify the requirements that must be satisfied before deductions become available under the log book method in a year which is not a log book year of income.

The amount of the deduction allowable in given cases is determined in accordance with the rules in proposed new sections 82KUD and 82KUE.

Specific notes on the individual clauses of the Bill relating to the changed requirements detailed above follow.

Clause 14: Interpretation

Section 82KT of the Principal Act defines certain terms used in Subdivision F of Division 3 of the Act. By paragraph 14(a) the existing definition of "retention period" in subsection 82KT(1) is being replaced with a new definition.

The new definition of "retention period" has the same function as the old of specifying the period for which a taxpayer must retain documentary evidence of an expense that is subject to substantiation requirements. Broadly, those periods commence from the date the expense was incurred and end on the date 7 years after the date of lodgment of the return of income of the particular year where the expense relates to income other than salary or wages, and 3 1/2 years where the expense relates to salary or wages income.

The definition is being modified to take account of the fact that, by new section 82KUA, car fuel or oil expenses incurred in a year of income may be substantiated by odometer records rather than receipts. Where odometer records are being used to evidence fuel or oil expenses, the new definition of retention period ensures that the retention period begins from the date when opening odometer readings are required to be recorded. Generally this will be from the commencement of the relevant year of income or, if the car was first used for income producing purposes during the year, the time of that first use.

Paragraph 14(b) omits the definition of "relevant car documents". That composite definition is being replaced by the separate definitions of "log books records" and "odometer records" being inserted by paragraph (c).

Paragraph 14(c) inserts a series of new definitions in subsection 82KT(1).

The definition of "applicable log book period" means, in effect, the period during a year of income when log book records will need to be kept in relation to a car in order to satisfy the conditions for deduction of car expenses under proposed section 82KUD. The years in which log book records must be maintained (e.g., where deductions are first being sought under the log book method) are specified in section 82KUB, in conjunction with section 82KTG.

By paragraph (a) of the definition, if the car is held for less than 12 weeks during the year of income, the applicable log book period is the holding period. In that context, new section 82KTA makes clear that "holding" a car means owning or leasing it during a period when it is for use in producing the taxpayer's assessable income (see notes on section 82KTA).

The general scheme of the deduction provisions (see notes on sections 82KUA to 82KUE) is to require that log books be maintained in a year in which there is a change in the number of cars for which deductions are being sought under the log book method. This is obligatory where there is an increase in the number of cars, and at the option of the taxpayer, where there is a decrease in the number of cars and a higher business percentage is being sought for the remaining car. Where the variation occurs prior to the last 12 weeks of the year of income, log books must generally be kept during that period.

Paragraph (b) of the definition of "applicable log book" period gives effect to this requirement and ensures that where there are 2 or more cars held in this period log books are maintained on a concurrent basis.

In the event that the variation is during the last 12 week period the general effect of the deduction provisions is to ensure that log books are required to be maintained in the following year of income.

In any other case, i.e., where neither paragraph (a) nor (b) applies, paragraph (c) specifies that the applicable log book period is 12 weeks during the period in the year when the car was held for use by the taxpayer for income producing purposes. As for paragraph (b), the chosen 12 weeks must be specified in the taxpayer's return of income for the year.

Another new definition is "exclusive business use deduction". It means the deduction for car expenses a taxpayer would be entitled to if all use of the particular car during a year of income while it was a business car was wholly for income producing purposes. In a case where the car is held for use for income producing purposes during a part of the year only (e.g., where it is acquired for use part way through the year of income - see notes on new section 82KTA) the exclusive business use deduction amount is determined by reference to that period. Determination of the amount of the exclusive business use deductions for a car is relevant to the calculation of deductions for car expenses allowable under new section 82KUD, i.e., the business percentage applicable to the car (as specified in sections 82KUB and 82KUC) is applied to the amount of the exclusive business use deductions to determine the amount of the deductions for car expenses allowable to the taxpayer.

A car will be a "log book car", as defined, if it is used by the taxpayer in the course of producing assessable income and is not one in respect of which the taxpayer has sought a deduction in the year of income under one of the statutory bases explained earlier in these notes. The expression is used in a number of provisions, e.g., in the definition of "applicable log book period" in circumstances where more than one log book car is used for income producing purposes during the year.

As previously explained, the definition of "log book records" (together with the definition of "odometer records") replaces the composite definition of "relevant car documents" which is being omitted by paragraph (a). Log book records are the entries of business journeys recorded during the applicable log book period for the purpose of establishing the pattern of business use. The journey details required to be entered are the same as those required in the existing definition of relevant car documents.

The definition of "long-term log book car" takes in any log book car other than a "rental log book car" (see later notes on that term) or one which is held pending replacement by another. Such cars will not be treated, for example, as additional cars for the purpose of ascertaining whether there has been an increase in the number of log book cars in a year of income.

"Low business kilometre car" is defined by reference to a formula which ascertains whether or not a car has travelled fewer than 5,000 kilometres during a year of income in the course of producing assessable income of the taxpayer or, if the car is in business use for less than the full year, the proportional equivalent of less than 5,000 kilometres applicable to that period. If the car travels less than 5,000 business kilometres (or the equivalent), it is a low business kilometre car. The definition of low business kilometre car is relevant to the safeguard mentioned in the introductory notes, which is given effect to in new sections 82KUC and 82KUD.

"Nominated business percentage" is defined to be an estimate by a taxpayer of the business percentage of kilometres travelled by a car for the period when it was held for use for income producing purposes having regard to all relevant matters, including any log book, odometer or other records kept and any variations in the pattern of use of the car.

The definition of "odometer records" has the same function as the document included in the composite definition of "relevant car documents" which is being omitted by paragraph (a). A new element to the document is that, if the taxpayer nominates a replacement car in accordance with new section 82KTJ, it will be necessary to record odometer readings of both the replacement car and the replaced car as at the date of the changeover. It is also necessary to enter in the odometer records the make, model and engine capacity of the car that the records refer to and, if one car has replaced another during the year, of the replacement car.

"Rental log book car" is defined for the purpose of the definition of "long-term log book car" (see the earlier notes on that definition) and for determining whether there has been an increase in the number of log book cars in a year of income. (See, for example, paragraph 82KTG(d).) It means a log book car (as defined) that is leased to the taxpayer on short-term hire except where the car is, or is likely to be, on hire successively so that there is a substantial continuity of hire.

"Underlying business percentage" is, in effect, an expression of the business proportion of kilometres travelled by a car in a year of income or lesser period, as required. It is the percentage calculated by dividing the number of kilometres travelled by a car in a period in the course of producing a taxpayer's assessable by the number of whole kilometres travelled by the car in the same period.

Clause 15: New sections 82KTA to 82KTK

Section 82KTA : Holding of car

New section 82KTA specifies what is meant whenever a car is referred to as being held by a taxpayer. It means the car is owned or leased by the taxpayer during a period when it is for use in the course of producing the taxpayer's assessable income. In the ordinary case where a car is used throughout the year of income, as required, for income producing purposes, the car will be taken to be held for the full year of income. If, however, a taxpayer commences a business or employment activity part way through a year of income and commences to use his or her existing car in that business or activity, the car will commence to be held within the meaning of section 82KTA from that date. In this latter case the effect is that deductions will be calculated by applying the business use percentage for the period in the year from when it commenced to be held for income producing purposes to the car expenses relevant to that period.

Section 82KTB : Holding period of car

New section 82KTB makes clear that any reference in Subdivision F of the Principal Act to a period in a year during which a taxpayer held a car is a reference to the total period during the year that it was so held.

Section 82KTC : Deemed specification of matters in taxpayer's return

The effect of new section 82KTC is that a taxpayer who inadvertently fails to specify certain matters in his or her return of income that are required as a condition of deduction of car expenses will not be denied a deduction if those matters are specified at a later date in a document lodged with and accepted by the Commissioner of Taxation. The particulars in question are the 12 week log book period chosen by the taxpayer in a year when log book records need to be completed, the details required to be specified when nominating a replacement car, and the business percentage applicable to the car for the particular year that must be specified for the purpose of ascertaining the deduction for car expenses allowable under new section 82KUD.

Section 82KTD : Deemed specification of matters in odometer records

Section 82KTD has the same effect as section 82KTC where a taxpayer inadvertently omits details of the make, model and engine capacity of the car from odometer records. That failure will not lead to denial of a deduction if the relevant details are written in a document lodged with and accepted by the Commissioner.

Section 82KTE : Unsigned or fraudulent entries in log book records

The effect of section 82KTE is that entries in a log book which are either not signed as required by the definition of log book records or false or misleading in a material way (e.g., if ordinary journeys to and from work are misdescribed as business journeys) will not be usable for determining the pattern of use of the car. Any journeys relating to such unsigned or false or misleading entries may not be treated as business journeys.

Section 82KTF : Reasonable estimate of underlying business percentage

Section 82KTF specifies that a reasonable estimate of the underlying business percentage (see notes on definition in clause 14) of a car in a year of income must take into account all relevant matters, including log book, odometer or other records maintained by the taxpayer, and any variations in the pattern of use. The section is relevant, for example, to paragraph 82KUD(a), which authorises a deduction for car expenses in a log book year based on a reasonable estimate of the underlying business percentage applicable to the car in the year. It applies similarly in a non log book year where the deductible business percentage previously established by log book records is over 10 percentage points more than a reasonable estimate of the underlying business percentage for the year, or if the car is a low business kilometre car and the previous deductible percentage exceeds a reasonable estimate of the underlying business percentage.

Section 82KTG : Log book year of income

New section 82KTG sets out the circumstances in which a year of income will be a log book year of income in relation to a car that is used by a taxpayer for the purpose of producing assessable income. Where a year is a log book year of income for a particular car, deductions under the log book method will be available only where the requirements in new section 82KUB are satisfied.

Paragraphs 82KTG(a) to (h) specify the various conditions in which a year of income (referred to in section 82KTG as the "current year of income") will be a log book year of income:

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paragraph (a) applies in a case where the current year of income is the first in which a deduction for car expenses of the deductible car is sought under section 82KUD, i.e., on the basis of the business proportion, established by reference to log book records, of car expenses incurred;

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by paragraph (b), the taxpayer may elect the current year to be a log book year, e.g., if the taxpayer wishes to increase the allowable business percentage established by log book records kept in a previous year;

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the current year of income is a log book year if a formula basis of deduction under section 82KW or 82KX has applied to the deductible car in the immediately preceding year (paragraph (c));

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under paragraph (d) the current year of income is a log book year if section 82KUD was applied in the immediately preceding year for the purpose of calculating deductions based on the business percentage of car expenses incurred, and in the current year deductions under section 82KUD are being sought in respect of an additional number of cars. The fact that an additional car is hired on a short term basis or that there is a period during the replacement of a car when both the old and the new car are held by the taxpayer is disregarded for this purpose;

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paragraph (e) applies to treat the current year of income as a log book year where the taxpayer owned or leased the deductible car in the immediately preceding year, but the car was not used in that year by the taxpayer for the purpose of producing assessable income (i.e., where deductions were not claimed in respect of the car);

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paragraph (f) renders the current year of income a log book year where the immediately preceding year was a log book year but the circumstances were such that there was no requirement to keep log book records for that year (i.e., subparagraph 82KUB(a)(i), (ii), (iii) or (iv) applies). This would apply, for example, where the car was first acquired in the last 12 weeks of the preceding year. (The broad effect of paragraph (f) in this case is to require log books to be kept in the following year.) Paragraph (f) also confirms that a year following one in which the taxpayer was not entitled to a deduction under the log book method because he or she failed to satisfy the requirements set out in subparagraphs 82KUB(b)(iii) and (iv) or 82KUB(c)(i) and (ii) to specify a nominated business percentage or to keep log book and odometer records as required, is a log book year of income;

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paragraph (g) applies similarly to confirm that the year following a year of income in which the taxpayer was not entitled to a deduction under the log book method because certain requirements specified in section 82KUC were not met (broadly, if odometer records were not kept in the previous year or the taxpayer did not specify an appropriate business percentage applicable to the car for that year), is a log book year. Paragraph (f) also ensures that where there has been a substantial fall (i.e., by more than 10 percentage points) in the business use of the car in a year of income that the following year is a log book year;

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by paragraph (h), the Commissioner of Taxation may require the taxpayer to treat the year as a log book year. To do so, the Commissioner would need to cause written notice to be served on the taxpayer before the beginning of the income year.

Section 82KTH : Business percentage established during applicable log book period

Section 82KTH is a technical provision that defines the business percentage established during a 12 week period when log book and odometer records are kept in relation to a car. That percentage is equal to what would be the underlying business percentage (as defined in subsection 82KT(1)) for the year of income (or lesser period if the car was not held for business use throughout the year) if the pattern of use of the car for the year (or lesser period) did not vary from the pattern of use shown by the log book and odometer records. The determination of this percentage is relevant to determining the maximum business percentage that may be adopted in a log book year of income (see, for example, paragraph 82KUB(c)).

Section 82KTJ : Replacement cars

The effect of subsections 82KTJ(1), (2) and (3) is that a taxpayer may treat one car as a replacement for another without having to re-establish a nominated business percentage by keeping new log book records etc. That could occur, for example, if a car is sold and replaced by a new car or if one car is retired from business use and another brought in that was previously used for private motoring.

To treat a car as a replacement car, the taxpayer must nominate in his or her return for the relevant year of income both the original and replacement cars by reference to their make, model and registration numbers, and specify the replacement date. In that case, the original car is treated from that date as a different car for the purposes of Subdivision F whereas the replacement car is treated as if it were the original car. The treatment of a replacement car as if it were the original does not give rise to deductions for car expenses that would not otherwise be deductible, e.g., it does not allow for a continuation of depreciation allowances in respect of a car that has been replaced.

Subsection 82KTJ(4) specifies the circumstances in which one car will be treated as a predecessor of a second car. That will be if the second car replaced the first car as a business car. Any car which in turn was replaced by the first car will also be a predecessor of the second car. The subsection is relevant, for example, to the application of section 82KUB for the purpose of determining whether or not there has been a variation in the number of log book cars held by a taxpayer during a year of income.

Subsection 82KTJ(5) makes clear that a car will not be treated as being held pending replacement by another as a business car unless both are held at the same time. The subsection relates to the application of paragraph 82KTG(d) and section 82KUB for the purpose of determining whether or not there has been a variation in the number of log book cars held by a taxpayer during a year of income.

Subsection 82KTJ(6) is a technical measure that treats a car that has been disposed of pending its replacement by another which is acquired subsequently as being held by the taxpayer until the date of acquisition of the replacement car. In the application of section 82KUB, for example, it prevents a replacement car being treated as an additional car simply on the technicality that there is an interval between the disposal of the replaced car and the acquisition of the replacement car.

Section 82KTK : Re-acquisition etc. of cars

New section 82KTK prevents a taxpayer from relying on car log book records kept in an earlier period as the basis for entitlement to car expense deductions where a car previously owned or leased has been re-acquired. Where that occurs, the car is treated as a different car for the purposes of Subdivision F.

Clause 16: Documentary evidence

Clause 16 is a technical provision that deletes from subsection 82KU(10) redundant references to paragraphs 82KV(1)(a) (being deleted by clause 18) and 82KW(2)(b) (being amended by clause 19). The relevant new references are paragraph 82KUA(b) (being inserted by clause 17) and paragraph 82KW(2)(ba) (being inserted by clause 19).

Clause 17: New Sections 82KUA to 82KUE

Clause 17 proposes to insert new sections 82KUA to 82KUE in the Principal Act to specify the basis for deduction of car expenses under the log book method. New sections 82KUA, 82KUB and 82KUC detail the conditions for deduction on this basis; while new sections 82KUD and 82KUE contain the rules for determining the amount of the deduction available where those conditions are satisfied.

Section 82KUA : Deductions not allowable for car expenses unless documentary evidence obtained, etc.

By new section 82KUA a deduction is not allowable under the log book method in a year of income for any car expenses incurred in relation to the car unless documentary evidence is obtained. In the case of fuel or oil, that evidence can take the form of odometer records for the year (see notes on clause 14 relating to the definition of odometer records) or receipts, etc. For other expenses the documentary evidence must be in the form of receipts or approved substitute documents. (See existing provisions of Subdivision F of Division 3 of the Principal Act which permit certain small expenses to be recorded in an expense diary and allow for replacement documents where originals are destroyed, etc.)

Section 82KUB : Deductions not allowable for car expenses incurred in log book year of income unless log book records and odometer records etc. are maintained

New section 82KUB specifies the additional requirements that must be satisfied for deductions to become allowable under the log book method in a case where the year of income is a log book year of income. The circumstances in which a year will be treated as a log book year of income are explained in the notes on new section 82KTG and include, for example, where it is the first year in which deductions are being claimed on the log book method or where it is the year following a year in which there has been a substantial fall (i.e., by more than 10 percentage points) in the percentage of business use.

Under paragraph 82KUB(a) it is a condition of deduction that the taxpayer specify in his or her return of income an estimate of the business percentage of the use of the car during the period it was held for use for income producing purposes (see notes on the definition of nominated business percentage to be inserted by clause 14). Log books need not be kept in these cases but because the next year would become a log book year under proposed new subparagraph 82KTG(f)(i) (see notes on clause 15) log books would generally be required in that subsequent year.

This condition applies in any of the following circumstances:

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where the taxpayer commenced to hold the car during the last 12 weeks of the year of income (subparagraph (a)(i));

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where there was a decrease to one in the number of cars for which deductions are being sought under the log book method during the last 12 weeks of the year of income (or, if the car ceased to be held prior to the close of the year of income, during the last 12 weeks it was so held) (subparagraph (a)(ii));

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where there was an increase in the number of cars (or a decrease to two or more in the number of cars) for which deductions are being sought under the log book method during the last 12 weeks of the year of income (or, if the car ceased to be held prior to the close of the year of income, during the last 12 weeks it was so held) (subparagraph (a)(iii)); or

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where the Commissioner is satisfied that it would be inappropriate to expect log book and odometer records to have been maintained (e.g., where the taxpayer unexpectedly ceases to use the car part way through the year and prior to log books having been maintained) (subparagraph (a)(iv)).

