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. 5) 1986

PART I - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act (No. 5) 1986.

Clause 2: Commencement

The amending Act is, by this clause, to come into operation on the day on which it receives the Royal Assent. But for the clause, the Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

PART II - AMENDMENT OF THE CRIMES (TAXATION OFFENCES) ACT 1980

Clause 3: Principal Act

This clause facilitates reference to the Crimes (Taxation Offences) Act 1980 which, in Part II, is referred to as "the Principal Act".

Clause 4: Interpretation

This clause is consequential upon the introduction of an instalment system for the payment of provisional tax (see the notes on clauses 14 to 30) and amends sub-section 3(1) of the Principal Act, which contains definitions and other interpretation provisions. By this clause, the definition of "income tax" is being broadened to include a reference to all provisional tax payable under Division 3 of Part VI of the Income Tax Assessment Act, including provisional tax payable by instalments (see the notes on paragraph (g) of clause 14, which will insert new sub-section 221YA(2A) in the Assessment Act so that references in other Acts to provisional tax include references to instalments of provisional tax). The liability to pay provisional tax by instalments is to be created by new section 221YBA of the Assessment Act to be inserted by clause 16, while "lump sum" provisional tax liability will continue to be derived from section 221YB.

PART III - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 5: Principal Act

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

Clause 6: Exemptions

Section 23 of the Principal Act provides an income tax exemption for a range of income receipts. Clause 6 proposes to insert a new paragraph - paragraph (jf) - in section 23 which will exempt the income derived by The British Phosphate Commissioners Banaba Contingency Fund (the Fund).

The Fund was established on 1 June 1981 by the British Phosphate Commissioners to meet any claims for compensation against the Commissioners by former employees in respect of mining operations on Banaba (formerly Ocean Island), which were terminated in 1980. The British Phosphate Commissioners constitute an unincorporated board, one Commissioner being appointed by the Governments of each of Australia, the United Kingdom and New Zealand. They had conducted phosphate mining operations on Banaba since 1920.

The affairs of the Commissioners are in the process of being wound up. Had they continued in operation and therefore been in a position to administer the Fund, income of the Fund would have been exempt from tax under the doctrine of sovereign immunity.

By sub-clause 32(2) of the Bill, income of the Fund derived at any time will be exempt from tax.

Clause 7: Dividends paid instead of interest under short-term finance arrangements

The amendments proposed by clause 7 will insert a new section - section 46C - in the Principal Act. This new section, in conjunction with the further amendments proposed in clauses 8, 10, 11 and 31 of the Bill will give effect to the measures announced on 7 April 1986 to treat as debt for income tax purposes certain share-based short-term finance arrangements principally involving the use of redeemable preference shares. The new section 46C is the operative provision that will deny, in relation to those arrangements that substitute dividends for interest, eligibility for the intercorporate dividends rebate provided by section 46 of the Principal Act.

Under the present income tax law, a deduction is not allowed for dividends paid by a company, but the section 46 rebate of tax effectively frees from tax dividends that are included in the taxable income of a resident company. Where dividend stripping is involved, section 46A operates instead of section 46 to limit the rebate of tax that a company may be allowed. In contrast, interest is taxed at the full company tax rate to the recipient and may be deductible to the payer under the general deduction provision (section 51) or specific provisions of the income tax law. This different tax treatment of dividends and interest has given rise to a number of share-based finance arrangements primarily using redeemable preference shares designed to attract the taxation treatment of equity for what essentially amounts to debt.

The amendments proposed in this Bill will ensure that dividends paid on shares issued or used under arrangements for the provision of funds for a period of 2 years or less will no longer be eligible for a dividend rebate. Such dividends generally will be tax deductible to the issuing companies by virtue of the amendment proposed by clause 8 - see notes on that clause.

Sub-section 46C(1) defines the terms that are used in section 46C. Unless the contrary intention appears, the terms are to have their defined meanings as described below.

"arrangement" is defined in terms similar to that contained in several other anti-avoidance provisions of the income tax law. The term is to mean any formal or informal agreement, arrangement or understanding, whether or not enforceable, or intended to be enforceable, by legal proceedings, and applies to express or implied arrangements;

"associate" for the purpose of these provisions is to have the same meaning as that term has in section 26AAB of the Principal Act. In that section, the term is defined in a wide manner to include relatives, partners, directors, trustees and beneficiaries;

"commencing time" means 5 o'clock, by Australian Eastern Standard Time, on 7 April 1986;

"debt dividend" is a term central to the application of the section, since it is only a debt dividend as defined that will be ineligible for a dividend rebate. In general terms, a debt dividend in relation to a shareholder is to mean a dividend (a term itself defined in sub-section 6(1) of the Principal Act) that is paid after the commencing time in respect of a share in either a resident or non-resident company, being a dividend that, if the conditions and factors specified in paragraphs (a) to (f) of the definition are satisfied, may reasonably be regarded as equivalent to the payment of interest on a loan. The inclusion in the definition of dividends paid on shares in a non-resident company will ensure that dividends paid on short-term redeemable preference and like shares used for investment in offshore companies to convert what otherwise would be income subject to tax in Australia into tax-free dividends here will also come within the scope of the new section.