Where the circumstances detailed in paragraph 82KUB(b) apply it is a condition of deduction that the taxpayer maintain log book and odometer records during the applicable log book period for that year (see notes on the definition of that term in clause 14) and that the taxpayer nominate in his or her return of income an estimate of the business proportion of the use of the car during the period it was held for income producing purposes. In these circumstances the nominated proportion is not restricted to the business percentage established in the log book period (see notes on proposed new section 82KTH). However, by virtue of new sub-subparagraph 82KUC(b)(i)(A), the taxpayer would be limited to that ceiling in the following year of income unless he or she chose to keep log books again in the next year to establish a higher business percentage.

The conditions for deduction under paragraph 82KUB(b) apply in any of the following circumstances:

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where there was a decrease to one in the number of cars for which deductions are being sought under the log book method prior to the last 12 weeks of the year of income (or if the car ceased to be held prior to the close of the year of income, prior to the last 12 weeks it was so held) (subparagraph (b)(i));

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where there was an increase in the number of cars (or a decrease to two or more in the number of cars) for which deductions are being sought under the log book method prior to the last 12 weeks of the year of income (or if the car ceased to be held prior to the close of the year of income, prior to the last 12 weeks it was so held (subparagraph (b)(ii)).

In determining for the purposes of paragraphs 82KUB(a) and (b) whether there has been a change in the number of cars no regard is had to cars which may have been obtained during the period on short-term hire (see definition of rental log book car proposed to be inserted by clause 14) or to intervening periods that occur on replacement of a car. In addition, there is a safeguard which disregards arrangements entered into during the last 12 week period with the purpose of obviating the need to maintain log book or odometer records (for paragraph (a) cases) or of the need to limit the estimated business proportion to the ceiling established in the log book period (for paragraph (b) cases).

It should be noted that under the provisions of new paragraph 82KTG(d) a year in which there is an increase in the number of cars will always result in the year in which the change occurs being a log book year and, accordingly, the requirements of paragraphs 82KUB(a) or (b) applying.

On the other hand, a decrease in the number of cars will not, of itself, automatically result in the year being treated as a log book year under section 82KTG. A taxpayer will be entitled in these circumstances to continue to use the existing nominated business percentage for the retained car (provided, of course, there is not a substantial reduction in the business use). However, if the taxpayer wishes to increase the business percentage for the retained car, he or she will be entitled to elect to treat the year in which the change occurred as a log book year (new paragraph 82KTG(b)), in which case the requirements of paragraphs 82KUB(a) or (b), as appropriate, will apply.

Paragraph 82KUB(c) specifies the conditions for deduction under the log book method for cases where the circumstances described in the preceding paragraphs do not apply (i.e., where the car was not acquired in the last 12 weeks of the year or there was not a change during the year in the number of cars for which deductions are being sought on the log book method).

Under paragraph (c) the conditions for deduction are that -

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log book and odometer records are maintained for the applicable log book period (see notes on definitions in clause 14) (subparagraph (c)(i)); and

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the taxpayer specifies in his or her return an estimate of the business percentage of use of the car during the period it was held for business use which may not exceed the percentage of business use established in the log book period (subparagraph (c)(ii)).

Section 82KUC : Deductions not allowable for car expenses incurred in a non-log book year of income unless log book records kept in previous year of income etc

New section 82KUC specifies the requirements (in addition to those specified in section 82KUA) that must be satisfied for deductions to become allowable under the log book method in a case where the year of income is not a log book year of income (see notes on new section 82KTG for circumstances in which a year is treated as a log book year of income).

Under paragraph 82KUC(a) it is a general condition of deduction that odometer records be maintained which, broadly, must record the odometer readings at the beginning and end of the year of income (or, if the car is not held for business purposes for the whole year, at the beginning and end of the period it was so held).

Under paragraph 82KUC(b), it is a further condition of deduction that the taxpayer specify the relevant business percentage. Subject to the limits detailed in new paragraph 82KUC(c) described below, the relevant proportion is as follows.

Firstly, where the last log book year was one in which there was a change in the number of cars under which deductions were being sought on the log book method and the taxpayer was required to keep log books but was not subject to the ceiling established in the log book period when nominating the business proportion under paragraph 82KUB(b) for that log book year, the rules for determining the appropriate percentage vary according to whether the current year of income was the year immediately after the log book year or not (subparagraph 82KUC(b)(i)).

Where the current year is the immediately succeeding year, the taxpayer must nominate the business percentage of use of the car during that year but is limited to the business percentage established during the log book period (sub-subparagraph 82KUC(b)(i)(A)). For a succeeding year, the taxpayer may specify the business proportion that was nominated in the year following the log book year (sub-subparagraph 82KUC(b)(i)(B)) provided that there has not been a substantial reduction in the actual business percentage in that subsequent year (see notes on subparagraph 82KUC(b)(iii)).

Under subparagraph 82KUC(b)(ii), which applies in circumstances where the year of income in which deductions are being sought is not a log book year for the car and the circumstances set out in subparagraph 82KUC(b)(i) do not apply, the deductible business percentage to be specified is the business percentage nominated in the last log book year.

Subparagraph 82KUC(b)(iii) limits the percentage that may be specified under the preceding subparagraphs in two circumstances. These are where the car is one that has a business usage of 5,000 or fewer kilometres per annum (see notes on definition of low business kilometre car in clause 14) or where there has been a reduction by more than 10 percentage points in the business use established in an earlier year in accordance with the log book records. Where this is the case the business percentage required to be specified is a percentage that represents a reasonable estimate of the actual business percentage during the current year.

Section 82KUD : Amount of deduction allowable for car expenses - log book method

New section 82KUD applies together with new section 82KUE to ensure that the deduction under the log book method is determined by reference to the appropriate business percentage. Generally this will be the percentage specified by the taxpayer in his or her return in accordance with the rules detailed in sections 82KUB or 82KUC. However, sections 82KUD and 82KUE will ensure that where a taxpayer specifies an incorrect percentage the correct percentage is used in determining the deductions allowable.

Having established the appropriate percentage, deductions under the log book method are determined by applying that business percentage to the amount of the car expenses incurred during the year of income (where the car is held for business purposes for part of the year only, e.g., where it is purchased or leased during the year, the appropriate business percentage for that period is applied to the expenses incurred during the period).

For example, if a car is held throughout the year of income for business purposes, the appropriate nominated business percentage is 70% and the car expenses (e.g., depreciation, fuel, maintenance) for which the necessary documentary evidence has been obtained total $5,000, the deduction allowable under section 82KUD would be $3,500.

The deductible business percentage established by section 82KUD is:

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in a case where the year is a log book year of income (broadly, a year in which the taxpayer is required to keep log books for a minimum 12 week period to establish the nominated business percentage - see notes on new section 82KTG), the percentage that is a reasonable estimate of the actual business percentage of kilometres travelled in the year;

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in a case where the year is a year subsequent to the last log book year and there has not been a substantial reduction (i.e., by more than 10 percentage points) in the business percentage since that log book year - the percentage nominated for the log book year;

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in a case where the year is subsequent to a log book year of income and there has been a substantial reduction (i.e., by more than 10 percentage points) in the business percentage from that established in the log book year - the percentage that is a reasonable estimate of the actual business percentage for the current year; or

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where the car is one with a business usage of 5,000 or fewer kilometres per annum (see definition of "low business kilometre car" in the notes on clause 14) - the percentage that is a reasonable estimate of the actual business percentage for the current year;

Section 82KUE : Nominated business percentage to be reduced if it exceeds business percentage established during applicable log book period or if it is unreasonable

New subsection 82KUE(1) complements the operation of section 82KUD in circumstances where the nominated business proportion is subject to the ceiling established in the applicable log book period. Subsection 82KUE(1) thus applies in the following cases:

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where the car is one to which sub-subparagraph 82KUC(b)(i)(A) applies (broadly, where deductions are being sought for the car in a year following a year in which there was a change in the number of cars which occurred more than 12 weeks before the end of the year of income); or

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where the car is one for which deductions are being sought in a log book year of income during which there was no change in the number of cars and in which the car was held for more than 12 weeks (subparagraph 82KUB(c)(ii)).

In these circumstances section 82KUE deems the taxpayer to have specified in his return the correct nominated percentage. This, in combination with section 82KUD, ensures that the deduction available to the taxpayer does not exceed the deduction calculated on the basis of the applicable ceiling percentage. It further limits the deduction in a year of income to which sub-subparagraph 82KUC(b)(i)(A) applies (see above) to the lesser of the ceiling and a reasonable estimate of the actual business percentage for the year.

A further effect of subsection 82KUE(1) is to ensure that, where a taxpayer nominates an inaccurate business percentage that has been used as the nominated business percentage for subsequent years of income, deductions in those subsequent years will also be adjusted to reflect the correct nominated percentage. That corrected percentage will form the basis of deductions for those subsequent years provided the actual business use is not substantially less than the corrected figure (i.e., by more than 10 percentage points).

Subsection 82KUE(2) ensures that in a case where a taxpayer who knowingly fails to specify a reduced percentage where there has been a substantial reduction (i.e. by more than 10 percentage points) in the percentage of business use in a year subsequent to the establishment of a nominated business percentage is deemed to have made such a specification. In the absence of subsection 82KUE(2) the taxpayer would be treated as not having satisfied the relevant requirements of section 82KUC and, accordingly, would not be entitled to any deduction under the log book method.

Clause 18: Car expenses - exemptions from log book method substantiation

Clause 18 amends section 82KV of the Principal Act in a number of ways. Paragraph (a) omits subsections 82KV(1) and (2) which are made redundant by other provisions of the Bill. Those paragraphs imposed full log book substantiation requirements.

Paragraph (b) omits from subsection 82KV(3) references to the redundant subsections (1) and (2), and substitutes references to sections 82KUA, 82KUB, 82KUC and 82KUD. The effect is to preserve the present exceptions in subsection 82KV(3) to the general requirement to substantiate car expenses by documentary evidence, car log books and odometer records previously required by subsections 82KV(1) and (2) and now required by sections 82KUA, 82KUB, 82KUC and 82KUD. Those exceptions include, for example, cars that are trading stock of a taxpayer and certain commercial vehicles used solely for business and related purposes.

Paragraph (c) of clause 18 inserts a new paragraph (3)(aa) in section 82KV which provides a further exception to the car expenses substantiation requirements. The exception applies in the case of a car that is unregistered for the whole time it is held for use for income producing purposes during a year of income provided that it is used during that period wholly or principally in the course of producing the taxpayer's assessable income.

For the purpose of that exception, new subsection 82KV(6) being inserted by paragraph (d) of clause 18 specifies that a car that may be driven on a public road without contravening any law shall be taken as being registered.

Clause 19: Deductions for car expenses where income-producing use exceeds 5,000 kilometres - statutory formula

Section 82KW of the Principal Act, which is being amended by clause 19, enables a taxpayer to elect, where more than 5,000 kilometres are travelled in a car in a year of income in the course of producing the taxpayer's assessable income, that one of two arbitrary bases of deduction apply in relation to car expenses. Broadly, these are the one-third of car expenses or the 12 per cent of cost price methods.

The amendment to subsection 82KW(1) by paragraph (a) of clause 19 is a technical one to specify that the period during a year of income when a car is owned or leased by a taxpayer is, in applying section 82KW, to be called the holding period. The new reference is made necessary by the terms of new paragraph 82KW(2)(b) being inserted by paragraph (c) which, inter alia, specifies that a deduction under subsection 82KW(2) is not allowable unless odometer records are maintained "for the holding period".

Paragraph (b) of clause 19 amends paragraph 82KW(2)(a) to include a reference to new paragraph 82KW(2)(ba) being inserted by paragraph (c). It ensures that the car expenses deduction referred to in paragraph 82KW(2)(a) is subject to the condition in paragraph 82KW(2)(ba) that documentary evidence of the relevant expense is obtained.

Paragraph (c) of clause 19 omits existing paragraph 82KW(2)(b) of the Principal Act and substitutes another. The effect is that, while there remains a general requirement to obtain documentary evidence of car expenses in order to obtain the one-third of expenses deduction allowable under subsection 82KW(2), the requirement as it relates to fuel or oil expenses is that either documentary evidence must be obtained or odometer records maintained for the holding period.

Existing paragraph 82KW(2)(c) of the Principal Act has the effect that, where an election is made for a deduction to be allowable in accordance with subsection 82KW(2) (the one-third of car expenses method), the rules applicable to the completion and retention of log book and odometer records - contained in section 82KV and paragraphs 82KZA(1)(b) and (3)(e) - do not apply. Paragraph (d) of clause 19 amends paragraph 82KW(2)(c) by deleting the reference, now redundant, to 82KV and substituting references to new sections 82KUA, 82KUB, 82KUC and 82KUD.

The amendments being made by paragraphs (e), (f) and (g) of clause 19 have the result that paragraph 82KW(3)(d) is omitted. Paragraph 82KW(3)(d) could no longer apply because of the references therein to subsection 82KV(2) which is being made redundant by paragraph (a) of clause 18.

Clause 20: Deduction for car expenses where income-producing use does not exceed 5,000 kilometres - statutory formula

Clause 20 amends section 82KX in a similar way to the amendment of section 82KW by paragraphs (e), (f) and (g) of clause 19, i.e., it omits paragraph 82KX(1)(c) on the basis that it has no further application because of the proposed omission of subsection 82KV(2) by paragraph (a) of clause 18.

Clause 21: Elections

Clause 21 proposes to amend section 82KY of the Principal Act by omitting existing subsections 82KY(2) and (3) and substituting new subsections.

The subsections being omitted operate, broadly, to prevent a taxpayer from electing different bases of deduction for car expenses year by year, except where a different car was acquired or circumstances changed from one year to the next, e.g., where annual business use of a car moved from less than 5,000 kilometres to in excess of that figure.

The new subsections apply so that there is no bar to the election, year by year, of a different method of deduction for car expenses provided the various conditions for deduction are satisfied, e.g., the more than 5,000 business kilometres requirement in section 82KW.

New subsection 82KY(2) will apply in a case where an audit of a taxpayer's records by the Commissioner of Taxation reveals that a deduction previously allowed under proposed section 82KUD for car expenses ought to be reduced (e.g., because some of the entries in the taxpayer's log book records for business kilometres had been fabricated), to ensure that the deductible amount is not reduced below the highest deduction otherwise allowable under the statutory formulae in sections 82KW or 82KX.

In these cases, if the highest amount that would have been deductible under one of the alternative formula bases authorised by sections 82KWT and 82ZKX had the taxpayer made an appropriate election is more than the amount correctly deductible in accordance with section 82KUD, the taxpayer is taken to have made an election that would authorise a deduction equal to the highest amount deductible under section 82KW or 82KX.

For the purpose of applying subsection 82KY(2), if it happens that a deduction is not allowable under section 82KUD for car expenses because the taxpayer failed to comply with a requirement of section 82KUB or 82KUC, new subsection 82KY(3) makes clear that the sum of those deductions is taken as nil.

Clause 22: Retention and production of documents

Section 82KZA of the Principal Act contains the rules that require documentary evidence of expenses to be retained for specified periods and be produced when required in order to satisfy the substantiation requirements of the Principal Act.

Paragraph (a) of clause 22 proposes to amend subsection 82KZA(1) by inserting new paragraph 82KZA(1)(aa) to recognise that, in relation to car fuel and oil expenses, a taxpayer may obtain documentary evidence (i.e., receipts or similar documents) or keep odometer records for the period that the expenses relate to.

Paragraph (b) is a drafting provision consequential upon the insertion of new paragraph 82KZA(1)(aa) by paragraph (b).

Paragraph (c) deletes the now redundant "relevant car documents" from paragraphs 82KZA(1)(b) and 82KZA(3)(e) and inserts instead references to log book records and odometer records.

Paragraphs (d) and (e) have effect in relation to subsection 82KZA(3) of the Principal Act in the same way as paragraphs (a) and (b) have in relation to subsection 82KZA(1) by recognising that fuel and oil expenses may be substantiated either by receipts or odometer records.

Paragraph (f) is a drafting measure consequential upon the amendments made by paragraphs (d) and (e).

Paragraph (g) includes in subsection 82KZA(5) of the Principal Act a new paragraph (5)(aa) that has the effect of including odometer records that constitute documentary evidence of car fuel and oil expenses as documents for which a copy may be treated as the original if the original is lost or destroyed.

Paragraph (h) deletes references to the now redundant "relevant car documents" in paragraphs 82KZA(5)(b) and 82KZA(7)(a) of the Principal Act and inserts instead references to log book records and odometer records.

Paragraph (j) is a technical amendment to insert references to new paragraphs 82KZA(1)(aa) and 82KZA(3)(ba) in paragraph 82KZA(6)(e) of the Principal Act.

New subsection 82KZA(6A) being inserted in the Principal Act by paragraph (k) applies to odometer records kept by a taxpayer to evidence car fuel and oil expenses in the same way as existing subsection 82KZA(7) applies to log book and odometer records that become lost or destroyed in circumstances where there is no copy of the original or a substitute document that was in existence when the original was lost or destroyed. In that case, the retention and production requirements under Subdivision F of the Principal Act cease to apply if the loss was due to circumstances beyond the control of the taxpayer and reasonable precautions against their loss had been taken.

As mentioned previously, section 82KZA requires taxpayers to retain car log books and odometer records that relate to a car expense incurred in a year of income for a minimum period. That period, called the retention period, is generally 3 1/2 years from the date of lodgment of the return of the relevant year of income or, if the car was used by the taxpayer in deriving income other than salary or wages, 7 years from that date.

New subsection 82KZA(7A) being inserted by paragraph (m) of clause 22 has the effect of extending that 3 1/2 or 7 year period wherever log books and odometer records continue to be evidentiary documents for the purpose of car expense deductions. That is, in a year of income in which log book records and odometer records form the basis of the deductible business percentage of car expenses specified by the taxpayer in accordance with section 82KUB or 82KUC, the taxpayer will be required to retain those records for 3 1/2 years or 7 years, as the case may be, from the date of lodgment of the return of income of that year of income.

Clauses 23 and 24 : Modified application of Act in relation to certain unit trusts

Clauses 23 and 24 will amend subsections 102L(11) and (12), and subsections 102T(12) and (13), respectively, of the Principal Act to delete references to section 116AAA which is to be repealed by clause 31 of the Bill as a consequence of the amendments to section 46 proposed by clause 10 - see notes on those clauses.