Paragraph (a) of the definition contains the basic test for the operation of the new section. It is that a dividend is paid on a share that was issued to a shareholder after the commencing time (sub-paragraph (a)(i)) under a short-term finance arrangement (itself a defined term - see later notes on this sub-section) in relation to a company, irrespective of the time at which that arrangement was entered into.

Paragraphs (b) and (c) of the definition contain two safeguarding measures to ensure that the intended operation of section 46C is not circumvented. Under the first of these measures the section will apply to a dividend paid on a share after the commencing time where -

•

the share was acquired by the shareholder after that time otherwise than by its issue to the shareholder (sub-paragraph (b)(i));

•

the dividend was paid under a short term financing arrangement entered into by the company before or after the commencing time (sub-paragraph (b)(ii));

•

if the arrangement was entered into at or before the commencing time, the share was not issued under the arrangement at or before the commencing time (sub-paragraph (b)(iii)).

Taken together, these tests will ensure that section 46C operates to deny a rebate of tax on dividends paid on any share acquired by the shareholder after its issue (e.g., by purchase), if the share was in fact issued after the commencing time under a short-term finance arrangement entered into at any time. If, however, the share was issued at or before the commencing time under such an arrangement also entered into at or before that time, a subsequent purchaser of the share will not be affected by the new section.

The second safeguarding provision will ensure that a rebate of tax is denied on any dividends paid on a share after the commencing time where the share -

•

was held by the shareholder at the commencing time (sub-paragraph (c)(i));

•

was first used under a short-term finance arrangement entered into by a company after that time (sub-paragraph (c)(ii)).

It is to be noted that, for the purposes of the above tests, the word "issued" is not defined in new section 46C. It is to have its usual meaning in relation to share transactions which implies some act, as distinct from allotment, whereby title to the allottee becomes complete, e.g., by the name being placed on the register of shareholders or by receipt of a share certificate (per Dixon J., Central Piggery Co. Ltd. v. McNicoll and Hurst (1949) 78 C.L.R. 594 at pp. 599, 600).

Paragraphs (d), (e) and (f) of the definition set out the factors that are to be taken into account to determine whether the payment of a dividend on a share that satisfies the conditions specified in paragraphs (a), (b) or (c) discussed above may reasonably be regarded as equivalent to the payment of interest on a loan. These factors are -

•

by paragraph (d) - the manner in which the amount of the dividends in respect of the affected share is to be calculated. In general terms, this requirement will be met in relation to any share that provides a return at a specified or determinable rate;

•

by paragraph (b) - the conditions applicable to the payment of dividends. The conditions to be considered would include those providing a preferential return to the shareholder, or those relating to any arrangements collateral to the issue of relevant shares. For example, where payment of a dividend on a particular share is conditional on collateral borrowings, the term of such arrangements would be relevant for the purpose of determining whether the dividend paid constitutes a debt dividend under new section 46C; and

•

by paragraph (f) - any other matters that are relevant to the payment of dividends on the particular shares.

"finance" is to include money raised by the issue of shares. This definition is designed to ensure that the meaning of the word "finance" in the definition of "short-term finance arrangement" (see notes below) is not confined to conventional borrowings at interest.

"loan" is defined in a manner that makes it clear that the term is not confined to amounts of borrowings actually advanced to the borrower, but is to include the provision of credit or any other form of financial accommodation.

"short-term finance arrangement" is a term used in the section that is also central to its operation. It restricts the application of the provision to dividends paid under arrangements for the provision of finance for a period of two years or less. It includes arrangements where only one party to the arrangement had as one of its purposes the obtaining of finance for a company for a period of less than 2 years and also situations where a company pays dividends on shares so that an associate of that company obtains finance for the relevant period.

Under paragraph (a) of the definition, a "short-term finance arrangement", in relation to a company, means an arrangement (also defined - see earlier notes) entered into or carried out by any of the parties to the arrangement for the purpose, or for purposes that included the purpose of enabling the company, or an associate (a further defined term discussed in earlier notes) of the company, to obtain finance (including by renewal of an earlier arrangement) for a period that is not to exceed, or is reasonably likely not to exceed, 2 years. Whether one of the purposes of any particular arrangement was to enable a company to obtain finance for the relevant period is a decision that must be made on a case by case basis, taking into account all the surrounding circumstances. For example, a share that is redeemable within 18 months would clearly fall within the definition of a short-term finance arrangement. On the other hand, a redeemable share issued for a term greater than 2 years would not, prima facie, come within the scope of the provisions, unless there are other circumstances to indicate that the share is in fact, to be effectively redeemed or extinguished within 2 years.

Paragraph (b) of the definition is a safeguarding measure for the purpose of ensuring that the new section is not circumvented where a finance arrangement in force before or after the commencing time is extended so that, in reality, a new finance arrangement is obtained after that time for a further period that is less than 2 years.

Sub-section (2) is the operative provision that will deny a shareholder a rebate of tax under section 46 or section 46A in respect of a dividend that, by the tests discussed above, is a debt dividend.

Clause 8: Deductions for debt dividends

This clause is associated with the proposed introduction, by clause 7 (see above notes), of the new measures that will alter the income tax treatment of dividends paid under certain short-term finance arrangements. The clause will insert a new section - section 67AA - in the Principal Act to give effect to the decision announced on 7 April 1986 to treat dividends falling within the scope of the new measures as allowable deductions to the paying company.

Sub-section 67AA(1) defines the term "debt dividend" for the purposes of the new section. A dividend will be a "debt dividend" for these purposes if the shareholder to whom the dividend is paid would have been entitled to a rebate of tax under section 46 or 46A of the Principal Act but, due to the application of the proposed new sub-section 46C(2), is not entitled to the rebate.

In this way, the definition of "debt dividend" as used in new section 46C is effectively imported into the provisions of section 67AA. However, sub-section (1) then effectively varies that definition to exclude from its scope for the purposes of section 67AA any debt dividend in respect of which the recipient company is denied a rebate of tax under section 46 or section 46A of the Principal Act, other than by virtue of the operation of new section 46C. For example, a dividend paid to a non-resident, to an individual, or in circumstances where no rebate is allowable due to the application of the dividend - stripping provisions of section 46B of the Principal Act, will not be eligible for deductibility under new section 67AA.

Sub-section 67AA(1) also makes it clear that, to the extent that a dividend is paid in respect of finance obtained by an associate (see earlier notes on clause 7) of the company that pays the dividend, the dividend is not a debt dividend for which a deduction may be allowed to that company.

Sub-section 67AA(2) is the operative provision for the allowance of a deduction in respect of a debt dividend to which the section applies. The basic rule is that a deduction for a debt dividend paid by a company in a year of income is allowable to the same extent as it would have been an allowable deduction to the company under section 51 of the Principal Act if -

•

the dividend had, in effect, been an amount of interest incurred by the company (paragraph (a)); and

•

that amount of interest had been incurred on the finance obtained by the company in respect of which the dividend was paid (paragraph (b)).

These provisions will ensure the application of the longstanding tests contained in section 51 of the Principal Act to the allowance of deductions for debt dividends. Thus, where the finance obtained is used for a purpose other than the production of assessable income (for example, in the production of exempt income) no deduction for the dividend paid will be allowable to the extent to which the finance is so used. This mechanism will also operate so that, to the extent that a deduction for interest would be limited by the application of the negative gearing provisions contained in Sub-division G of Division 3 of Part III of the Principal Act, a debt dividend deduction will be similarly limited.

Clause 9: Foreign currency exchange gains and losses

Introductory Note

Clause 9 proposes the insertion of a new division - Division 3B - Foreign Currency Exchange Gains and Losses - in Part III of the Principal Act to give effect to the proposal announced on 18 February 1986 to treat as assessable income foreign exchange gains and to allow an income tax deduction for foreign exchange losses where those gains or losses are realised on or after 19 February 1986 in respect of certain contracts.

Division 3B contains new sections 82U to 82ZB notes on which are set out below.

Section 82U: Application

Section 82U determines the extent to which proposed new Division 3B is to apply to an exchange gain or loss.

Sub-section 82U(1) makes it clear that the Division will apply to an exchange gain or loss only to the extent to which the gain or loss is of a capital nature.

Sub-section 82U(2) in conjunction with section 51 of the Principal Act, means that an income tax deduction will only be allowable for an exchange loss, otherwise deductible under the new Division, to the extent to which, if the loss had not been of a capital nature, a deduction would have been allowable under section 51. In broad terms, such a loss is one incurred in gaining or producing the assessable income of the taxpayer or necessarily incurred by the taxpayer in carrying on a business for that purpose. A loss will not be deductible if it was of a private or domestic nature or incurred in relation to the production of exempt income.

Correspondingly, sub-section 82U(3) applies to treat an exchange gain of a capital nature as assessable income only to the extent to which the gain relates to the gaining or producing of the taxpayer's assessable income or to the carrying on of a business for that purpose. The Division will not apply to gains of a private or domestic nature or those related to the production of exempt income.

Sub-section 82U(4) limits the application of the new Division 3B to exchange gains and losses realised on or after 19 February 1986 including those realised between that date and the date of Royal Assent to this Bill.

Section 82V: Interpretation

Section 82V defines several terms used in Division 3B and contains a number of interpretative provisions.

Sub-section 82V(1) defines the following terms, each term having the given meaning unless a contrary intention appears.