By subclause 47(2) of the Bill, the amendments proposed by clauses 23 and 24 will apply to assessments of the 1987-88 and later years of income.

Clause 25: Interpretation

Subsection 103(1) of the Principal Act contains definitions of various terms used in Division 7 of Part III of that Act which relates to the undistributed profits tax that may be payable by private companies that do not make sufficient distributions of their after-tax taxable income. Clause 25 proposes amendments to two of those definitions.

The term "special fund dividends" is defined in subsection 103(1) to mean, broadly, dividends or parts of dividends paid by a private company which are excluded from the assessable income of shareholders by the operation of sections specified in the definition. The effect of this definition, and the definition of "the undistributed amount" (see notes below), is to prevent dividends which are not assessable income of shareholders of a private company because of the operation of the provisions specified from being taken into account in determining the undistributed amount of the company (and thus whether the company has made a sufficient distribution in relation to a year of income and, if not, the extent of its liability to undistributed profits tax).

By paragraph (a) of clause 25, the reference in the definition of "special fund dividends" to subsection 44(2) will be deleted consequent upon the repeal of that subsection proposed by clause 9 of this Bill - see notes on that clause.

By subclause 47(1) of the Bill, the amendment proposed by paragraph (a) of clause 25 will apply to dividends satisfied by shares issued on or after 1 July 1987.

"The undistributed amount" in relation to a private company is defined in subsection 103(1) to mean the amount remaining after deducting from the company's distributable income for a year of income (another defined term which means, broadly, taxable income less the tax payable on it) the sum of the company's retention allowance in respect of that year and the dividends (other than certain dividends which are specifically excluded) paid by the company during the prescribed period in relation to the year of income. Where a private company is not deemed by subsection 105A(1) of the Principal Act to have made a sufficient distribution in relation to a year of income, the company is liable to pay additional tax under subsection 104(1) on the undistributed amount in relation to the year of income.

Paragraph (b) of clause 25 will insert in the definition of the undistributed amount a reference to new subsection 105A(4AA), which is proposed to be inserted in the Principal Act by clause 28 of the Bill. As indicated in the notes on that clause, subsection 105A(4AA) is to the effect, in broad terms, that dividends paid on or after 1 July 1987 by a private company will not be able to be taken into account for Division 7 purposes to the extent that they are franked under the new imputation arrangements that are to apply on and from 1 July 1987. The amendment being made by this paragraph will ensure that the franked amount of dividends paid by a private company after 30 June 1987 will not be taken into account in determining a company's liability to undistributed profits tax.

Clauses 26 to 29 : Phasing out of undistributed profits tax payable under Division 7 of Part III of the Principal Act

Introductory note

Division 7 of Part III of the Principal Act provides for the imposition of an additional tax on the undistributed income of private companies. In brief terms, a company that is classified as a private company for the purposes of the Principal Act that has not made a prescribed level of distribution to its shareholders (a "sufficient distribution") within a certain time (the "prescribed period") in relation to a year of income is liable to pay additional tax on the amount of the shortfall. A sufficient distribution is, broadly, an amount by which the company's distributable income (in general, its taxable income less company tax payable) exceeds its "retention allowance".

Any need to impose additional tax on the undistributed income of private companies, for the 1986-87 and later income years, will be removed by the combined effect of the introduction (by the Taxation Laws Amendment (Company Distributions) Bill 1987) of a full imputation system of company taxation, and the alignment (by the Income Tax Rates Amendment Bill 1987) of the company tax rate with the maximum marginal rate of personal income tax.

However, in order to protect the revenue from the loss of personal income tax that could be brought about by arrangements designed to retain income of the 1985-86 and earlier income years in private company groups, transitional arrangements will continue the practical application of the undistributed profits tax by requiring a sufficient distribution to continue to be made in relation to income of those years.

By the amendments proposed by this group of clauses the existing retention allowance rules will last apply to income derived by private companies in the year of income that ended on 30 June 1986. For subsequent years of income, the retention allowance will be the amount remaining after deducting from the company's distributable income only the amount of any "phasing-out dividends" received.

Phasing-out dividends

Phasing-out dividends essentially will be those dividends paid by a private company out of income of the 1985-86 income year that have been, or are to be, taken into account in determining whether that company has made a sufficient distribution, and which dividends form part of the distributable income of the shareholder, being another private company, of the year of income ending on 30 June 1987 or of a subsequent income year. It would generally be this sufficient distribution of 1985-86 income that will be a phasing-out dividend as it flows through a group of private companies until the relevant amount is distributed to individual or public company shareholders, or bears undistributed profits tax under Division 7.

That will be the general rule where the relevant companies all balance on the basis of conventional financial years, i.e., years ending on 30 June. To allow for situations where all or some of the companies in a group have adopted substituted accounting periods, the provisions of the Bill will apply to any dividend paid by a private company on or after 1 July 1985 which forms part of the assessable income of another private company of the year of income ending on 30 June 1987 or of a subsequent income year. For example, where a company that balances on 30 June pays a dividend on 1 January 1986, being a dividend that is taken into account in determining whether that company is deemed to have made a sufficient distribution of its 1984-85 income, that dividend would be received in the 1986-87 income year of a shareholder that is a company that has an accounting period from 1 January to 31 December 1986 in substitution for the normal year of income ending on 30 June 1987. In such a case, the dividend would be a phasing-out dividend of the recipient company.

Where a private company has made a sufficient distribution in relation to income derived in the year of income ended 30 June 1986 (or in a subsequent income year in which phasing-out dividends are received), the maximum amount of the dividends it has paid that may be treated as phasing-out dividends is an amount equal to the excess of the company's distributable income over its retention allowance. In this situation, the company will be required to allocate that amount among its shareholders, on a basis determined at its discretion, to determine how much of the dividends paid to each shareholder represent phasing-out amounts. The phasing-out amount allocated to each shareholder will be required to be notified respectively to each shareholder, and a copy of each notice will be required to be sent to the Commissioner.

Where a private company makes a distribution to shareholders on or after 1 July 1985 that is taken into account in determining whether it has made a sufficient distribution in relation to income derived in the year ended 30 June 1985, or an earlier income year, the company will be required to notify each shareholder that the dividend represents, in effect, a potential phasing-out dividend. The dividend will only become a phasing-out dividend of the shareholder, being a private company, if it is derived by the shareholder in the year of income ending on 30 June 1987, or a subsequent income year.

A dividend paid on or after 1 July 1987 will only be taken into account in full in ascertaining whether the company is deemed to have made a sufficient distribution if the dividend is entirely unfranked. Where a dividend is partially franked, the franked amount is excluded from the amount of the dividend to be taken into account in ascertaining whether the company has made a sufficient distribution.

The following example illustrates the general application of the phasing-out arrangements to a private company group in which all the companies have a balancing date of 30 June.

1985-86 year of income

In this example, company A, which is a private company, has a taxable income of $10,000 for the 1985-86 year of income consisting of net business profits of $9,000 and private company dividends of $1,000. The tax payable by A is $4,140, giving it a distributable income of $5,860. The retention allowance of the company is $4,219 (rounded off), representing 80 per cent of the net trading profits included in the company's distributable income. The amount of dividends required to be paid by A during its prescribed period in relation to the 1985-86 year of income in order to make a sufficient distribution is $1,641. The company has three shareholders, X and Y, who are individuals, and B, which is another private company.

1986-87 year of income

On 30 April 1987, A distributes dividends of $547 to each shareholder in order to satisfy its sufficient distribution requirement, giving it a phasing-out amount of $1,641 for 1985-86, and advises each shareholder that $547 of its phasing-out amount has been allocated to each. X and Y would be liable to pay tax on the dividends at their respective marginal rates. However, B, being a private company would be entitled to a rebate in its assessment, and for this example it is assumed that the Commissioner allows a further rebate under subsection 46(3). Assume B has no other income nor expenses in 1986-87, and accordingly has no tax to pay. However, because B's distributable income consists of phasing-out dividends of $547, it will be required to pay dividends of that amount to its shareholders within its prescribed period in relation to the 1986-87 year of income in order to make a sufficient distribution for that year. It distributes that amount as unfranked dividends to its shareholders on 30 April 1988 - $182 each to V and W, who are individual shareholders, and to C, which is a private company (these figures are rounded off). B, therefore, has a phasing-out amount of $547 for that year, and advises each shareholder that $182 of its phasing-out amount has been allocated to them respectively.

1987-88 year of income

As the dividends are unfranked, V and W are liable to pay tax on them at their respective marginal rates. For the purposes of this example, it is assumed that the Commissioner allows a further rebate under subsection 46(3). Accordingly, C will not be liable to pay tax. However, because C's distributable income for 1987-88 includes phasing-out dividends of $182, C has a sufficient distribution requirement of $183 for that year. C has two individual shareholders, S and T, and pays unfranked dividends of $91 each to those shareholders on 30 April 1989 in order to satisfy its sufficient distribution requirement. The company allocates $91 of its phasing-out amount to each shareholder, but because they are not private companies, no phasing-out dividends arise in their hands.

In this way, the sufficient distribution of company A for the 1985-86 year of income has flowed through to individual shareholders and has borne tax at the respective marginal rates of the shareholders concerned.

Notes on the individual clauses giving effect to these transitional arrangements follow.

Clause 26: Additional tax on undistributed amount

The additional tax on the undistributed profits of a private company is imposed by section 104 of the Principal Act. Clause 26 will amend that section by inserting an additional subsection - subsection (3) - which will ensure that undistributed profits tax will last apply in relation to the 1985-86 income year for income other than private company dividends that are phasing-out dividends - see notes on clause 27.

In specific terms, subsection (3) is to the effect that, for the year of income that commenced on 1 July 1986, or a subsequent year of income, a private company will not be liable to pay additional tax under Division 7 unless its distributable income of the year of income includes an amount of a phasing-out dividend.

Clause 27: Phasing-out dividends

By this clause, a new section - section 105 - is to be inserted in the Principal Act to specify the circumstances in which phasing-out dividends arise, and the obligations of private companies to inform shareholders of the extent to which dividends paid to them represent phasing-out amounts.

Subsection (1) establishes the phasing-out amount of a company that has made a sufficient distribution in relation to the year of income commencing on 1 July 1985, or a subsequent income year. The phasing-out amount in this situation will be the amount of the excess referred to in existing subsection 105A(1) of the Principal Act ascertained as at the end of the prescribed period, that is, the excess of the distributable income of the year of income over the retention allowance in respect of that distributable income. For example, where a private company has after-tax business income of $100 in 1985-86 and has no other income or expenses, its sufficient distribution requirement for Division 7 purposes will be $20. If the company distributes "eligible dividends" (see later notes on subsection (3)) of at least that amount during the prescribed period for the year, $20 will be the phasing-out amount of the company under subsection (1).

The phasing-out amount is to be determined at the end of the prescribed period, and will not be affected by later events. For example, a dividend to which section 105AA of the Principal Act applies that is paid by a private company after the end of the prescribed period in relation to a year of income in order to satisfy its sufficient distribution requirements in relation to the year concerned, will not form part of the phasing-out amount of the company in relation to that year.

Where a company has not made a sufficient distribution in relation to the year of income commencing on 1 July 1985, or a subsequent income year, subsection (2) sets the basis for ascertaining the phasing-out amount of the company. In this situation, the phasing-out amount will be the total amount of dividends that have been taken into account in determining the undistributed amount in relation to the year of income, ascertained as at the end of the prescribed period. For example, if in the earlier example the private company concerned paid eligible dividends of only $10 during the prescribed period, the phasing-out amount of the company would be $10. Again later events, such as the application of 105AA to dividends paid subsequent to the end of the prescribed period, do not affect the calculation of the phasing-out amount under subsection (2).

Subsection (3) will require a private company to allocate its phasing-out amount among shareholders to whom eligible dividends were paid, to notify each shareholder of the phasing-out amount allocated to that shareholder, and to furnish the Commissioner with a copy of each notice given to a shareholder within prescribed time limits. Failure to comply with the requirements will result in the dividends paid not being taken into account in determining whether the company has made a sufficient distribution - see notes on proposed subsection (7) below - thus making the company liable to additional tax, or a greater amount of additional tax, under Division 7.

Paragraph (a) sets out the obligations of a company that has a phasing-out amount in relation to a year of income. Subparagraph (i) requires the company to allocate the phasing-out amount, in whole or in part, to all or any of the shareholders to whom eligible dividends were paid. Where the company has paid eligible dividends which exceed the amount required to satisfy its sufficient distribution requirement, it will have a discretion in allocating the phasing-out amount to some shareholders and not others. Eligible dividends are those dividends taken into account in ascertaining whether the company has made a sufficient distribution in relation to the year of income. They will therefore exclude special fund dividends and prescribed dividends as defined in Division 7 of the Principal Act, and will also exclude the franked amount of dividends paid after 1 July 1987. A phasing-out amount allocated to a shareholder cannot exceed the amount of eligible dividends paid to the shareholder, and the sum of amounts allocated to shareholders must equal the company's phasing-out amount. The eligible dividends paid to each shareholder will potentially be phasing-out dividends to the extent of the shareholder's respective phasing-out amount allocation - see later notes on subsection (6).

If, in the example given above in relation to subsection (1), the private company concerned had paid eligible dividends of $20, each shareholder to whom eligible dividends were paid would be allocated a phasing-out amount equal to the dividends received. However, if the private company had paid eligible dividends of $30, the company would be required to allocate, at its discretion and in such manner as it determined, the $20 phasing-out amount to the shareholders concerned. The company would not be able to allocate to any shareholder a phasing-out amount greater than the eligible dividends paid to the shareholder, and the total of the amounts allocated would be required to total $20.

Subparagraph (ii) requires the company to give to each shareholder to whom a phasing-out amount is allocated, a notice in writing specifying the amount allocated. Under subparagraph (iii) the company is also required to give to the Commissioner a copy of each notice given in accordance with subparagraph (ii).

Paragraph (b) prescribes the time limits within which the requirements of paragraph (a) are to be satisfied. Under subparagraph (i), the allocation of the phasing-out amount and the notification of the allocations must be made within 28 days after the commencement of the subsection - that is, within 28 days after the Amending Act receives the Royal Assent - in those cases where the relevant prescribed period ended before the commencement date. Where the Amending Act comes into operation before the end of the relevant prescribed period, subparagraph (ii) prescribes that the requirements under paragraph (a) must be satisfied within 28 days after the end of the prescribed period. The Commissioner will be authorised to allow further time for a company to comply with the paragraph (a) requirements.

Subsection (4) will require a private company to notify shareholders to whom "retrospective dividends" are paid, that the subsection applies to the dividend. Retrospective dividends are defined as those dividends paid to a shareholder after 1 July 1985 and after the end of the prescribed period in relation to a year of income, but which are deemed by section 105AA to have been paid during the prescribed period in relation to the year of income concerned. Section 105AA enables the Commissioner to extend the time period during which a private company may make additional distributions in order to satisfy its sufficient distribution requirements for Division 7 purposes.

For example, where a private company has paid eligible dividends of $20 in satisfaction of its sufficient distribution requirement for the 1985-86 year of income on the basis of the figures quoted in earlier examples and receives, after the end of the prescribed period, an assessment increasing its taxable income for the year to, say, $120, the company may apply to the Commissioner to pay a further $4 of eligible dividends in order to satisfy its sufficient distribution requirement. If the Commissioner approves the request under section 105AA, the extra $4 becomes, in effect, a potential phasing-out dividend in the hands of the shareholders concerned and will, by proposed new subsection (6), become a phasing-out dividend if paid to a shareholder that is a private company during the 1986-87 or a later year of income of that company.

Under paragraph (a), a company that pays retrospective dividends to any of its shareholders will be required to give a notice in writing to each such shareholder stating that this subsection applies to the dividends, and to furnish a copy of each such notice to the Commissioner. Paragraph (b) stipulates the time limits within which the notices under paragraph (a) must be given to the shareholder and the Commissioner. Consistent with the time limits imposed under the preceding subsection, subparagraph (i) specifies that the notifications must be made within 28 days after the commencement of this subsection - that is, within 28 days after the Amending Act receives the Royal Assent - in those cases where the dividends were paid before the commencement date. Where the dividends are paid after the commencement date, the notifications must be made not later than 28 days after the time when the dividends are paid. The Commissioner will be authorised to allow further time for a private company to comply with these notification requirements.

Subsection (5) is similar in its operation to the preceding subsection and will require a private company to notify a shareholder that the subsection applies where:

(a)

dividends were paid to the shareholder after 1 July 1985 (paragraph (a));

(b)

the dividends are taken into account in determining whether the company has made a sufficient distribution in relation to the year of income ending on 30 June 1985, or an earlier year of income (paragraph (b)); and

(c)

with the exception of any dividends deemed by section 105AA to have been paid during a prescribed period, the dividends were paid during the prescribed period in relation to the relevant year of income (paragraph (c)).

Again, the notice is to be given to the shareholder within 28 days after the commencement of this subsection, or within such further time as the Commissioner allows. This measure, in conjunction with paragraph 6(b), is designed to cover situations where a private company with a 30 June balance date, or a later balance date if it has a substituted accounting period, has paid dividends to a shareholder which is an early balancing private company and which had commenced its 1986-87 year of income at the time the dividend was paid. For example, a private company that balances on 30 June 1985 may have paid dividends in January or February 1986 to a company balancing on 31 December 1986 in lieu of 30 June 1987, i.e., the 1986-87 income year.

Subsection (6) will determine the amount of phasing-out dividends that are included in the distributable income of a private company of a year of income. To the extent that the total does not exceed the company's distributable income, the amount of phasing-out dividends will be the aggregate of -

(a)

the phasing-out amount allocated and notified to the company in accordance with paragraph (3)(a) in relation to dividends paid to the company in the year of income (subparagraph (a)(i)) or, where the phasing-out amount relates to dividends received by the company in more than one of its years of income, the amount ascertained in accordance with the apportionment rules contained in subparagraphs (a)(ii) and (iii) - see note below; and

(b)

the amount of the dividends to which either subsection (4) or subsection (5) applies paid to the company in its 1986-87 or a later year of income (paragraph (b)).

Where a private company receives a notice of a phasing-out amount which relates to dividends paid to the company over 2 of its years of income (because of differences in the accounting periods of that company and the company paying the dividends), the apportionment rules contained in subparagraph (a)(ii) specify that the phasing-out amount is to be first attributed, up to the amount of those dividends, to dividends paid to the company in the earlier year of income. To the extent, if any, that the phasing-out amount notified to the company exceeds the dividends to which it relates that were paid to the company in its earlier year of income, subparagraph (iii) operates to attribute the excess of that amount to dividends to which it relates paid to the company in the later year of income.

For example, where a private company with a balancing date of 31 December in lieu of the following 30 June receives eligible dividends of $50 on, say, 15 October 1987, and a further $50 on 15 April 1988, and those dividends represent eligible dividends paid by a private company (with a phasing-out amount of $70) in respect of its 1986-87 year of income, the provisions will operate so that the $50 eligible dividends paid to the shareholder in its 1987-88 year of income will be phasing-out dividends of that company, and the $20 of those dividends paid to it on 15 April 1988 (in its 1988-89 year of income) will also be phasing-out dividends of the company.

If a private company fails to comply with the requirements of subsections (3), (4) or (5), subsection (7) will operate to apply Division 7 in relation to the year of income concerned as if the company did not pay any dividends at all during the relevant prescribed period.

Clause 28: Sufficient distribution

Section 105A of the Principal Act specifies the criteria for determining whether a private company is deemed to have made a sufficient distribution. Subject to other provisions of Division 7, subsection 105A(1) deems a private company to have made a sufficient distribution in relation to a year of income if it has, during the prescribed period, paid in dividends (other than special fund dividends and prescribed dividends) an amount not less than the excess of the distributable income of that year of income (broadly, taxable income less tax payable) over the retention allowance in respect of that distributable income (see notes on clause 29).

This clause will amend section 105A to give effect to the announcement that dividends paid under the phasing-out arrangements for Division 7 will not be franked dividends under the imputation system, but will be subject to tax when paid to non-corporate shareholders. Clause 28 will therefore insert a new subsection - subsection (4AA) - in section 105A to preclude a dividend from being taken into account in ascertaining whether a private company is deemed to have made a sufficient distribution in relation to a year of income, to the extent that the dividend has been franked in accordance with section 160AQF of Part IIIAA (which is to be inserted in the Principal Act by the Taxation Laws Amendment (Company Distributions) Bill 1987).

Clause 29: Retention allowance

Section 105B of the Principal Act determines the amount of a private company's retention allowance in respect of its distributable income of a year of income. As noted in relation to clause 28, the retention allowance applies in determining whether a private company has made a sufficient distribution in relation to a year of income, and the extent of its liability for the undistributed profits tax where it has not.

This clause will amend section 105B so that the existing retention allowance rules will last apply to the 1985-86 year of income, and to specify the new retention allowance rule that is to apply during the transitional period in which liability to the additional tax may continue to arise. These amendments will ensure that, in respect of the 1986-87 and later income years, potential liability for the undistributed profits tax will only arise in relation to phasing-out dividends received by a private company.

Paragraph (a) of this clause will amend section 105B to terminate the currently existing retention allowance rules.

Paragraph (b) will insert in section 105B an additional subsection - subsection (2) - to specify that the retention allowance in relation to the distributable income of a private company of the 1986-87 year of income, or of a subsequent year of income, will be the amount remaining after deducting from the company's distributable income the amount of phasing-out dividends included in the distributable income.

Clause 30: Premiums not assessable income

This clause proposes to amend subsection 111(2) of the Principal Act to remove the reference to section 116AA, consequent on the repeal of that section proposed by clause 31 of the Bill - see notes below on that clause.

Clause 31: Repeal of section 116AA

Division 8 of Part III of the Principal Act is concerned solely with life assurance companies. Like other companies, a life assurance company is entitled to the benefit of the intercorporate dividend rebate under section 46 of the Principal Act. However, the amount of dividends on which the rebate is calculated is, by section 116AA of the Principal Act, reduced by a proportion of 2 special deductions which are allowable to life assurance companies. The deductions concerned are those allowable under section 113 relating to expenses of general management of a life assurance company, and section 115 which allows such companies a deduction of an amount related to their calculated liabilities.

As indicated in the notes on clause 10 of the Bill, paragraph (b) of that clause proposes to change the basis for calculating the section 46 rebate for companies generally so that deductions allowable to a company from income from dividends do not reduce the amount of the dividends on which the rebate is calculated. To ensure that the full benefit of that change is available to life assurance companies, clause 31 will repeal section 116AA of the Principal Act. Consequential amendments are proposed by paragraph (c) of clause 10 and clauses 23, 24 and 30 of the Bill.

By subclause 47(2) of the Bill, the amendment proposed by clause 31 will apply to assessments in respect of the year of income commencing on 1 July 1987 and all subsequent years of income.

Clauses 32 to 34 : Australian films

Introductory note

Clauses 32 to 34 of the Bill will overcome a perceived deficiency in the provisions of Division 10BA of the Principal Act, which authorises a deduction equal to 120% of capital moneys expended in, or as a contribution to, the production of a qualifying Australian film. Other provisions of the Act (in section 23H) apply to exempt from tax an investor's net earnings from a qualifying Australian film, of an amount up to 20% of the eligible investment.

To attract the special income tax concessions, a film must be the subject of a provisional certificate (in the case of a proposed film) or a final certificate (in the case of a completed film) issued by the Minister for Arts, Heritage and Environment stating that the Minister is satisfied that the film is a qualifying Australian film and that the applicant for the certificate is an appropriate person to whom to grant a certificate in respect of the film. For this purpose, a "qualifying Australian film" is defined in section 124ZAA of the Act as a film which, among other things, has a significant Australian content and section 124ZAD specifies the matters to which the Minister is to have regard in determining whether the completed film has, or the proposed film will have, a significant Australian content.

The provisions have been applied on the basis that the Minister is entitled to give discretionary weight to the matters specified in section 124ZAD when determining whether a film with non-Australian content nevertheless satisfies the significant Australian content requirement. The validity of that approach has, however, been brought into question by a decision of the Federal Court. The Bill therefore proposes to give legislative backing to the approach and provide that the Minister may treat a film with an Australian content as not being a qualifying Australian film where the Minister is satisfied that it also has a significant non-Australian content.

In terms of subclause 47(5) of the Bill the amendments proposed will apply in respect of applications for provisional or final certificates that are received after 6 May 1987 - being the date of the introduction of the Bill into the Parliament.

Clause 32: Interpretation

Clause 32 will insert a new subsection (11) in section 124ZAA of the Principal Act to enable the Minister for Arts, Heritage and Environment to treat a film as not being a qualifying Australian film for the purposes of special income tax concessions if the Minister is satisfied that -

•

in the case of a proposed film, it will when completed have a significant non-Australian content (paragraph (a)); or

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in the case of a completed film, it has a significant non-Australian content (paragraph (b)).

Clause 33: Provisional certificates

This clause will amend subparagraph 124ZAB(6)(b)(ii) to correct a drafting error. It will substitute the present reference in the subparagraph to a "qualifying film" with a reference to a "qualifying Australian film".

Clause 34: Determination of content of film

As noted earlier, section 124ZAD of the Principal Act specifies the matters to which the Minister for Arts, Heritage and Environment is to have regard in determining whether a film has a significant Australian content for the purposes of the special income tax concessions. The amendment proposed by clause 34 will require the Minister to also have regard to those matters in determining whether a completed film has, or a proposed film when completed will have, a significant non-Australian content.

Clause 35: Liability to withholding tax

This clause will make a formal amendment to paragraph 128B(3)(c) of the Principal Act to remove the reference to subsection 44(2), which is no longer relevant because of the repeal of that subsection proposed by clause 9 of the Bill - see earlier notes on that clause.

Introductory Note : Clauses 36 to 43

Clause 14 of the Taxation Laws Amendment (Company Distributions) Bill 1987 will insert a new Part - Part IIIAA - in the Principal Act to implement the imputation system of company taxation, the key features of which were announced on 10 December 1986. Clauses 36 to 43 of this Bill will amend new Part IIIAA -

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to ensure that, as announced, the new arrangements will apply to those corporate unit trusts and public trading trusts that are treated as companies for income tax purposes in accordance with Divisions 6B and 6C respectively of Part III of the Principal Act;

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to make certain modifications to Divisions 2 and 5 of Part IIIAA consequent upon the amendments proposed in clauses 25 to 29 of this Bill; and

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to limit the entitlement to franking credits arising under sections 160APP and 160APQ of Part IIIAA in respect of franked dividends that are exempt income of the shareholder or are received by companies that are life assurance companies and registered organisations for the purposes of Divisions 8 and 8A respectively of Part III of the Principal Act.

References in the notes which follow on clauses 36 to 43 of this Bill to sections contained in Part IIIAA, are references to sections contained in that Part as proposed to be inserted in the Principal Act by the Taxation Laws Amendment (Company Distributions) Bill 1987, and which are explained in the Explanatory Memorandum for that Bill.

Clause 36: Interpretation

Section 160APA defines terms used in, and contains other drafting aids for the purposes of, the imputation measures contained in Part IIIAA. The amendments proposed by this clause will insert in section 160APA definitions of terms used in the amendments to Part IIIAA proposed by clauses 37 to 43 of this Bill. The defined terms and their meanings are:

"corporate trust dividend" is defined to mean a unit trust dividend within the meaning of Division 6B or 6C of Part III of the Principal Act. In general terms (with the exception of certain distributions in respect of the cancellation, extinguishment or redemption of a unit), a "unit trust dividend" is defined in each of those Divisions to mean any distribution made or amount credited by the trustee of a "prescribed trust estate" to a "unitholder" (terms also defined in the respective Divisions), other than such distributions or amounts credited to the extent to which they are attributable to profits arising during a year of income in relation to which the prescribed trust estate was not a corporate unit trust or public trading trust.

"corporate trust estate" means a prescribed trust estate within the meaning of Division 6B or 6C of Part III of the Principal Act. A "prescribed trust estate" is defined in those Divisions as a trust estate that is, or has been, a corporate unit trust or public trading trust, as the case may be.

"current corporate trust" is defined in relation to a year of income to mean a corporate unit trust or a public trading trust in relation to the year of income.

"insurance funds" and "life assurance company" have the same meaning as those terms have in Division 8 of Part III of the Principal Act.

"resident trust estate" in relation to a year of income is defined to have the same meaning as the term "resident unit trust" contained in Division 6B or 6C of Part III of the Principal Act.

"unit" and "unitholder" have the same meanings as those terms have in Division 6B and 6C of Part III of the Principal Act.

Clause 37: Receipt of franked dividends

Section 160APP of Part IIIAA is to the effect that a company becomes entitled to a franking credit for a franked dividend paid to it on the day on which the franked dividend is paid. Under that section, a number of companies that are exempt from tax on all or some of their income and/or do not distribute their profits as dividends would, but for the amendments proposed by this clause, become entitled to franking credits. For example, the profits of life assurance companies which are allocated to policy holders, are not frankable dividends for the purpose of Part IIIAA. Such companies would nevertheless be entitled under section 160APP as presently proposed to the franking credits that are referrable to policy holders' funds.

To address this situation, clause 37 will amend section 160APP to subject the entitlement of a company to franking credits to the satisfaction of conditions contained in four additional subsections - subsections (2)-(5) - to be added to that section. Paragraph (a) of clause 37 is a drafting measure to facilitate the addition of the four subsections proposed by paragraph (b) of this clause. Subsection (2) will ensure that a franking credit does not arise if the franked dividend is wholly "exempt income" of the shareholder. Subsection (3) applies where the relevant franked dividend is only partly exempt income of the company. It operates to reduce the franking credit of the company by an amount calculated by applying that proportion of the dividend that is exempt income to the franking credit that would otherwise arise under the section.

The principal application of these subsections will be in relation to life assurance companies which, by section 112A of the Principal Act, are exempt from income tax on each item of income referable to their superannuation business and specific types of annuity business. However, the new provisions would also apply to any other company which receives franked dividends as exempt income.

Subsection (4) will operate so that a "registered organisation" within the meaning of Division 8A of Part III of the Principal Act will not be entitled to a franking credit for a franked dividend it is paid. Under Division 8A, a registered organisation is a friendly society, trade union or employee association which is subject to tax under that Division on income from the issue of life, disability and accident insurance policies.

Subsection (5) will ensure that a "life assurance company" (a defined term - see earlier notes) is not entitled to a franking credit if the assets from which the dividends were derived were included in the "insurance funds" (also defined - see earlier notes) of the company at any time during the year of income of the company in which the dividend was paid prior to the time when the dividend was paid.

The effect of subsections (4) and (5) is to deny to registered organisations and life assurance companies respectively franking credits in respect of franked dividends received on assets that are attributable to life assurance policies the distributions on which are not frankable dividends for the purposes of the imputation arrangements contained in Part IIIAA.

Clause 38: Receipt of franked dividends through trusts and partnerships

Clause 38 proposes amendments to section 160APQ of Part IIIAA to restrict, in a similar manner to the amendments proposed by clause 37, the entitlement of life assurance companies and registered organisations to franking credits for franked dividends that flow through trusts and partnerships.

Paragraph (a) is a drafting measure to facilitate the addition in section 160APQ, by paragraph (b) of this clause, of two subsections - subsections (2) and (3) - on which the operation of that section will be conditional.

Subsection (2) ensures that a registered organisation which, as indicated in the notes on clause 37, is subject to tax under Division 8A of Part III of the Principal Act only on income from insurance policies the distributions on which are not frankable dividends, will not be entitled to a franking credit under section 160APQ on dividends received through a partnership or trust estate.

Subsection (3) will operate in a similar way by denying a franking credit in relation to a trust amount or partnership amount if the assets of the company to which that amount is attributable were included in the insurance funds of the company at any time during the company's year of income prior to the time when the franking credit would otherwise arise.

Clause 39: Under-franking

Clause 39 is one of three measures (see also clauses 40 and 42) which are complementary to the amendments proposed by clauses 26 to 29 of the Bill. As indicated in earlier notes, those clauses will amend Division 7 of Part III of the Principal Act to phase-out the undistributed profits tax payable on the undistributed income of private companies. As part of those arrangements, a private company will be able to take into account, for Division 7 sufficient distribution purposes, dividends paid after 30 June 1987 (when the imputation system commences) only to the extent that the dividends are unfranked. The amendments contained in clauses 39, 40 and 42 of this Bill will in combination enable a private company to under-frank the dividends it pays on and after 1 July 1987 to the extent necessary to satisfy its Division 7 requirements, without incurring a franking debit for under-franking which might otherwise arise.

As part of this arrangement, clause 39 will insert a new subsection - subsection (2) - in section 160APX which operates to create a franking debit where dividends are franked to an extent less than the required franking amount for the dividends - the debit being the amount by which the dividends are under-franked. Subsection (2) will have the effect, for the purposes of the under-franking debit, of treating dividends as having been franked to the extent specified under new subsection 160AQF(1A) - which is proposed by clause 42 of the Bill. Briefly, subsection 160AQF(1A) will enable companies, in effect, to declare the extent to which dividends would have been franked if they had not been required to be unfranked for the purposes of Division 7. In conjunction with that provision, subsection 160APX(2) will operate to prevent a franking debit from arising under section 160APX if a dividend is franked to the required amount set out in section 160AQE of Part IIIAA, as reduced by the amount determined by the company's Division 7 requirements.

Clause 40: Excessive reduction in section 160APX debit

Clause 40 proposes the insertion of a new section - section 160APXA - in Part IIIAA which will operate to prevent intentional or indiscriminate under-franking of dividends by private companies purporting to satisfy their Division 7 requirements. Where that happens, the Commissioner of Taxation will be empowered to determine a franking debit of up to 120 per cent of the amount by which a dividend is so under-franked.

Under subsection (1), the relevant pre-requisites for the application of the section are -

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a franking debit which would otherwise have arisen under subsection 160APX(1) has been reduced because a private company has made a declaration under proposed new subsection 160AQF(1A) (see notes on clause 42) that the dividend concerned is under-franked to satisfy its Division 7 requirements for a particular year of income (paragraph (a)); and

•

the total amount of the dividends paid by the company which are taken into account in order to determine whether the company has made a sufficient distribution in relation to the year of income exceed the amount of the company's sufficient distribution requirement for that year (paragraph (b)).

Where these tests are met and the Commissioner determines that a franking debit is to arise under subsection 160APXA(1), the franking debit will, by subsection (2), arise on the day on which the Commissioner serves on the private company concerned notice of the debit.

Clause 41: Transfer of asset to insurance funds

Clause 41 is related to the amendments proposed by clauses 37 and 38 of this Bill which limit the entitlement of a life assurance company in relation to franking credits that arise under sections 160APP and 160APQ of Part IIIAA. In brief terms, the amendments to be made by those clauses will operate to ensure that the company does not become entitled to a franking credit where the assets from which the franked dividend, or trust or partnership amount, giving rise to the franking credit were part of the insurance funds of the company prior to the time at which the franking credit would otherwise arise.

The amendments proposed by clause 41 of this Bill will insert a new section in Part IIIAA - section 160AQCA - to ensure that, if the assets that gave rise to a franking credit under section 160APP or 160APQ at a particular time (paragraph (a)), are transferred to the insurance funds of a company later in the year of income (paragraph (b)), a franking debit equal in amount to the relevant franking credit will be made to the company's franking account at the time when those assets become part of the company's insurance funds.

Clause 42: What constitutes franking

As indicated in earlier notes on clauses 39 and 40, private companies will be able to under-frank dividends paid after 1 July 1987 to the extent that it is necessary to do so in order to satisfy their Division 7 sufficient distribution requirements by the payment of unfranked dividends. Clause 42 will insert a new subsection - subsection (1A) - in section 160AQF of Part IIIAA as part of the measures to achieve that result.

Subsection (1A) will enable private companies to specify, as part of their declaration of franking, the extent to which the dividends are under-franked for Division 7 purposes. Under the subsection, a private company paying a dividend will, when making a franking declaration under subsection 160AQF(1) of Part IIIAA, be able to specify a percentage to which the dividends would have been franked had they not been required to be unfranked to any extent for Division 7 purposes. The percentage so specified will not be able to exceed 100 per cent of the dividends.

A company may make a declaration under subsection 160AQF(1) of Part IIIAA of a nil percentage so that where dividends are entirely unfranked but would have been franked to some extent if the private company concerned did not have to satisfy a Division 7 requirement, the company will be able to avoid having a franking debit arise by making a declaration specifying a nil franking percentage under subsection 160AQF(1) and a greater percentage (the percentage to which the dividends would have been franked) under subsection 160AQF(1A).