"arrangement" is given an extended meaning, common to the meaning it has in other provisions of the Principal Act, so as to include any agreement, arrangement, understanding, promise or undertaking (paragraph (a)), or any scheme, plan, proposal, action or course of action or conduct (paragraph (b)). The term is used in sub-section 82V(4).

"associate" is to have the same meaning in Division 3B as that term has in Part IIIA of the Principal Act which applies to capital gains and capital losses. The term specifies who is to be treated as an associate of a natural person, a company, a trustee of a trust estate or, by extension, a partnership. Broadly, the term includes persons who by reason of business or family connections might appropriately be regarded as being associated with a particular person. The definition is relevant, for example, in the definition of hedging contract.

An associate is defined for the purposes of Part IIIA to mean -

(a)

in relation to a taxpayer other than a trustee or partnership -

•

a relative of the taxpayer;

•

a partner of the taxpayer;

•

a spouse or child of a partner of the taxpayer;

•

a trustee of a trust estate where the taxpayer or a person who is, by reason of the definition, an associate of the taxpayer, benefits or is capable of benefiting under the trust either directly or through any interposed companies, partnerships or trusts;

•

a company that is effectively controlled (either individually or collectively) by the taxpayer or by persons who are, by reason of the definition, associates of the taxpayer - including any companies that are so controlled;

and, where the taxpayer is a company -

•

a person who, either alone or with persons who are, in the terms of the definition, associates of that person, is able effectively to control the taxpayer company; and

•

persons who are, in the terms of the definition, associates of a person who controls the taxpayer company;

(b)

in relation to a taxpayer in the capacity of a trustee -

•

any person who benefits or is capable of benefiting under the trust estate either directly or through any interposed companies, partnerships or trusts;

•

persons who are, in the terms of the definition, associates of a person who benefits or is capable of benefiting under the trust;

(c)

in relation to a partnership -

•

a partner in the partnership;

•

persons who are, in the terms of the definition, associates of a partner in the partnership.

It should be noted that, by sub-section 160K(2), references in Part IIIA, and in provisions other than in that Part but having effect for the purposes of that Part, to a spouse of a person will generally include a reference to a de facto spouse (as defined in Part IIIA). Thus, for example, a reference in the definition of "associate" to a relative of a taxpayer will include not only a spouse of a person but also a de facto spouse of a person.

"commencing day" means 19 February 1986. The term is used in a number of places in the Division to give effect to the intent that the Division applies only to exchange gains and losses realised on or after 19 February 1986 in respect of contracts entered into on or after that date.

"compensation" is defined to include insurance, indemnity and a recoupment or reimbursement, however described.

"currency exchange gain" and "currency exchange loss" mean, respectively, a gain or a loss to the extent to which it is attributable to fluctuations in currency exchange rates.

"eligible contract" in relation to a taxpayer when read with the definition of commencing day, means -

•

a contract, other than a hedging contract - see definition of that term - entered into by the taxpayer on or after 19 February 1986 (paragraph (a) of the definition); and

•

a hedging contract entered into by the taxpayer on or after 19 February 1986 in relation to a contract to which paragraph (a) of the definition applies (paragraph (b) of the definition).

Sub-section 82V(2) contains a number of interpretative provisions. By paragraph (a) of the sub-section, a currency exchange gain that is made, or a loss that is incurred in respect of currency purchased under a contract is to be taken, for the purposes of Division 3B, to have been made or incurred under that contract.

Paragraph 82V(2)(b) specifies that a currency exchange gain is to be taken to have been made, and a currency exchange loss is to be taken to have been incurred, at the time when the gain or loss was realised. That is, in broad terms, a currency gain will be taken to have been made, or a loss to have been incurred on a borrowing, when the borrowing is repaid. In the case of a contract for the sale or purchase of an asset, any related currency gain or loss will be taken to have been made or incurred when payment of the purchase price is received or made.

Paragraph 82V(2)(c) provides that where in the new Division, for example in sub-section 82V(3), a reference is made to a person acquiring rights or obligations arising under a contract, that reference is to be taken to be to rights or obligations that the person acquired otherwise than by reason of having entered into the contract, for example, by assignment of those rights or obligations.

Subject to certain safeguarding measures contained in sub-section 82V(4), sub-section 82V(3) applies where a taxpayer acquires rights or obligations arising under a contract otherwise than as a party to that contract. In such cases, Division 3B will apply in relation to the taxpayer as if the taxpayer had entered into the contract at the time when, and for the purposes for which, he or she acquired the rights or obligations. The latter is relevant to the definition of hedging contract.

Sub-section 82V(4) is an anti-tax avoidance measure to guard against arrangements aimed at bringing within the new Division losses attributable to currency exchange fluctuations incurred on or after 19 February 1986 under contracts entered into before that date and which would otherwise not fall within the Division. It will operate in circumstances where -

•

a taxpayer has acquired rights or obligations under a contract that, disregarding sub-section 82V(3), was entered into before the commencing day (paragraph (a)); and

•

the Commissioner is satisfied that those rights or obligations were acquired under or as a result of an arrangement (see definition of that term in sub-section 82V(1)) that was entered into or carried out by any person before or after Royal Assent to this Bill, for the purpose, or purposes that included the purpose, of ensuring that a deduction would be allowable under new Division 3B in respect of a currency exchange loss incurred under the contract (paragraph (b)).