The percentage specified under subsection 160AQF(1) of Part IIIAA must apply to each dividend paid in the particular distribution and, similarly, the greater percentage specified under subsection 160AQF(1A) will apply to each of the dividends covered by the franking declaration. In this way, private companies will be unable to selectively frank some dividends to a greater extent than others which are part of the same distribution for the purposes of satisfying their Division 7 requirements.

Clause 43: Application of Part IIIAA in relation to trusts that are treated as companies

Clause 43 will give effect to the announcement of 10 December 1986 that the imputation system will apply to trustees of corporate unit trusts and public trading trusts that are treated as companies for taxation purposes in accordance with Divisions 6B and 6C respectively of Part III of the Principal Act. To that end, the clause will insert a new Division - Division 7A - which will provide for the application of Part IIIAA to such trusts.

Division 7A - Application of Part IIIAA in Relation to Trusts that are Treated as Companies

Subdivision A - General Modifications

Section 160ARDA : General application of Part IIIAA in relation to corporate trust estates

Subsection (1) of this section states that the object of Division 7A is to provide for the application of Part IIIAA to "corporate trust estates" and "current corporate trusts" which are defined terms - see earlier notes on clause 36.

By subsection (2), references in Part IIIAA to certain terms are to include a reference to equivalent terms as they relate to corporate trust estates. Paragraph (a) operates so that the term "company" in Part IIIAA may be read as a reference to a corporate trust estate or, as the context requires, the trustee of such a trust estate.

Under paragraphs (b), (c) and (d), a reference to a shareholder, a share or a dividend, is to include a reference to a "unitholder", "unit" or "corporate trust dividend", respectively, which are also defined terms - see earlier notes on clause 36.

Subsection (3) operates so that new section 160APB, which excludes from the provisions of Part IIIAA a company in the capacity of trustee, will not apply to a corporate trust estate.

Section 160ARDB : Company tax to include tax payable by current corporate trust

Section 160ARDB operates so that tax payable by the trustee of a current corporate trust on its net income will be included within the meaning of company tax for the purposes of Part IIIAA.

Section 160ARDC : Certain corporate trust dividends to be treated as frankable dividends

Section 160APA of Part IIIAA contains a definition of the term "frankable dividend" such that the term includes a dividend within the meaning of section 6 of the Principal Act. Section 160ARDC ensures that, for the purposes of Part IIIAA, a corporate trust dividend will be a frankable dividend (i.e., as if it were a dividend within the meaning of section 6 of the Principal Act).

Subdivision B - Modification of Rules Regarding Franking Credits and Franking Debits

Section 160ARDD : Residence requirement for credit or debit to arise

Sections 160APK and 160APW of Part IIIAA contain conditions that must be satisfied in respect of the residence of a company for certain franking credits and franking debits to arise. Because of the different residency treatment of corporate trust estates under the existing income tax law, these sections are not relevant to such entities. Accordingly, by section 160ARDD, those sections are not to apply in relation to a corporate trust estate.

By subsection (2), a franking credit or debit of a corporate trust estate will not arise in relation to -

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company tax instalments (paragraph (a));

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assessments or amended assessments of company tax (paragraph (b)); or

•

foreign tax credits (paragraph (c)),

in relation to a year of income unless the corporate trust estate is a current corporate trust in that year of income.

Section 160ARDE : Franking credit where franked dividends received

Under section 160ARDE, a corporate trust estate will not be entitled to a franking credit under section 160APP of Part IIIAA unless it is a current corporate trust for the year of income in which the dividend is paid.

Section 160ARDF : Franking credit where franked dividends received through trusts and partnerships

Section 160ARDF is to the effect that a franking credit will not arise under section 160APQ of Part IIIAA in respect of the trust amount or partnership amount of a corporate trust estate for a year of income, unless the corporate trust estate is a current corporate trust for that year of income.

Subdivision C - Franking of Corporate Trust Dividends

Section 160ARDG : Residence requirement for franking

By section 160ARDG, a corporate trust estate will be required to frank a corporate trust dividend if it is a resident trust estate in relation to the year of income in which the corporate trust dividend is paid.

Section 160ARDH : Residence requirement for franking deficit tax to offset tax payable by trustee

Section 160ARDH operates to allow a corporate trust estate to offset franking deficit tax payable against tax payable by that corporate trust estate for an eligible year of income during which it is a current corporate trust.

Subdivision D - Miscellaneous

Section 160ARDJ : No extra amount assessable under section 160AQT to trustee of corporate trust estate

Under section 160ARDJ, an extra amount will not be included as assessable income under section 160AQT of Part IIIAA if the shareholder that is paid the franked dividend is a current corporate trust.

Section 160ARDK : No rebate under section 160AQX or 160AQZ to trustee of current corporate trust

By section 160ARDK, a trustee of a current corporate trust will not be entitled to a rebate of tax provided for by sections 160AQX or 160AQZ of Part IIIAA.

Section 160ARDL : Adjustments for section 160AQT amounts

Section 160ARDL ensures that a corporate trust estate will not be entitled to deductions under sections 160AR, 160ARA or 160ARD of Part IIIAA unless it is a current corporate trust in relation to the year of income.

Clause 44: Provisional tax on estimated income

This clause proposes amendments to section 221YDA of the Principal Act relating to the ascertainment of provisional tax to insert references to the various provisions of Part IIIAA by which franking rebates may be allowed. Those provisions are contained in sections 160AQU (franking rebate for resident individuals), 160AQX (franking rebate for certain beneficiaries), 160AQY (franking rebate in trustee's assessment) and 160AQZ (franking rebate for certain partners).

Under section 221YDA a taxpayer may apply for a variation of the provisional tax that he or she has been called upon to pay. In an application for this purpose, the taxpayer is required to provide an estimate of taxable income for the year in question, the composition of that taxable income, and details of the rebates or credits to which he or she will be entitled for the year concerned. Provisional tax is then recalculated on the basis of those estimates.

The amendments to section 221YDA proposed by this clause will enable a taxpayer to estimate the franking rebates that may arise under the new imputation system, so as to reduce the provisional tax otherwise payable.

Paragraph 221YDA(1)(da) will be amended to permit the taxpayer to estimate his or her entitlement (if any) to these rebates. Subparagraph 221YDA(2)(a)(ii) will also be amended so that a taxpayer's estimated entitlement to these rebates may be taken into account in recalculating the provisional tax payable.

Clause 45: Additional tax where income understated

This clause will amend proposed new subsection 221YDB(1AA) which is being inserted in the Principal Act by the Taxation Laws Amendment Bill 1987 (see the notes on subclause 2(3)). Amongst other things, that Bill provides, for the 1987-88 and subsequent years of income, for the payment of provisional tax by instalments during the year of income by taxpayers whose annual provisional tax liability exceeds $2000. Subsection 221YDB(1AA) will impose additional tax in cases where a taxpayer who is liable to pay provisional tax by way of instalments substantially under-estimates his or her taxable income in varying the amount of a provisional tax instalment otherwise payable.

Additional tax payable is ascertained in accordance with the formula AB - C in subsection 221YDB(1AA), which effectively calculates a hypothetical "correct" instalment to be measured against the "insufficient" instalment. In broad terms, the formula takes into account the total "correct" amounts of provisional tax for the year of income (component A), the percentage (e.g., 75 per cent for the third of 4 instalments) of that amount that would be payable depending on the particular instalment concerned and earlier instalments for the year (component C).

Clause 45 will redefine component C, which is presently the total of any instalments for the year that became due and payable before the due date for payment of the "insufficient" instalment. As amended, the definition of component C will mean simply the amount of any previous instalments of provisional tax for the year of income. The amendment is of a technical nature.

Clause 46: Penalty tax for over-estimating business percentage applicable to car held by taxpayer

Clause 46 inserts new section 223A into the Principal Act which will impose penalty tax where a taxpayer specifies a deductible percentage for car expenses under the proposed new log book deduction rules described in the notes on clauses 14 to 22 that is excessive.

Subsection 223A(1) applies where a taxpayer specifies in his or her return for a year of income a percentage as required by proposed new section 82KUB or 82KUC (see earlier notes on those sections) that purports to be the deductible business percentage applicable to car expenses incurred in the year. If the percentage so specified is more than the percentage on which deductions are correctly allowable the taxpayer may be liable to penalty tax.

In these cases, if the tax properly payable by the taxpayer exceeds the tax that would be payable if the car expenses deduction were allowable on the basis of the incorrect deductible percentage specified by the taxpayer, the taxpayer will be liable to the usual rate of penalty tax of double the excess. The normal remission powers conferred by section 227 of the Principal Act will apply in these cases.

Subsection 223A(2) is a drafting measure that operates to ensure that expressions from Subdivision F of Division 3 of Part III (the substantiation rules) that are used in subsection (1), e.g., underlying business percentage, low business kilometre car, applicable log book period etc., have the same meanings as they do in Subdivision F.

Clause 47: Application and transitional provisions

This clause, which will not amend the Principal Act, contains application provisions (subclauses (1), (2), (3) and (5)), the operation of which is explained in the notes on the clauses to which those subclauses relate. The operation of subclause (4) of this clause is explained below.

Subclause 47(4) is a transitional measure that will apply to a taxpayer who has not satisfied the requirements under Subdivision F of Division 3 of the Principal Act (the substantiation rules) of keeping a record of opening and closing odometer readings for the period in the year ending 30 June 1987 when a car was in use as a business car. It will enable the taxpayer to lodge a document with the Commissioner of Taxation before the date of lodgment of the taxpayer's return of income (or such extended time as the Commissioner allows) that sets out reasonable estimates of those readings and particulars of the make, model and engine capacity of the car.

If another car has been nominated as a replacement for the car in accordance with paragraph 82KTJ(1)(b), estimated odometer readings relating to the replacement car at the nominated date of replacement and the end of the year (or earlier cessation of business use) should also be included, along with the particulars of the replacement car. If the taxpayer declares in the document that the estimates are reasonable and the particulars are correct, it will be treated as the odometer records required for substantiation purposes.

This provision will ensure, for example, that a taxpayer who wishes to use odometer records to evidence fuel or oil expenses in the 1986/87 year of income but who, prior to the 29 October 1986 announcement of the changes to the substantiation requirements, had not kept odometer records will be able to do so on the basis of a reasonable estimate of those records.

Clause 48: Amendment of assessments

Clause 48 will give the Commissioner of Taxation authority to re-open an income tax assessment made before Part IV of the Bill becomes law should this be necessary for the purpose of giving effect to the amendments proposed by the Part.

PART V - AMENDMENT OF THE PAY-ROLL TAX (TERRITORIES) ASSESSMENT ACT 1971

Clause 49: Principal Act

This clause facilitates reference to the Pay-roll Tax (Territories) Assessment Act 1971 which, in this Part, is referred to as "the Principal Act".

Clause 50: Interpretation

Clause 50 of the Bill will amend subsection 4(1) of the Principal Act to include within the general definitions in the Act a definition of "apprentice". By that definition -

"apprentice" means an apprentice within the meaning of the ACT Apprenticeship Ordinance 1936, an applicant for apprenticeship within the meaning of the Ordinance who is employed on probation or a person whose employment (being employment for the purpose of training the person, or assessing the person's suitability for training, in a trade or other occupation) is, under regulations proposed to be made, to be treated as apprenticeship for the purposes of the Principal Act. Under the ACT Apprenticeship Ordinance, an apprentice means any person employed in the ACT and contracted as an apprentice to an employer in an apprenticeship trade. Proposed regulations under the Principal Act will include as apprentices for the purposes of the Act employees similarly contracted and covered by State and Northern Territory apprenticeship laws.

Clause 51: Exemption from tax

This clause will amend section 13 of the Principal Act, which provides specific exemptions from ACT pay-roll tax for wages paid or payable in certain circumstances. The amendment - to insert two new paragraphs, paragraph (j) and paragraph (k) - will extend the scope of section 13 to exempt from ACT pay-roll tax two further categories of wages.

New paragraph 13(j) will provide an exemption in respect of wages paid or payable to an apprentice (a defined term - see the notes on the preceding clause) for the first 12 months of employment as an apprentice in an apprenticeship trade or apprenticeship trades.

New paragraph 13(k) will exempt from ACT pay-roll tax wages paid or payable to a trainee employed under a training agreement as part of the Australian Traineeship System - a scheme established by the Commonwealth and individual State Governments. An outline of the scheme is provided in earlier notes.

Clause 52: Deferral of refund of overpaid tax etc.

Subclause (1) of clause 52, which will not amend the Principal Act, provides that, notwithstanding section 25 of the "amended Act" (as defined in subclause (2)), overpayments of "tax" (also defined in subclause (2)) resulting from the exemption of the wages of apprentices and ATS trainees are not to be refunded, or applied against any other liability of the employer to the Commonwealth arising under an Act administered by the Commissioner of Taxation (as provided for in section 25), before 1 July 1987. Consistent with the provisions (section 14) of the Principal Act dealing with refunds or rebates on annual adjustment, overpayments of pay-roll tax for the 1986-87 year resulting from the exemptions proposed by the Bill, which are to apply to wages paid or payable on or after 1 July 1986, will be determined, and refunded or applied as the case may be, during the 1987-88 year.

Subclause 52(2) defines two terms used in clause 52.

"amended Act" is defined to mean the Principal Act as proposed to be amended by clauses 50 and 51 of the Bill.

"tax" is defined as having the same meaning as that term has in section 25 of the amended Act. In terms of subsection 25(2), "tax" includes further tax and additional tax imposed by way of penalty under section 27 (penalty for unpaid tax) or section 42 (penalty for failure to furnish return, etc.).

Clause 53: Application

This clause, which will not amend the Principal Act, specifies that the amendments proposed in Part V of the Bill apply to wages paid or payable on or after the date of commencement of the clause. By subclause 2(5) of the Bill, that date is deemed to be 1 July 1986.

PART VI - AMENDMENT OF THE TAXATION ADMINISTRATION ACT 1953

Clause 54: Principal Act

This clause facilitates reference to the Taxation Administration Act 1953 which, in this part of the Bill, is referred to as "the Principal Act".

Clause 55: Acting appointments

Section 6B of the Principal Act establishes the procedure whereby the Governor-General may make acting appointments, directions or determinations in respect of the statutory offices of the Commissioner of Taxation and the Second Commissioners of Taxation.

Paragraph (a) of subclause 55(1) proposes the omission, from subsections 6B(1), (2), (5), (8) and (9) of the Principal Act, of the term "Governor-General" and the substitution of the term "Prime Minister". These amendments will provide the Prime Minister with the power to make acting appointments, directions or determinations. Paragraph (b) of subclause 55(1) will insert new subsection 6B(11) in the Principal Act. Under that subsection, the Prime Minister will be able to authorise the Treasurer to make section 6B acting appointments, directions or determinations on the Prime Minister's behalf.

Subclause 55(2), which will not amend the Principal Act, is a "saving" provision to ensure that an appointment, direction or determination made by the Governor-General under existing section 6B of the Principal Act and in force immediately before the commencement of clause 55 will continue in force after that commencement. In terms of subclause 2(1) of the Bill, clause 55 will commence on the day on which the Bill receives the Royal Assent.

PART VII - AMENDMENTS OF CERTAIN ACTS RELATING TO BANK ACCOUNT DEBITS TAX

Clause 56: Amendment of Acts

Schedule 1 of the Bill details proposed amendments of a number of Acts that refer to or relate to bank account debits tax. Clause 56 is a formal provision required to give effect to those amendments. The amendments are explained in detail in the notes on Schedule 1.

Clause 57: Application of amendments

By subclause (1) of this clause, the amendments in Schedule 1 to insert a definition of "account transaction" in subsection 3(1) of the Bank Account Debits Tax Administration Act 1982 and insert new sections 3A and 3B in that Act will apply to debits made on or after the date of commencement of subclause (1). In terms of subclause 2(7), that date is 6 May 1987 - the date of introduction of the Bill.

Subclause (2) of this clause provides that the amendments in Schedule 1 to substitute a new paragraph (b) in the definition of "excluded debit" in subsection 3(1) of the Bank Account Debits Tax Administration Act 1982 will apply to debits made on or after the date of commencement of subclause (2). In terms of subclause 2(6), that date is the date (to be proclaimed) of commencement of Part VIII of the Cheques and Payment Orders Act 1986 - proposed to be 1 July 1987.

PART VIII - AMENDMENT OF CERTAIN ACTS IN CONNECTION WITH THE TRANSFER OF CERTAIN AUSTRALIAN CAPITAL TERRITORY TAXES AND DUTIES

Introductory note

This Part will amend the Commonwealth Acts relating to Australian Capital Territory (ACT) stamp duty and tax (including pay-roll tax) to facilitate the transfer of responsibility for ACT stamp duties and taxes from the Commissioner of Taxation to the proposed Commissioner for Australian Capital Territory Revenue Collections. An explanation of the transfer arrangements - expected to be effective on and from 1 July 1987 - is set out in the "Main Features" section of this Explanatory Memorandum.

Clause 58: Objects of Part

Subclause 58(1) confirms that the objects of Part VIII of the Bill are to terminate the imposition of taxes and duties under the Australian Capital Territory (ACT) stamp duty and tax and pay-roll tax laws (paragraph (a)) and to provide for the transfer of the administration of those laws (paragraph (b)). Subclause 58(2) requires that Part VIII, and the Commonwealth laws affected by it, be construed so as to give effect to those objects.

Clauses 59 and 60 : Amendment of Acts

Schedule 2 to the Bill contains proposed amendments of certain Acts relating to ACT stamp duty and tax, while Schedule 3 contains proposed amendments of certain Acts relating to ACT pay-roll tax. Clauses 59 and 60 are formal provisions required to give effect to those amendments, by providing that the Acts specified in Schedules 2 and 3 respectively are amended as set out in those Schedules.

Clause 61: Transitional provisions relating to annual reports

Section 6A of the Australian Capital Territory Taxation (Administration) Act 1969 and section 7A of the Pay-roll Tax (Territories) Assessment Act 1971 require the Commissioner of Taxation, as soon as practicable after 30 June in each year, to prepare and furnish to the Minister a report on the working of each of those Acts.

If the transfer of administrative responsibility for those Acts is effected on 1 July 1987 as intended (see earlier notes), the Commissioner of Taxation will be required to prepare and furnish annual reports in respect of those Acts for the year ending 30 June 1987 and the Commissioner for Australian Capital Territory Revenue Collections will be required to prepare and furnish annual reports for the year ending 30 June 1988 and for subsequent years. This follows because on and after the "changeover day" (i.e., the date of transfer of functions), the references in those sections to the Commissioner of Taxation will, in effect, be references to the Commissioner for Australian Capital Territory Revenue Collections (see notes on Schedules 2 and 3 to the Bill). However, if the changeover day is after 1 July 1987, clause 61 (which will not amend the Principal Act) will operate to provide that the respective Commissioners are required to furnish reports for the periods prior to and on and after the changeover day.

Subclause 61(1) deals with the annual report on the working of the Australian Capital Territory Taxation (Administration) Act 1969, while subclause 61(3) deals with the annual report on the working of the Pay-roll Tax (Territories) Assessment Act 1971. Subclauses 61(2) and (4) reflect the requirements of section 3B of the Taxation Administration Act 1953 and section 7 of the Taxation (Interest on Overpayments) Act 1983 to furnish annual reports and those Acts deal with matters which are common to various Commonwealth taxation laws and the reports under the Acts relate in part to ACT stamp duties and taxes (including pay-roll tax). Accordingly, subclauses 61(2) and 61(4) will require the references to reports in subclauses 61(1) and 61(3) to include references to reports under those Acts, to the extent that they relate to the working of the Australian Capital Territory Taxation (Administration) Act 1969 and the Pay-roll Tax (Territories) Assessment Act 1971 respectively.

PART IX - AMENDMENT OF CERTAIN ACTS RELATING TO THE COMMISSIONER'S INFORMATION GATHERING AND ACCESS POWERS

Clause 62: Amendment of Acts

By this clause, the Acts specified in Schedule 4 to the Bill are to be amended as set out in that Schedule. In terms of subclause 2(1), the amendments will apply on and from the day on which the Bill receives the Royal Assent.

SCHEDULES 1 TO 4

The amendments contained in Schedules 1 to 4 to the Bill are explained in the following notes.

SCHEDULE 1

AMENDMENTS OF CERTAIN ACTS RELATING TO BANK ACCOUNT DEBITS TAX

Introductory note

The amendments of Acts that relate to or refer to bank account debits tax - being the amendments made formally by clause 56 of the Bill - are set out in Schedule 1 to the Bill.

The substantive amendments set out in Schedule 1 will amend the Bank Account Debits Tax Administration Act 1982 to bring debits to payment order accounts with non-bank financial institutions within the debits tax base. Reflecting the broader scope of the debits tax legislation when these amendments are enacted (see the notes on subclauses 2(6) and 57(2)), the short title of that Act will be changed to the Debits Tax Administration Act 1982. Similarly, the short title of the Bank Account Debits Tax Act 1982 will, by the accompanying Bank Account Debits Tax Amendment Bill 1987, be changed to the Debits Tax Act 1982.

A number of consequential amendments to other Acts - to change references to the bank account debits tax legislation to reflect the new short titles - are set out in Schedule 1.

A more detailed explanation of the Schedule 1 amendments is set out below.

Schedule 1 : Amendments of the Bank Account Debits Tax Administration Act 1982

Title

The existing long title of this Act is:

"An Act relating to the collection of a tax in respect of certain debits made to accounts kept with banks, and for related purposes".

Reflecting the broader scope of the Act (see the Introductory note), the Bill will amend that long title by substituting "financial institutions" for "banks".

Short title

The Bill will amend section 1 of the Act to change its short title to the Debits Tax Administration Act 1982 and will amend subsection 3(1) (the definition of "tax") and section 8 to change references to the Bank Account Debits Tax Act 1982 to references to the Debits Tax Act 1982 (see the Introductory note).

References to "bank"

As part of the amendments required to bring debits to payment order accounts with non-bank financial institutions within the debits tax base (see the Introductory note), the Bill will amend the following provisions of the Act to change various references to "bank" to references to "financial institution" -

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subsections 3(1) and 8(1);

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section 10;

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subsections 11(5), 12(1) and (3), 13(1) and (2), 14(1), (2) and (5) and 15(1), (3) and (4);

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paragraph 16(3)(a);

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subsection 18(3);

section 56; and

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subsections 57(2), (3), (4) and (5).

The expression "financial institution" will be defined in subsection 3(1) of the Act - see the following notes.

Interpretation : Subsection 3(1)

Existing subsection 3(1) defines various terms and expressions used in the Act.

"bank"

The term "bank" is presently defined to mean "a person carrying on banking business that includes the keeping of accounts that may be drawn on by cheque". The Bill will amend this definition by excluding a "non-bank financial institution" - a definition of which expression is also being inserted (see later notes).

"excluded debit"

Paragraph (b) of the present definition of "excluded debit" in subsection 3(1) includes a debit "made to an account kept with a bank in the name of another bank, being another bank that carries on banking business in Australia". The Bill will replace existing paragraph (b) with a new paragraph.

The definition of "excluded debit" is central to the operation of the exemption provisions of the Act. Section 11 requires the Commissioner of Taxation to issue a certificate of exemption in relation to an account if the Commissioner is satisfied that all debits made, or to be made, to the account are, or are likely to be, either excluded debits or "exempt debits" (as defined). Paragraph (b) of the existing definition of "excluded debit", when read in conjunction with section 11, operates to require the Commissioner to issue certificates of exemption for accounts kept with one bank in the name of another bank that carries on banking business in Australia. This means that, generally stated, banks are not liable for tax on debits to accounts operated with them by other banks.

With the extension of the scope of the debits tax law to include debits to payment order accounts with non-bank financial institutions, the Bill will extend this exemption for inter-bank transactions to inter-financial institution transactions. Hence, the opening words of the new paragraph (b) of the definition of "excluded debit" include in the definition, debits made to an account kept with a financial institution (called the "account keeping institution") in the name of another financial institution (called the "account holding institution").

Two conditions must be satisfied before exemption is available in respect of these inter-financial institution debits. The first is that -

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the business carried on by the account holding institution in Australia must consist wholly or principally of banking business (sub-subparagraph (b)(i)(A) of the definition); or

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all debits made, or to be made, to the account are in connection with banking business carried on by the account holding institution in Australia (sub-subparagraph (b)(i)(B)).

The effect is that exemption will be denied where banking operations are only a minor part of the business of an institution in Australia, but nonetheless sufficient for the institution to qualify as a "bank", and therefore as a "financial institution" (see later notes on the definition of a "financial institution"). But for this condition, such institutions could obtain exemption on all debits to all accounts they hold with other financial institutions.

The expression "banking business" is not defined and is therefore given its ordinary meaning. In this regard, it is noted that banking business is not limited to business carried on by registered banks. It is broad enough to embrace the ordinary banking business carried on by building societies, credit unions and similar bodies. Where a financial institution is not engaged in Australia wholly or principally in banking business, it will generally be entitled to a certificate of exemption for any account or accounts held with other institutions exclusively for purposes of the account holding institution's banking business. Debits to other accounts kept by the institution with other institutions will attract tax, where appropriate, in the normal manner.

The second condition to be satisfied for the purposes of new paragraph (b) of the definition of "excluded debit" is that the debit is not in connection with a cheque or payment order drawn on the account holding institution, where the cheque or payment order was, at a time when it was "incomplete" (as defined - see later notes), delivered by that institution to a customer for completion (subparagraph (b)(ii) of the definition). This will ensure that debits in relation to so-called "third party cheques" are subject to tax. Third party cheques are offered by some non-bank financial institutions to their customers under an arrangement whereby cheques are drawn on an account held by the institution with a bank, the customer is authorised to complete (or "fill up") the cheque and the institution debits the customer's account for the amount required to be paid to the bank to honour the cheque. To provide for the possibility of third party payment order arrangements being adopted after payment orders are created as a new payment instrument, subparagraph (b)(ii) of the definition of "excluded debit" refers to debits arising from both cheques and payment orders under arrangements of this type.

"account"

The present definition of "account" in subsection 3(1) of the Act refers to an account kept with a bank, being an account to which amounts paid by the bank in respect of cheques drawn by the account holder(s) may be debited.

The Bill will substitute a new definition of "account". It restates (in paragraph (a)) the existing definition and extends it (by paragraph (b)) to include an account kept with a non-bank financial institution to which amounts paid by the institution in respect of payment orders drawn by the account holder(s) may be debited. The effect is that references in the Act to debits to accounts will mean debits to cheque accounts with banks (as under the existing law) and debits to payment order accounts with non-bank financial institutions.

"account transaction"

The Bill will insert in subsection 3(1) of the Act a definition of "account transaction" which, in relation to an "account" (as defined), means the payment of a cheque (paragraph (a)), the payment of a payment order (paragraph (b)) or the doing of any other act or thing (paragraph (c)) that will result in a debit being made to the account. This definition is used in new section 3A being inserted in the Act (see later notes).

Other definitions

The Bill will also insert the following definitions, which are central to the imposition of debits tax in relation to debits to payment order accounts, in subsection 3(1) of the Act.

"financial institution" is defined to mean a "bank" (as defined - see earlier notes) or a "non-bank financial institution" (also defined - see later notes).

"incomplete", in relation to a cheque or payment order, means that the instrument is wanting in a material particular that is necessary for it to be, on its face, a complete instrument - e.g., an unsigned cheque would be an incomplete cheque. This definition is relevant to the operation of new subparagraph (b)(ii) of the definition of "excluded debit" - see earlier notes.

"non-bank financial institution" means a non-bank financial institution within the meaning of the Cheques and Payment Orders Act 1986 that carries on a business that includes the keeping of accounts that may be drawn on by payment order. Subsection 3(1) of the Cheques and Payment Orders Act 1986 defines "non-bank financial institution" for the purpose of that Act as -

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a building society or credit union that is a registered corporation within the meaning of the Financial Corporations Act 1974; and

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any other registered corporation within the meaning of that Act, being a registered corporation prescribed, or included in a class of registered corporations prescribed, for the purposes of the definition in that Act.

"payment order" has the same meaning as it has in the Cheques and Payment Orders Act 1986. Subsection 101(1) of that Act defines a payment order as an unconditional order in writing that -

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is addressed by a person to another person (being a non-bank financial institution);

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is signed by the person giving it;

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requires the non-bank financial institution to pay on demand a sum certain in money; and

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clearly bears the words "payment order" on the front of the instrument.

Subsection 101(2) of that Act provides that an instrument that does not comply with subsection 101(1), or that orders any act to be done in addition to the payment of money, is not a payment order.

Non-bank financial institution account : New subsection 3(9)

Proposed new subsection 3(9) of the Act ensures that, where there is a reference in the Act to an account kept with a non-bank financial institution, it includes a reference to an account kept by way of withdrawable share capital in the institution or money deposited with the institution. Debits to accounts of this kind (e.g., building society accounts kept by way of withdrawable share capital) which may be drawn on by payment orders will be within the scope of the debits tax law.

Deemed separate debits : New section 3A

Proposed new section 3A treats as separate debits what would otherwise be a single debit made to an account in respect of 2 or more account transactions. For this purpose, an "account transaction" is defined (see earlier notes) to mean the payment of a cheque or payment order, or the doing of any other act or thing, that will result in the making of a debit to the account.

The new section will counter the possible avoidance of tax that would occur if institutions aggregated payments from accounts in respect of separate cheques, payment orders or other transactions into one debit. Because the tax applies to debits and not to the instruments or transactions underlying the debits, such aggregation would reduce the tax payable by limiting the number of debits recorded without any change in the number or value of cheques or payment orders paid or other transactions actually conducted.

Debits to be expressed in Australian currency : New section 3B

Proposed new section 3B will give statutory backing to the practice of the Commissioner of Taxation of calculating tax on the Australian currency equivalent of debits to accounts in Australia that are expressed in a foreign currency.

Representative officers, etc. : New subsections 57(1A) and (1B)

Existing subsection 57(1) of the Act provides for a bank that carries on banking business in Australia to appoint an officer or officers of the bank to represent the bank for the purposes of the Act. Unless exempted by the Commissioner of Taxation, the bank is required to ensure that, at all relevant times, at least one officer holds an appointment as such representative officer. The bank is guilty of an offence (punishable on conviction by a fine not exceeding $50) in respect of each day on which it refuses or fails to comply with subsection 57(1).

New subsection 57(1A) will impose the same obligation on a non-bank financial institution carrying on a business in Australia that includes the keeping of accounts that may be drawn on by payment order. Unless exempted by the Commissioner, such an institution will be required to have at least one representative officer at all times after the later of -

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the end of one month after the commencement of subsection 57(1A) (expected to be 1 July 1987 - in which case an institution would be required to have a representative officer by 31 July 1987); or

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the day on which the institution commences to carry on that business.

New subsection 57(1B) provides that it is an offence to contravene subsection 57(1A), also punishable on conviction by a fine not exceeding $50 per day.

Schedule 1 : Amendments of certain other Acts

Schedule 1 to the Bill will also amend certain other Acts to reflect the change in the short titles of the Bank Account Debits Tax Administration Act 1982 and the Bank Account Debits Tax Act 1982 to the Debits Tax Administration Act 1982 and the Debits Tax Act 1982, respectively. Those other Acts, which contain references to those short titles, are -

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the Administrative Decisions (Judicial Review) Act 1977;

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the Australian Sports Commission Act 1985;

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the Australian Institute of Sport Act 1986;

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the Taxation Administration Act 1953; and

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the Taxation (Interest on Overpayments) Act 1983.

SCHEDULE 2

AMENDMENT OF CERTAIN ACTS IN CONNECTION WITH THE TRANSFER OF CERTAIN AUSTRALIAN CAPITAL. TERRITORY TAXES AND DUTIES

Introductory note

As mentioned in the notes on clause 59, that clause provides that the Commonwealth Acts specified in Schedule 2 are amended as set out in that Schedule.

The amendments in Schedule 2 will amend various Commonwealth Acts relating to Australian Capital Territory (ACT) stamp duties and similar taxes, to facilitate the transfer (expected to take effect on 1 July 1987) of responsibility for administration of the ACT stamp duty and tax laws from the Commissioner of Taxation to the proposed Commissioner for Australian Capital Territory Revenue Collections. In broad terms, the amendments will terminate the imposition of ACT stamp duties and taxes by those Acts and transfer any outstanding functions under those Acts to the proposed new Commissioner. To complete the transfer, new ACT Ordinances will be made to create the statutory office of Commissioner for Australian Capital Territory Revenue Collections and to impose the duties and taxes on and from the transfer date.

Schedule 2 : Amendment of the Australian Capital Territory Stamp Duty Act 1969

Termination of stamp duty : New section 3A

Subsection 4(1) of the Act imposes stamp duty on instruments included in the classes of instruments specified in Schedule 1 to the Act. New subsection 3A(1) will terminate the imposition of that stamp duty under subsection 4(1) of the Act in the case of -

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an instrument of Crown lease where the date of commencement specified in the lease is on or after the "termination day" (paragraph (a));

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a bill of exchange (which includes a cheque) or promissory note that is drawn or made on or after the "termination day" (paragraph (b)); or

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an instrument (other than an instrument of Crown lease or a bill of exchange or promissory note) that is executed on or after the "termination day" (paragraph (c)).

A definition of the expression "termination day" is being inserted in subsection 4(1) of the Act - see later notes - and has the same meaning in other Acts relating to ACT taxes and duties.

Because item 2 in Schedule 1 to the Act is to the effect that stamp duty may also be imposed on a bill of exchange or promissory note (other than a cheque) which is negotiated, presented for payment or paid in the ACT, new subsection 3A(2) provides that stamp duty is not imposed on a bill of exchange or promissory note by reason of its negotiation, presentation for payment or payment on or after the termination day.

Stamp duty imposed by subsection 4(2) of the Act will be terminated by amendments of sections 58M, 58P, 58Q and 58R of the Australian Capital Territory Taxation (Administration) Act 1969, also being effected by Schedule 2 to the Bill - see later notes.

Schedule 2 : Amendments of the Australian Capital Territory Taxation (Administration) Act 1969

Interpretation : Subsection 4(1)

Existing subsection 4(1) of this Act is an interpretative provision giving particular meanings to words and expressions used in the Act.

Because of the transfer of outstanding functions under the Act, the definition of the term "Commissioner", which means the Commissioner of Taxation, is being omitted. The following new definitions are, however, being inserted.

"ACT Commissioner" is being defined to mean the Commissioner for Australian Capital Territory Revenue Collections, who is to be appointed under the proposed new ACT Taxation Administration Ordinance 1987.

"changeover day", being the date of transfer of responsibility for ACT stamp duties and taxes, is being defined to mean the date of commencement of clause 59 of the Bill. That date (to be proclaimed) is expected to be 1 July 1987 - see the Introductory note on Schedule 2.

"Commonwealth Commissioner" is a new term being used to describe the Commissioner of Taxation and to distinguish the ACT Commissioner.

"termination day" means -

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the day fixed by Proclamation as the "termination day" in relation to ACT tax or duty of a particular class or classes (paragraph (a)); or

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if no date is fixed by Proclamation as the "termination day" in terms of paragraph (a), the "changeover day" (as defined) - expected to be 1 July 1987 (paragraph (b)).

The amendments in Schedule 2 relating to the transfer of functions are expressed to be effective from the "changeover day", while the amendments terminating the imposition of tax or duty are expressed to be effective from the "termination day". As mentioned earlier in the "Main Features" section of this Memorandum, it is expected that the date proclaimed for the transfer of functions and termination of imposition of stamp duty and similar taxes under the Commonwealth Acts will be 1 July 1987. The provision for separate dates to be proclaimed for the "changeover day" and "termination day" is a precaution to provide against contingencies.

By way of example, in accordance with the1986-87 Budget announcement, certain ACT stamp duties on financial transactions are to be abolished when the proposed ACT Financial Institutions Duty (FID) is introduced on 1 July 1987. Accordingly, the ACT stamp duties to be abolished would not be included in the proposed new ACT stamp duty Ordinance, which is expected to operate on and from 1 July 1987. If, however, the ACT stamp duty Ordinance is not able to be brought into effect on 1 July 1987 but the FID is introduced on that date as planned, abolition of the relevant ACT duties will be able to be effected by simply proclaiming 1 July 1987 as the "termination day" in respect of those duties.