Where these conditions are fulfilled sub-section 82V(3) is not to operate to bring any currency exchange loss or gain on the contract within Division 3B and where the rights or obligations were acquired by the taxpayer under another contract, for example, an assignment contract, that other contract is to be taken for the purposes of Division 3B as having been entered into before 19 February 1986.

Decisions made by the Commissioner under this provision will be subject to the usual rights of objection and appeal provided under the income tax law.

This means that where on or after 19 February 1986 a taxpayer acquires from another person rights or obligations arising under a contract entered into by that other person before 19 February 1986, the taxpayer will be taken to have entered into the contract on or after 19 February 1986. The effect is that the contract, in relation to the taxpayer, will be treated as an eligible contract. Accordingly, the taxpayer will be entitled to deductions, subject to the other provisions of Division 3B being met, for any loss that he or she may incur under that contract from fluctuations in currency rates from the time when he or she acquired the rights or obligations under the contract. Conversely, any gain made by the taxpayer would be assessable income.

Section 82W: Application of Division to certain pre-commencement contracts

Section 82W will give effect, in circumstances where a contract has been entered into before 19 February 1986, to the intention that the contract date of each borrowing under a draw down facility be taken to be the date on which the borrowing is actually drawn down. It will also mean that the rollover or extension of a pre-19 February 1986 borrowing contracted for on or after that date, constitutes a new borrowing for the purpose of the new measures.

Section 82W will not apply in a retrospective manner to bring a draw down, rollover or extension of a loan within the new provisions where the taxpayer was contractually bound to make the draw down, rollover or extension before 19 February 1986.

Sub-section 82W(1) applies where, on or after 19 February 1986 and under a contract entered into by a taxpayer before that date -

•

the taxpayer receives loan money, that is, the loan money is drawn down (paragraph (a));

•

a loan made to the taxpayer is rolled over in whole or part (paragraph (b)); or

•

the taxpayer obtains an extension of the period of a borrowing that he has made (paragraph (c)),

otherwise than pursuant to a contractual obligation that was binding on the taxpayer before 19 February 1986.

Where paragraph (a) of the sub-section applies, Division 3B, by paragraph (d) is to apply to the draw down as if the taxpayer had entered into a contract to borrow the money drawn down at the time when the money was received.

By paragraph (e) of the sub-section, where paragraph (b) applies to a borrowing that is rolled over in whole or part by a taxpayer, Division 3B is to apply as if the taxpayer had entered into a contract to borrow the money rolled over at the time of the rollover.

Where paragraph (c) of the sub-section applies to a borrowing by a taxpayer, paragraph (f) will apply Division 3B to the extension of that borrowing as if the amount of borrowings outstanding immediately before the commencement of the extension period had been borrowed by the taxpayer under a contract entered into at the commencement of the extension period.

Sub-section 82W(2) applies where the taxpayer is the lender of the money that is drawn down, or the loan of which is rolled-over or extended. It is identical in effect to sub-section (1) as it applies where the taxpayer is the borrower of the money.

Section 82X: Payments in respect of unexercised options

By new section 82X, a payment made by a taxpayer in respect of an unexercised option to purchase currency or the forfeiture of a deposit paid in respect of a prospective purchase of currency, may be treated as a currency exchange loss for the purposes of the Division. The circumstances in which the section will apply are where the contract for the option or the purchase of currency in respect of which the deposit was made was entered into by the taxpayer on or after 19 February 1986, for the purpose of eliminating or reducing the risk of loss to the taxpayer or an associate from currency rate fluctuations under another contract entered into by the taxpayer or associate on or after 19 February 1986.

Sub-section 82X(1) applies where -

•

a taxpayer has acquired an option to purchase currency under a contract that is both an eligible contract and a hedging contract (paragraph (a)); and

•

the option expires without having been exercised, or is otherwise cancelled, released or abandoned (paragraph (b)).

In these circumstances for the purposes of the new Division -

•

the taxpayer is to be taken to have realised a currency exchange loss of the amount paid for the option, and to have realised it at the time of expiry of the option or when the option was cancelled, released or abandoned (paragraph (c)); and

•

that loss is to be taken to have accrued to the taxpayer over the period from the time when the taxpayer acquired the option to when the option expired or was cancelled, released or abandoned. This is relevant to currency exchange losses being treated as, in effect, rental property loan interest for the purposes of Subdivision G of Division 3 of Part III of the Principal Act - see notes on new section 82ZA.