Transfer of administration from Commonwealth Commissioner : Section 5A

Proposed new subsection 5A(1) of the Act will mean that, on and after the "changeover day", the Act and related laws will have effect as if -

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a reference in the Act (other than sections 7 and 95 - see paragraph (d) below) or a related law to the Commissioner or to the Commissioner of Taxation were a reference to the ACT Commissioner i.e., the Commissioner for Australian Capital Territory Revenue Collections (paragraph (a));

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anything done by, or done or arising in relation to, the Commonwealth Commissioner before the "changeover day" had been done by, or had been done or had arisen in relation to, the ACT Commissioner (paragraph (b));

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a reference in sections 58AD, 58T and 91A of the Act to an Act of which the ACT Commissioner has the general administration included a reference to a law of the ACT of which the ACT Commissioner has the general administration (paragraph (c)) - it should be noted that the existing references to the "Commissioner" in these sections will be references to the "ACT Commissioner", by the operation of paragraph (a);

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a reference in sections 7 and 95 of the Act to the Commissioner were a reference to the ACT Commissioner or the Commonwealth Commissioner (paragraph (d)); and

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a reference in section 3C of the Taxation Administration Act 1953 and section 8 of the Taxation (Interest on Overpayments) Act 1983 to the Commissioner were a reference to the ACT Commissioner or the Commonwealth Commissioner (paragraph (e)).

Paragraph 5A(1)(a) will have the effect of transferring responsibility for the remaining functions of the Commissioner of Taxation under the Act and related laws to the ACT Commissioner. It will also ensure that any rights or obligations which have accrued before the "termination day" are thereafter owed to, or by, as the case may be, the ACT Commissioner in place of the Commonwealth Commissioner - e.g., liability for payment of tax or duty, accrued or accruing additional tax or duty and penalties, as well as rights to refunds and objection and appeal rights.

Paragraph 5A(1)(b) will preserve the efficacy of any acts done by or in relation to the Commonwealth Commissioner under the Act or a related law before the "changeover day" - e.g., the issue of assessments and the lodgment of notices of objection.

Paragraph 5A(1)(c) affects the operation of sections 58AD, 58T and 91A of the Act which allow certain credits and refunds of overpaid duty or tax due to a person under the Act to be offset against any liability of the person arising under an Act of which the Commissioner of Taxation has the general administration. It will allow such credits and refunds to be offset against liabilities arising under an Ordinance administered by the ACT Commissioner - e.g., an ACT stamp duty Ordinance that replaces an existing Commonwealth Act.

Paragraph 5A(1)(d) affects the operation of subsection 7(2), which sets out exceptions to the secrecy provisions of the Act and allows the disclosure of information acquired by the Commissioner of Taxation or authorised persons to the Administrative Appeals Tribunal in connection with proceedings under an Act administered by the Commissioner, or to a person performing a function under such an Act. Paragraph 5A(1)(d) will permit disclosures for such purposes by the Commonwealth Commissioner, the ACT Commissioner or persons authorised by them. The paragraph also affects the operation of section 95 of the Act, which requires judicial notice to be taken of the signature of the person who holds or has held the office of Commissioner of Taxation. Paragraph (d) will require judicial notice to be taken of the signature of the Commonwealth Commissioner and the ACT Commissioner.

Paragraph 5A(1)(e) relates to the secrecy provisions in section 3C of the Taxation Administration Act 1953 and section 8 of the Taxation (Interest on Overpayments) Act 1983. The paragraph will permit disclosures of taxation information under those Acts by the Commonwealth Commissioner, the ACT Commissioner or persons authorised by them, to the same extent as disclosures by the Commonwealth Commissioner, or persons authorised by the Commonwealth Commissioner, are permitted at present under those Acts.

New subsection 5A(2) will facilitate the continuation of any tax-related proceedings (e.g., proceedings for recovery of unpaid tax or duty, or before the Administrative Appeals Tribunal) commenced but not finalised at the date of the transfer of functions. For example, where a person owes taxes or duties under more than one Act for which the Commissioner of Taxation is responsible, proceedings for recovery of the aggregated amount may be taken. It thus may be that, at the "changeover day", proceedings are in course for recovery of an aggregated amount made up of taxes or duties for which the ACT Commissioner is responsible and other taxes for which the Commonwealth Commissioner has retained responsibility.

In the interests of administrative efficiency, subsection 5A(2) will require tax-related proceedings to which the Commonwealth Commissioner is a party that are not finalised at the "changeover day" to be continued with the Commonwealth Commissioner acting as representative of the ACT Commissioner insofar as the proceedings relate to ACT stamp duty or similar taxes. Subsection 5A(2) will apply to all relevant proceedings continued after the "changeover day", whether the Commonwealth Commissioner is the plaintiff, defendant or intervenor (see the following notes on new subsection 5A(3) and on the definition of "party").

Section 8 of the Taxation Administration Act 1953 allows the Commissioner of Taxation, inter alia, to delegate his powers or functions under taxation laws to any person. New subsection 5A(3) will allow the ACT Commissioner to delegate the powers and functions under the Pay-roll Tax (Territories) Assessment Act 1971 and related laws which the Bill transfers to him.

New subsection 5A(4) contains definitions of the following terms used in section 5A.

"party" is defined to specifically include an intervenor. Thus the references in subsection 5A(2) to the Commonwealth Commissioner being a party to proceedings includes the situation where the Commissioner intervenes in an action or other proceedings with the leave of the court.

"related law" means any law of the Commonwealth (other than Part II, and Division 3 of Part IIIA, of the Taxation Administration Act 1953) to the extent to which the law has effect in relation to the Australian Capital Territory Taxation (Administration) Act 1969. The use of this term in section 5A obviates the need to insert a similar provision in other Acts which affect the operation of, or relate to, this Act - e.g., the Taxation Administration Act 1953, which deals with matters such as prosecutions for offences and objections and appeals under various taxation laws including the ACT stamp duty laws.

Part II of the Taxation Administration Act 1953 is excluded from the definition of "related law". Part II deals with matters such as the appointment, tenure and resignation of the Commissioner of Taxation. The appointment, tenure and similar matters relating to the ACT Commissioner will be regulated by the proposed ACT Taxation Administration Ordinance 1987. Division 3 of Part IIIA of the Taxation Administration Act 1953, which regulates the provision of Commonwealth taxation information to State taxation authorities, is also excluded from the definition. References to the Commissioner in Division 3 will therefore continue to mean the Commissioner of Taxation. This will allow the Commissioner to continue to pass Commonwealth taxation information, although obtained in whole or in part under the existing ACT pay-roll tax legislation, to State taxation authorities, to the extent presently permitted by Division 3.

New subsection 5A(5) provides that a reference in any law of the Commonwealth to an Act of which the Commissioner of Taxation has the general administration includes a reference to this Act - i.e., the Australian Capital Territory Taxation (Administration) Act 1969. This will preserve the legislative link between this Act and other Acts affecting the operation of, or relating to, this Act (e.g., the Taxation Administration Act 1953).

Unauthorised supply or use of cheque forms : Subsections 22(2) and 23(2)

Under Division 2 of Part III of the Act, bankers may be authorised to supply to their customers, or to use for their purposes, cheque forms bearing an approved form of notation to the effect that stamp duty has been paid. Section 22 prohibits bankers from supplying or using cheque forms bearing or purporting to bear such notations without approval, while section 23 prohibits persons from drawing a cheque bearing or purporting to bear such a notation, knowing the cheque form is not authorised under Division 2.

New subsections 22(2) and 23(2) provide that these prohibitions do not apply to the supply or use of a cheque form, or the drawing of a cheque, on or after the "termination day" for the tax imposed by the Australian Capital Territory Tax (Cheques) Act 1969 - see later notes on Schedule 2 amendments to that Act.

Returns by authorised bankers : Subsection 24(1A)

Section 24 requires bankers to lodge monthly returns bringing to account stamp duty on cheque forms supplied or used by the bank in the previous month. In keeping with the termination of the liability to stamp duty on the "termination day", new subsection 24(1A) will remove the requirement on bankers to lodge returns for any month commencing after that day.

Returns by registered hire-purchase owners : Subsection 32(1A)

Section 32 of the Act requires persons who are registered owners under Division 4 of Part III to lodge monthly stamp duty returns relating to hire-purchase agreements entered into by them. New subsection 32(1A) removes the requirement to lodge returns for any months commencing after the "termination day".

Returns in respect of insurance business : Subsections 42(1A) and 44E(1A)

Sections 42 and 44E of the Act require insurers registered under Divisions 6 and 6A respectively to lodge monthly stamp duty returns. New subsections 42(1A) and 44E(1A) terminate the obligation to lodge returns for months commencing on or after the "termination day".

Broker's statement on transfer : Subsections 52(1A) and 52(4)

Subsection 52(1) of the Act requires a broker who makes a sale or purchase of a marketable security to endorse the relevant instrument of transfer to the effect that stamp duty, if payable, has been or will be paid and to impress a stamp (expressed to be the stamp of the broker) on the instrument of transfer. New subsection 52(1A) will terminate that requirement in respect of sales or purchases occurring on or after the "changeover day", as there will be no liability to ACT stamp duties on those transactions after that day. New subsection 52(4) will terminate the prohibition in subsection 52(3) - on impressing brokers' stamps without lawful authority - on and after the "termination day" for the tax imposed by the Australian Capital Territory Tax (Purchases by Marketable Securities) Act 1969 - see later notes on Schedule 2 amendments of that Act.

Returns by brokers : Subsection 53(1A)

Subsection 53(1) of the Act requires brokers carrying on business in the ACT to lodge monthly stamp duty returns in relation to sales and purchases of marketable securities. New subsection 53(1A) removes the obligation to lodge returns for months commencing on or after the "termination day" for the tax imposed by the Australian Capital Territory Tax (Purchases of Marketable Securities) Act 1969 - see later notes on Schedule 2 amendments of that Act.

Registration of vehicles : Subsection 58C(1)

Broadly, section 58C of the Act requires the Registrar of Motor Vehicles, before registering a motor vehicle, to ensure that any stamp tax payable in connection with an application for registration of the vehicle is paid. New paragraph 58C(1)(aa) will terminate that requirement where the Registrar is satisfied that the registration is exempt from tax under section 3A of the "Taxing Act", which for this purpose means the Australian Capital Territory Tax (Vehicle Registration) Act 1981. New section 3A of that Act, to be inserted by the Bill (see later notes), terminates the imposition of tax where the application on for registration of a vehicle is made on or after the "termination day".

Registration of transfers of marketable securities : Subsection 58G(2)

Section 58G of the Act prohibits the registration of a transfer of a marketable security in the books of a company or unit trust unless the transfer has been duly stamped or certain other requirements have been complied with. New subsection 58G(2) will terminate that prohibition in respect of any transfer of a marketable security where the transfer is effected by an instrument of transfer that appears to have been executed by the transferor, or by any of the transferors, on or after the "changeover day" (including an instrument that appears to have been executed by the transferee, or by any of the transferees, before the "changeover day").

Duty where amount under loan security is increased, not a definite sum, etc.: Subsection 58M(6)

Section 58M of the Act provides for duty to be payable where certain increases in amounts secured or recoverable, or further advances, are made under loan securities or where loan securities are enforced in relation to an amount greater than the amount in respect of which duty has been paid. New subsection 58M(6) will ensure that no liability to duty arises because of any such increase or advance made, or enforcement that occurs, on or after the "termination day".

Collateral securities : Subsection 58P(2A)

Subsection 58P(2) of the Act provides that a loan security that is connected with the ACT and is a collateral security for the same money as is secured by a primary loan security connected with the ACT, is liable to stamp duty equal to the duty that would be payable on the collateral security if it were a primary security and the primary security had been executed when the collateral security was executed. The subsection applies only where the primary security or any other collateral security for the same money has not been duly stamped. By new subsection 58P(2A) subsection 58P(2) will not apply if the collateral security is executed on or after the "termination day".

Subsequent mortgages : Subsection 58Q(3)

Section 58Q of the Act provides for duty to be payable where a payment is made under a covenant in a subsequent mortgage connected with the ACT which confers upon the mortgagee a right to pay an amount owing under a prior mortgage and provides that any payment so made will be directly secured by the subsequent mortgage. New subsection 58Q(3) limits the application of section 58Q to a payment made under such a covenant before the "termination day".

Duty on subscriptions under instruments which secure debentures : Subsection 58R(2A)

Under subsection 58R(1) of the Act, a body corporate which is or will be under a liability to repay any money received or to be received by it in respect of its corporate debentures may elect that section 58R apply in relation to those debentures. Where such an election is made, the instrument of trust relating to the debentures, any mortgage executed by the body corporate protecting the interests of the debenture holders and the debentures are deemed to be duly stamped. A body corporate which makes an election under subsection 58R(1) is required, by subsection 58R(2), to lodge for assessment each month an instrument setting out, in accordance with the subsection, amounts subscribed in respect of the debentures. That instrument is liable to duty under subsection 58R(3). Because of the termination of that liability under the Bill, subsection 58R(2A) will remove the requirement to lodge the instrument for assessment under subsection 58R(2) in respect of any month commencing on or after the "termination day".

Schedule 2 : Amendment of the Australian Capital Territory Tax (Cheques) Act 1969

Section 4 of this Act imposes stamp tax on cheque forms supplied by a banker to its customers, or used for the purposes of the banker, pursuant to an authority given to the banker under Division 2 of Part III of the Australian Capital Territory Taxation (Administration) Act 1969. The Bill will insert new section 3A to terminate the imposition of tax on cheque forms supplied or used by a banker on or after the "termination day".

Schedule 2 : Amendment of the Australian Capital Territory Tax (Hire-purchase Business) Act 1969

Section 4 of this Act imposes tax on the purchase price under a hire-purchase agreement entered into in the ACT where the owner is a person registered under Division 4 of Part III of the Australian Capital Territory Taxation (Administration) Act 1969. The Bill will insert new section 3A to terminate the imposition of tax on hire-purchase agreements entered into on or after the "termination day".

Schedule 2 : Amendment of the Australian Capital Territory Tax (Insurance Business) Act 1969

Section 4 of this Act imposes tax on all premiums received in the ACT by an insurer in respect of insurance effected by the insurer being -

•

insurance on land (including crops growing on land) situated in the ACT;

•

insurance effected by the insurer on goods in the ACT; or

•

insurance, other than insurance on land, crops growing on land or goods, effected by the insurer in the ACT.

New section 3A is being inserted in the Act to terminate the imposition of tax on premiums received by an insurer in respect of insurance effected by the insurer on or after the "termination day".

Schedule 2 : Amendment of the Australian Capital Territory Tax (Life Insurance Business) Act 1981

Section 4 of this Act imposes tax in respect of all life insurance effected in the ACT in respect of which premiums are received in the ACT by the insurer. The Bill will insert new section 3A to terminate the imposition of tax in respect of life insurance effected on or after the "termination day".

Schedule 2 : Amendment of the Australian Capital Territory Tax (Purchases of Marketable Securities) Act 1969

Section 4 of this Act imposes tax on each purchase by a broker carrying on business in the ACT of a marketable security listed for quotation in the official list of an Australian Stock Exchange or of a prescribed stock exchange (i.e., certain overseas stock exchanges) being -

•

a purchase made in the ACT on the broker's own account or own behalf; or

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a purchase made in accordance with an order to purchase given to the broker in the ACT by or on behalf of a person who is not a broker or is not acting for or on behalf of a broker.

New section 3A is being inserted in the Act to terminate the imposition of tax on purchases of marketable securities made on or after the "termination day".

Schedule 2 : Amendment of the Australian Capital Territory Tax (Sales of Marketable Securities) Act 1969

Section 4 of this Act imposes tax on each sale by a broker carrying on business in the ACT of a marketable security listed for quotation in the official list of an Australian Stock Exchange or of a prescribed stock exchange (i.e. certain overseas stock exchanges) being -

•

a sale made in the ACT on the broker's own account or own behalf; or

•

a sale made in accordance with an order to sell given to the broker in the ACT by or on behalf of a person who is not a broker or is not acting for or on behalf of a broker.

The Bill will insert new section 3A in the Act to terminate the imposition of tax on sales of marketable securities made on or after the "termination day".

Schedule 2 : Amendment of the Australian Capital Territory Tax (Transfers of Marketable Securities) Act 1986

This Act is designed to counter the avoidance of ACT tax by the keeping of company registers of marketable securities in jurisdictions which impose the lowest rates of stamp duty or tax on transfers of marketable securities. The Act imposes tax on the transfer of marketable securities listed on the register of a company incorporated in the ACT where the register is kept outside the ACT.

New section 3A is being inserted in the Act to terminate the imposition of tax on the registration of marketable securities, where the transfer is effected by an instrument of transfer that appears to have been executed by the transferor, or by any of the transferors, on or after the "termination day" (including an instrument that appears to have been executed by the transferee, or by any of the transferees, before the "termination day").

Schedule 2 : Amendment of the Australian Capital Territory Tax (Vehicle Registration) Act 1981

Section 4 of this Act imposes tax on registrations of motor vehicles in the ACT under the ACT Motor Traffic Ordinance 1936. The Bill will insert new section 3A in that Act to terminate the imposition of tax under this Act where the application for registration is made on or after the "termination day".

SCHEDULE 3

AMENDMENT OF CERTAIN ACTS IN CONNECTION WITH THE TRANSFER OF AUSTRALIAN CAPITAL TERRITORY PAY-ROLL TAX

Introductory note

As mentioned in the notes on clause 60, that clause provides that the Acts specified in Schedule 3 are amended as set out in that Schedule.

The Schedule will amend the Pay-roll Tax (Territories) Act 1971 and the Pay-roll Tax (Territories) Assessment Act 1971 to facilitate the transfer (expected to take effect on 1 July 1987) of responsibility for administration of ACT pay-roll tax from the Commissioner of Taxation to the proposed Commissioner for Australian Capital Territory Revenue Collections. The amendments are to similar effect in relation to ACT pay-roll tax as the amendments in Schedule 2 in relation to ACT stamp duties and taxes - see the Introductory note on Schedule 2.

Schedule 3 : Amendments of the Pay-roll Tax (Territories) Act 1971

Termination of Tax : Section 2A

Section 3 of this Act formally imposes ACT pay-roll tax payable in accordance with the Pay-roll Tax (Territories) Assessment Act 1971. The Bill will insert new section 2A in the Act to terminate the imposition of pay-roll tax in respect of wages that become payable on or after the "termination day". A definition of the expression "termination day" is being inserted in subsection 4(1) of the Pay-roll Tax (Territories) Assessment Act 1971 - see later notes - and the expression has the same meaning in this Act.

Imposition of pay-roll tax : Section 3

As mentioned in the preceding notes, existing section 3 of the Act formally imposes ACT pay-roll tax. In the case of wages that become payable on or after 1 December 1974, paragraph 3(1)(d) of the Act specifies that the rate of tax is 5% of the wages. The Bill will amend that paragraph, as a consequence of the insertion of new section 2A, so that the paragraph applies to wages that become payable on or after 1 December 1974 but before the "termination day". In other words, the section will not apply to wages paid on or after that day.

Existing subsection 3(2) provides that, for the purposes of section 3, wages paid before the day on which they would otherwise have become payable shall be deemed to have become payable on that day. As a consequence of the insertion of new section 2A, the Bill will amend subsection 3(2) so that it applies for the purposes of the Act (including section 2A), rather than only for the purposes of section 3. This will have the effect that, notwithstanding new section 2A, wages that are paid before the "termination day", although they do not become payable until on or after that day, will continue to attract tax under this Act.

Schedule 3 : Amendments of the Pay-roll Tax (Territories) Assessment Act 1971

Interpretation : Subsection 4(1)

Existing subsection 4(1) of this Act is an interpretative provision which gives particular meanings to words and expressions used in the Act. As administration of the Act is to be transferred from the Commissioner of Taxation to the proposed new Commissioner for Australian Capital Territory Revenue Collections, the existing definitions of the terms "Deputy Commissioner", "Second Commissioner" and "the Commissioner" are being omitted by the Bill. However the following new definitions are being inserted:

"ACT Commissioner" is being defined to mean the Commissioner for Australian Capital Territory Revenue Collections - to be appointed under the proposed new ACT Taxation Administration Ordinance 1987.

"Commonwealth Commissioner" is a new term being used to describe the Commissioner of Taxation and to distinguish the ACT Commissioner.

"termination day" means the date of commencement of clause 60 of the Bill. That date (to be proclaimed) is expected to be 1 July 1987 - see the Introductory note on Schedule 3.

Transfer of administration from Commonwealth Commissioner : Section 5A

Subsections (1) to (5) of new section 5A being inserted in the Act by Schedule 3 to the Bill are to the same effect in relation to ACT pay-roll tax as those subsections of new section 5A being inserted in the Australian Capital Territory Taxation (Administration) Act 1969 by Schedule 2 to the Bill in relation to ACT stamp duties and taxes - see the relevant notes on Schedule 2. Section 5A of this Act refers to the "termination day", while new section 5A of the Australian Capital Territory Taxation (Administration) Act 1969 refers to the "changeover day". Those expressions are defined in similar terms and are expected to be the same day - i.e., 1 July 1987.

Annual adjustments : Subsections 14(1AA) and 15A(1A)

Existing sections 14 and 15A of the Act provide for a system of annual adjustments of pay-roll tax on a financial year basis to ensure the correct amount of tax is paid. Section 14 provides for refunds or rebates of overpayments, while section 15A provides for further payments in the case of underpayments. New subsections 14(1AA) and 15A(1A) will have the effect that sections 14 and 15A do not apply in relation to the financial year commencing on 1 July 1987 or subsequent financial years. Annual adjustments in relation to the financial year commencing 1 July 1987 and subsequent years will be determined under the proposed new ACT pay-roll tax Ordinance.

Returns : Subsection 17(1AA)

Existing section 17 of the Act formally imposes the requirement to furnish pay-roll tax returns. New subsection 17(1AA) will ensure that there is no obligation on employers to furnish returns in respect of any period commencing on or after the "termination day".

Grouping provisions : Subsections 21J(1A) and 21K(2A)

Put simply, Part IVA of this Act contains grouping provisions which prevent employers from avoiding pay-roll tax by splitting their pay-rolls between two or more entities. Under these provisions, employers that are related corporations or commonly controlled, or use the same employees in different businesses, generally are required to be grouped together for pay-roll tax purposes and treated as one employer when calculating allowable deductions from wages.

Section 21J of Part IVA provides for annual adjustments where the grouping provisions apply. By new subsection 21J(1A), that section will not apply in relation to the financial year commencing on 1 July 1987 or subsequent financial years. As with annual adjustments where the grouping provisions do not apply (see earlier notes on subsections 14(1AA) and 15(1A)), annual adjustments for group employers in relation to the financial year commencing 1 July 1987 and subsequent financial years will be determined under the proposed new ACT pay-roll tax Ordinance.

Section 21K provides for part-year adjustments where the grouping provisions apply. By new subsection 21K(2A), that section will not apply in relation to a group period ending on or after the "termination day". Under existing subsection 21J(2), "group period" means a continuous part of a financial year for which at least one member of the group was liable to pay taxable wages or wages taxable under the pay-roll tax law of a State or the Northern Territory. Again, part-year adjustments under the grouping provisions in relation to a group period ending on or after the "termination day" will be determined under the proposed new ACT pay-roll tax Ordinance.

SCHEDULE 4

AMENDMENTS RELATING TO THE COMMISSIONER'S INFORMATION GATHERING AND ACCESS POWERS

Because the amendments of the Income Tax Assessment Act 1936 (the Act) being made by Schedule 4 are of more significance than other amendments contained in the Schedule, they are explained first in the following notes.

By paragraph 264(1)(b) of the Act, the Commissioner of Taxation may, by notice in writing, require any person to attend and give evidence concerning the person's, or another person's, income or assessment. The Commissioner may require the person to produce all books, documents or other papers that may be in the person's custody or control. New section 221YAA, being inserted by Schedule 4, will extend the operation of paragraph 264(1)(b) to matters that are relevant to the administration or operation of those provisions of the Act that relate to the deduction of tax instalments by employers from the wages of employees - that is, the pay-as-you-earn provisions.

Section 263 of the Act provides the Commissioner and authorised officers with the power of access to, inter alia, buildings and documents. Schedule 4 will amend section 263 by adding two new subsections that are substantially the same as those found in the more recently enacted access provisions of taxation laws, such as those of the sales tax and fringe benefits tax laws.

New subsection 263(2) will require a taxation officer, at the request of a person occupying a building or place, to produce an authority, signed by the Commissioner (or a delegate of the Commissioner), to the effect that the officer is authorised to exercise powers under section 263. An officer who does not produce such an authority is not entitled by the section to enter, or to remain in or on, the building or place.

New subsection 263(3) will ensure that the Commissioner or an authorised taxation officer who has entered or proposes to enter a building or place for the purposes of the Act is entitled to reasonable facilities and assistance for the effective exercise of powers under section 263. An authorised taxation officer will thus be entitled to reasonable use of photocopying, telephone and light and power facilities and of work space and facilities to extract relevant information stored on computer. In addition, the officer will be entitled to reasonable assistance in the form of, for example, advice as to where relevant documents are located and the provision of access to areas where such documents are located.

The maximum penalty that may be imposed by a court on conviction for failure to comply with subsection 263(3) will be a fine of $1,000.

Other amendments by Schedule 4 will ensure that provisions corresponding to proposed new subsections 263(2) and (3) of the Act are also included in the access provisions of other taxation laws. In terms of subclause 2(1) of the Bill, all the Schedule 4 amendments will come into operation on the day on which the amending Act receives the Royal Assent.

The following new provisions that are being inserted in the nominated Acts by Schedule 4 are to the same effect as new subsection 263(2) of the Income Tax Assessment Act 1936 -

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subsection 44(2) of the Estate Duty Assessment Act 1914;

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subsection 41(2) of the Tobacco Charges Assessment Act 1955; and

•

subsection 90(2) of the Wool Tax (Administration) Act 1964.

The following new provisions that are being inserted in the nominated Acts by Schedule 4 are to the same effect as new subsection 263(3) of the Income Tax Assessment Act 1936 -

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subsection 97(3) of the Australian Capital Territory Taxation (Administration) Act 1969;

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subsection 58(3) of the Bank Account Debits Tax Administration Act 1982;

•

subsection 44(3) of the Estate Duty Assessment Act 1914;

•

subsection 68(3) of the Pay roll Tax (Territories) Assessment Act 1971;

•

subsections 13F(4) and 14J(3) of the Taxation Administration Act 1953;

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subsection 41(3) of the Tobacco Charges Assessment Act 1955; and

•

subsection 90(3) of the Wool Tax (Administration) Act 1964.

NOTE ABOUT SECTION HEADINGS

Section 10 of the Bank Account Debits Tax Administration Act 1982 is presently headed "Recovery of tax by banks" and section 57 of the Act is headed "Representative officers, etc., of banks". Reflecting the broader scope of the debits tax law that will result when the amendments are effected to bring debits to payment order accounts within the tax base (see Introductory note on Schedule 1), the Bill will amend the headings to sections 10 and 57 by substituting ''financial institutions" for "banks".

BANK ACCOUNT DEBITS TAX AMENDMENT BILL 1987

Clause 1: Short title etc.

Subclause (1) of this clause provides for the amending Act to be cited as the Bank Account Debits Tax Amendment Act 1987, while subclause (2) facilitates references to the Bank Account Debits Tax Act 1982 which, in the Bill, is referred to as "the Principal Act".

Clause 2: Commencement

In the absence of the provisions of this clause, the amending Act would, by virtue of subsection 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date on which it receives the Royal Assent. The clause provides for alternative commencement days.

Subclause 2(1) provides that both the preceding clause and this clause are to come into operation on the day on which the amending Act receives the Royal Assent.

Under subclause 2(2), clauses 3 to 6 and subclause 9(1) of the Bill are to come into operation on commencement of Part VIII of the Cheques and Payment Orders Act 1986. The provisions of that Part introduce a new payment instrument (called a payment order) to be drawn on non-bank financial institutions and will come into operation on a date to be fixed by Proclamation. It is expected that that date will be 1 July 1987. As clauses 3 to 6 and subclause 9(1) are consequential on the inclusion of payment orders in the debits tax base, they will come into operation at the same time.

Subclause 2(3) provides for the remaining provisions of the Bill - dealing with the abolition of the higher rates of debits tax in the ACT, consequent on the proposed introduction on 1 July 1987 of a Financial Institutions Duty (FID) - to come into operation on a day to be fixed by Proclamation. It is expected that 1 July 1987 will be the date to be proclaimed for commencement of subclause 2(3).

Clauses 3 to 5 : Title/Short title/Incorporation

Reflecting the inclusion of debits made to payment orders accounts within the debits tax base, these clauses will amend, respectively -

•

the long title of the Principal Act to substitute "financial institutions" (i.e., banks and non-bank financial institutions) for "banks" (clause 3);

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the short title of the Principal Act to delete "Bank Account", so that the short title will read "Debits Tax Act 1982" (clause 4); and

•

section 3 of the Principal Act to delete "Bank Account" from the reference to the Bank Account Debits Tax Administration Act 1982 (clause 5).

Clause 6: Accounts kept outside Australia

Paragraph 4(c) of the Principal Act is an anti-avoidance provision which imposes tax on certain debits made to accounts kept outside Australia for the purpose of avoiding liability for payment of the tax which would have been imposed if the debit had been made to an account kept in Australia. Clause 6 inserts a new section - section 3A - which extends the meaning given to a reference in the Principal Act to a debit made to an account kept outside Australia. Put simply, section 3A will ensure that certain debits to "non-bank" accounts kept outside Australia for the purpose of avoiding liability to tax are subject to tax. A more detailed explanation of the operation of the new section 3A is contained in the notes on clause 7.

Clause 7: Imposition of tax/Amount of tax

This clause proposes the repeal of existing sections 4 and 5 of the Principal Act and their replacement with new sections 4 and 5. The clause will also repeal existing section 6 of the Principal Act.

Broadly, existing subsection 4(1) imposes bank account debits tax in four specified circumstances, namely, where -

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a taxable debit of $1 or more is made to a taxable account (i.e., a debit is made to a cheque account in Australia for which a certificate of exemption is not in force) - paragraph 4(1)(a);

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an eligible debit of $1 or more is made to an exempt account (i.e., a debit is made to an account for which a certificate of exemption is in force, but the debit is not of a kind covered by the certificate of exemption) - paragraph 4(1)(b);

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an eligible debit of $1 or more is made to an account kept outside the ACT or outside Australia by a resident of the ACT where the objective conclusion is that the debit was made to that account for a purpose of avoiding tax that would have been payable if the debit had been made to an account kept in the ACT - paragraph 4(1)(c); or

•

an eligible debit of $1 or more is made to an account kept outside Australia by a resident of Australia for the purpose of avoiding the tax for which the account holder would otherwise be liable had the debit been made to a cheque account kept in Australia but outside the ACT - paragraph 4(1)(d).

Tax imposed in respect of an eligible debit in these circumstances is payable by the account holder, while tax imposed in respect of a taxable debit is payable by the bank, but is recoverable from the account holder.

Existing section 5 provides that the amount of tax imposed in respect of debits made to accounts is the amount specified in the Schedule to the Principal Act. Paragraph 5(1)(a) identifies the rates of tax levied on taxable and eligible debits to non-ACT accounts as those set out in Column 2 of the Schedule. Paragraph 5(1)(b) identifies the rates of tax levied on taxable and eligible debits made to -

•

an account kept in the ACT; or

•

an account kept by an ACT resident outside the ACT or outside Australia for the purpose of avoiding ACT rates of tax,

as those set out in Column 3 of the Schedule (references to the ACT in section 5 include the Jervis Bay Territory).

Existing section 6 is essentially an anti-avoidance provision. That section deems certain accounts kept in Australia but outside the ACT (again including Jervis Bay), that are opened on behalf of depositors with an ACT building society or credit union, to be accounts kept in the ACT. Debits made to those accounts are, therefore, subject to the current higher ACT rates of tax.

Paragraph (a) of new section 4 essentially restates existing paragraph 4(1)(a) of the Principal Act and will impose tax on every taxable debit of $1 or more made to a taxable account. Tax imposed by this paragraph will continue to be payable on a monthly basis by the financial institution (i.e., a bank or, after the amendments to bring to account debits to payment order accounts with non-bank financial institutions (NBFIs) come into operation, an NBFI - see notes on Part VII of the accompanying Taxation Laws Amendment Bill (No. 2) 1987) with which the account is kept and be recoverable from the account holder.

New paragraph 4(b) restates in substance existing paragraph 4(1)(b) and will impose tax on eligible debits of $1 or more made to exempt accounts. Tax imposed in these circumstances will continue to be payable by the account holder.

Paragraph (c) of new section 4 is a re-statement of existing paragraph 4(1)(d). It will impose tax on each eligible debit of $1 or more made to an account kept outside Australia by an Australian resident for the purpose, or for purposes that include the purpose, of avoiding tax that would be payable if the debit were made to an account kept in Australia. New section 3A, being inserted by clause 6 of the Bill, relates to the operation of paragraph 4(c).

Under arrangements entered into for legitimate commercial purposes, some building societies, credit unions and similar bodies offer cheque facilities to their customers. These facilities, commonly called "third party cheques", enable customers to make payments from their accounts by way of cheques drawn on a bank account operated by the building society, credit union or other body with which the customer's account is held. Under these arrangements, although the cheque is drawn on the bank, the customer is authorised to fill out the cheque and the body is authorised to debit the customer's account for the purpose of paying to the bank the amount required to honour the cheque. If an Australian resident drew a cheque in these circumstances on an account kept by a non-resident building society, credit union or similar body outside Australia for the purpose of avoiding tax, paragraph 4(c) itself would not operate to subject the resultant debit to tax, as the bank account is not kept in the name of the Australian resident - as required by subparagraph 4(c)(i) - but in the name of the body.

New section 3A therefore provides that a reference to a debit made to an account kept outside Australia includes a reference to a debit made to a non-bank account of the kind described above that is kept outside Australia. The effect is that a debit made to such an account kept outside Australia by an Australian resident, for the purpose of avoiding the tax that would be payable if the debit were made to an account kept in Australia, will attract tax under new paragraph 4(c).

Consistent with the position under the present law, financial institutions will not be called upon to monitor and identify eligible debits to which paragraphs 4(b) and (c) apply. Administrative responsibility lies with the Commissioner of Taxation, who will recover the appropriate tax direct from the account holder. Financial institutions will, however, be liable, jointly and severally with account holders, for the tax payable on taxable debits to which paragraph 4(a) applies. Financial institutions so liable to pay tax are authorised under the law to recover from an account holder the tax paid in respect of taxable debits made to the account of the account holder.

New section 5 specifies the amount of tax imposed in respect of debits made to accounts kept with banks or NBFIs. The rates of tax applicable to these debits are those set out in Column 2 of the new Schedule being inserted by clause 8 - see notes on that clause. Under the new section, the rates, which are the same as the existing general (i.e., non-ACT) rates, will apply to all debits including debits to accounts kept in the ACT.

Clause 8: Schedule

This clause proposes the repeal of the existing Schedule to the Principal Act - which sets out the rates of tax for debits to non-ACT (Column 2) and ACT (Column 3) accounts - and the substitution of a new Schedule. The effect is to remove the higher ACT rates of tax and restate the existing general rates of tax (Column 2 of the existing Schedule) for all debits. The rates of tax specified in the new Schedule are:

Clause 9: Application of amendments

Subclause (1) of this clause, which will not amend the Principal Act, provides that the amendment made by clause 6 applies to debits made on or after the date of commencement of the subclause. As mentioned in the notes on clause 2, that date (to be proclaimed) will be the same as the date of commencement of Part VIII of the Cheques and Payment Orders Act 1986. It is expected that the proclaimed date will be 1 July 1987.

Subclause 9(2) provides that the amendments made by clauses 7 and 8 apply to debits made on or after the date of commencement of the subclause. As also noted in relation to clause 2, that date, (to be proclaimed) is to coincide with the introduction in the ACT of a Financial Institutions Duty. Again 1 July 1987 is expected to be the operative date.