Sub-section 82X(2) applies where a taxpayer has forfeited a deposit paid for the prospective purchase of currency under a contract that is cancelled or otherwise abandoned. In these circumstances sub-section (2), when read with sub-section (1), will have two effects. The first is that the taxpayer will be taken to have realised, at the time when the deposit was forfeited, a currency exchange loss of the amount forfeited. The second is that the loss will be taken to have accrued to the taxpayer over the period from the time the deposit was made until the time when it was forfeited.

Section 82Y: Gains to be included in assessable income

Section 82Y is an operative provision which, when read with other provisions of the Division, will include in a taxpayer's assessable income of a year of income any currency exchange gain made by the taxpayer in the year of income.

Section 82Z: Losses to be allowable deductions

Sub-section 82Z(1) corresponds to section 82Y. It will apply, subject to the other sub-sections of section 82Z, to allow an income tax deduction for a currency exchange loss incurred by a taxpayer, to the extent that the loss falls within the new Division, in the year of income in which the loss is realised.

Sub-section 82Z(2) is an anti-avoidance measure to guard against non-disclosure of gains under hedging contracts. It will operate to deny a deduction to a taxpayer for a currency exchange loss unless the taxpayer notifies the Commissioner in writing that the contract has been entered into, details of its terms (paragraph (a)) and of his or her purpose in entering into the contract (paragraph (b)). Notification is required no later than the date of lodgment of the taxpayer's first income tax return after the contract was entered into or, if later, after the commencement of Division 3B. In effect, notification would be made in the taxpayer's income tax return (paragraphs 82Z(2)(c) and (d)). Paragraph 82Z(2)(e) allows the Commissioner to extend the date by which a taxpayer is to notify him of these matters.

Sub-section 82Z(3) is also an anti-avoidance measure. Under it a currency exchange loss incurred by a taxpayer under a contract (referred to as the primary contract) which would otherwise be allowable as a deduction may be reduced or disallowed in certain circumstances. The first of those circumstances is that the taxpayer or another person has made a currency exchange gain under another contract (referred to as the hedging contract) that would not have been entered into, or might reasonably be expected not to have been entered into, if the taxpayer had not entered into the primary contract. The second is that some or all of the currency exchange gain on the hedging contract is not brought to account as assessable income of the taxpayer or of the person making the gain.

Where those circumstances occur and the gain on the hedging contract was made by the taxpayer or an associate, the deduction allowable to the taxpayer for the currency exchange loss on the primary contract is to be reduced by the amount of the gain on the hedging contract not be brought to account as assessable income.

Where the hedging contract was made by a person other than the taxpayer or an associate of the taxpayer, the deduction allowable to the taxpayer for the currency exchange loss on the primary contract is to be reduced by the lesser of -

•

the amount or value of any compensation or other benefit received from the person by the taxpayer or an associate of the taxpayer for the loss incurred by the taxpayer on the primary contract; or

•

the amount of the gain on the hedging contract not brought to account as assessable income by the other person.

Where a deduction is allowed for a currency exchange loss on the primary contract and subsequently a gain is made on the hedging contract, the section will permit the taxpayer's assessment to be amended to make the necessary adjustment. The amendment being made to section 170 of the Principal Act by clause 13 is also relevant.

Sub-section (4), which applies in cases where sub-section (3) does not apply, denies a deduction to a taxpayer for a currency exchange loss in other situations to the extent that the taxpayer is compensated for that loss - for example, by order of a court - and the amount of that compensation is not included in the taxpayer's assessable income.

Where a deduction is allowed for a currency exchange loss and the taxpayer is subsequently compensated for that loss, the section will permit the taxpayer's assessment to be amended to make the necessary adjustment (see also clause 13).

Sub-section (5) is a drafting measure. It treats a person who has acquired rights or obligations under a contract - for example by assignment of the contract - as having entered into that contract for the purposes for which he or she acquired the rights or obligations. Thus, where a person takes over rights under a contract for the purpose of hedging another contract, the first mentioned contract will be a "hedging contract" for the purposes of Division 3B.

Section 82ZA: Application of Subdivision G of Division 3 in relation to gains and losses

Under Subdivision G of Division 3 of Part III of the Principal Act (in the notes on this section referred to as Subdivision G) a limitation is placed on the income tax deduction allowable for interest associated with the "negative gearing" of rental property investments made after 17 July 1985. Negative gearing occurs where, in a particular year, interest on borrowings used to finance rental property investments exceeds net rental income (i.e., after accounting for other relevant deductions) from such investments.

Section 82ZA has the effect that a currency exchange loss on borrowings that are used to finance a rental property investment will be treated as rental property loan interest for the purposes of the provisions contained in Subdivision G. In the reverse situation where an exchange gain is made on such borrowings, that gain is, by section 82ZA, to be treated as rental property income for the purposes of that Subdivision.

By Sub-section 82ZA(1) a currency exchange loss incurred by a taxpayer will be treated for the purposes of Subdivision G as interest incurred by the taxpayer over the period during which the loss accrued.

The effect of sub-section (1) when read with the provisions of Subdivision G and of this Division will be that where monies borrowed by a taxpayer are used by the taxpayer for rental property investment purposes for, say, one-quarter of the period that the monies are on loan to the taxpayer then one-quarter of any currency exchange loss on those borrowings will be taken as rental property loan interest that was incurred in the year of income in which the currency exchange loss was realised.

Sub-section 82ZA(2) acknowledges that section 82ZA causes Subdivision G to be applied in respect of deductions that, but for Subdivision G, would be allowable under section 82Z, whereas Subdivision G now applies only where the deduction in question would otherwise have been allowable under section 51 of the Principal Act. Accordingly, where Subdivision G is being invoked by section 82ZA, the various references in the Subdivision to section 51 are to be read as including references to section 82Z.

Sub-section 82ZA(3) applies to a currency exchange gain made by a taxpayer and corresponds to sub-section 82ZA(1) as it applies to a currency exchange loss. Sub-section 82ZA(3) will treat a currency exchange gain (or part of a gain) as rental property income of the taxpayer for the purposes of Subdivision G in circumstances where, if the taxpayer had made a currency exchange loss instead of a gain under the particular contract, that loss (or part of that loss) would have been treated as rental property loan interest by virtue of section 82ZA for the purposes of Subdivision G.

Sub-section 82ZA(4) is a drafting measure which ensures that the limitation on deductibility of rental property loan interest in Subdivision G will apply to relevant currency exchange losses that are taken to be incurred by Division 3B.

Section 82ZB: Certain deductions not allowable

The provisions of Subdivision A of Division 3 of Part III of the Principal Act operate to allow as deductions from the assessable income of a taxpayer certain items of expenditure incurred in producing that assessable income. For example, losses and outgoings incurred in gaining or producing assessable income are deductible if they are not of a capital, private or domestic nature.

As explained, the Division will treat certain currency exchange gains made by a taxpayer as assessable income of the taxpayer and in the absence of any provisions to the contrary, this could result in the taxpayer being entitled to a deduction to which he or she would not otherwise be entitled and to which it is not intended he or she be entitled.

Section 82ZB will operate to deny a deduction that would otherwise be allowed under Subdivision A of Division 3 where the deduction would be allowable only because a currency exchange gain has been included in a taxpayer's assessable income.

Clauses 10 and 11: Modified application of Act in relation to certain unit trusts

The measures proposed by clauses 7 and 8 of the Bill in relation to the income tax treatment of dividends paid on short-term finance arrangements (see earlier notes on those clauses), will also apply to trustees of corporate unit trusts and public trading trusts that, in accordance with Divisions 6B and 6C respectively of Part III of the Principal Act, are treated as companies for income tax purposes.

Clause 10 will amend section 102L of the Principal Act which modifies the application of several provisions of that Act to treat a corporate unit trust as a company and its distributions as dividends. By paragraph (a) of the clause, sub-section 102L(2) will be amended to extend the mutatis mutandis application of sections 46, 46A and 46B of the Principal Act in relation to trustees of corporate unit trusts to include the proposed new section 46C. By this amendment, debt dividends, as defined in the new section 46C, paid to trustees of corporate unit trusts will not qualify for a rebate of tax, and unit trust dividends paid under short-term finance arrangements entered into by such trustees will also be ineligible for a rebate of tax in the hands of unit holders.

Under paragraph (b) of clause 10, a new sub-section - sub-section (3B) - will be inserted in section 102L of the Principal Act. Sub-section 102L(3B) is to the effect that the new section 67AA proposed to be inserted in the Principal Act by clause 8 of the Bill applies mutatis mutandis in relation to the trustee of a corporate unit trust. This will ensure that trustees of corporate unit trusts are entitled to deductions for debt dividends in the same manner and to the same extent as such deductions are to be available to companies pursuant to the new section 67AA.

Section 102T of the Principal Act relates to trustees of public trading trusts that are taxed as companies under the income tax law and mirrors the provisions of section 102L of that Act discussed above. Clause 11 will amend section 102T in a manner corresponding to the amendments to section 102L proposed by clause 10 and also explained in preceding paragraphs.

Clause 12: Exemption of certain gains and losses

Clause 12 proposes an amendment to section 160ZB of the Principal Act so that the provisions of that Act relating to capital gains and capital losses will not apply to capital gains attributable to currency exchange rate fluctuations made under certain hedging contracts. The hedging contracts, the gains under which will be so excluded, are those that were entered into for the sole purpose of eliminating or reducing the risk of losses that might result from currency rate fluctuations in relation to another contract, where any actual gains or losses from such fluctuations on that other contract would not fall within the provisions relating to capital gains and losses.

It will also have the effect that those capital gains and capital losses provisions will not apply to capital losses attributable to currency rate fluctuations incurred under such hedging contracts entered into after the day of introduction of this Bill.

New sub-section 160ZB(4) will have the effect that a capital gain that has accrued to a taxpayer under a hedging contract, to the extent that the gain is attributable to currency exchange rate fluctuations, will not be taken into account for the purposes of the capital gains and capital losses provisions of the Principal Act where the hedging contract relates to either -

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a right acquired before 20 September 1985 to receive money under another contract (paragraph (a)); or

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a liability to make a payment under another contract (paragraph (b)).

In a case to which paragraph (a) applies, any loss incurred by the taxpayer on the right to receive the money that was attributable to currency exchange rate fluctuations would not fall within the capital gains and capital losses provisions because the right was acquired before the commencing date of those provisions - i.e., 20 September 1985 - and the effect of the amendment is that a capital gain in respect of a hedging contract entered into by the taxpayer solely in relation to that right to the extent the gain is attributable to currency exchange rate fluctuations will also not be subject to those provisions.

As regards cases falling within paragraph (b), any loss incurred by the taxpayer on the liability that was attributable to currency exchange rate fluctuations would not fall within the capital gains and capital losses provisions because those provisions only relate to the disposal of assets, and the effect of the amendment is that the capital gains and capital losses provisions will also not apply to a capital gain in respect of a hedging contract which was taken out solely in relation to a liability to the extent to which the gain was attributable to currency exchange rate fluctuations.

New sub-section 160ZB(5) of the Principal Act will, with one exception, have a corresponding effect in relation to a loss on a hedging contract that is attributable to currency rate fluctuations. The exception is that the sub-section will only apply to contracts entered into after the day of introduction of this Bill. This will ensure that taxpayers are not retrospectively denied deductions for losses under contracts to which they would have been entitled at the time they were entered into.

Clause 13: Amendment of assessments

This clause will amend sub-section 170(10) of the Principal Act, which allows the Commissioner of Taxation to re-open assessments at any time, without the limitations usually applying to the making of amended assessments, where this is necessary to give effect to specified provisions of the Principal Act. Clause 13 of the Bill will insert into sub-section 170(10) references to two sub-sections of new section 82Z being introduced by clause 9. This will ensure that the Commissioner will have the necessary authority to give effect to the provisions of sub-sections 82Z(3) or 82Z(4). Discussion of those provisions is contained in the notes on those sub-sections.

Clauses 14 to 30 and 32: Instalments of provisional tax

Introductory note

Division 3 of Part VI of the Principal Act provides for the payment of provisional tax by taxpayers, other than companies, in respect of income, other than salary or wages and capital gains, in the year in which such income is derived. Provisional tax paid is credited against income tax subsequently assessed in respect of the income.

Clauses 14 to 30 of the Bill propose amendments of Division 3, which will require certain taxpayers to pay their provisional tax by instalments. Where instalments are payable under new section 221YBA, the taxpayer will not be liable to pay "lump sum" provisional tax under existing section 221YB. Conversely, where instalments are not payable under section 221YBA, provisional tax will continue to be calculated under section 221YC and payable in a lump sum in accordance with section 221YD.

Instalments of provisional tax are to be payable under section 221YBA only where effective instalment notices are served under new section 221YDAA. In terms of that section, notices will not be effective if -

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the taxpayer's provisional tax liability in respect of the previous year's income, at the date on which the first instalment notice would have issued, does not exceed $2000; or

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the taxpayer is notified that provisional tax is payable in a lump sum in accordance with existing section 221YD before the first instalment notice can issue.

These will be the only two circumstances in which provisional taxpayers will not be liable to pay instalments of provisional tax.

Each instalment will be based on the amount that is, in effect, the most recently available estimate of, or if available the actual determination of, the taxpayer's total provisional tax liability for the year (to be defined in section 221YA of the Principal Act as the "applicable provisional tax amount"). This method of calculating instalments (used in proposed new section 221YCA) will ensure that a taxpayer's instalments are spread as evenly as possible over the year and that their sum will ultimately equal the amount of provisional tax that would have been payable in a lump sum if instalments had not been payable.

Where a taxpayer wishes to have instalments of provisional tax based on the taxpayer's estimate of taxable income, the same information as is now required by sub-section 221YDA(1) of the Principal Act will have to be submitted under that sub-section. However, new sub-sections are proposed to provide for the effects of estimates in respect of instalments. It is noteworthy that, as already indicated, the applicable provisional tax amount will change following such an estimate. New sub-sections in section 221YDB will provide rules for the calculation of additional tax for underestimates in respect of instalments.

Clause 14: Interpretation

Sub-section 221YA (1) of the Principal Act defines certain terms used in Division 3 of Part VI of the Principal Act. Paragraphs (a) to (e) of clause 14 propose the insertion in the sub-section of the following definitions of terms used in the proposed amendments of the Division.

"applicable provisional tax amount" , as at the date of issue of an instalment notice, is the amount (which, depending on the instalment, may be either the "best estimate" or the most recent actual determination to that stage of the year of the taxpayer's total provisional tax liability for the year) used in new section 221YCA (see clause 18) as a basis from which to ascertain the amount of each instalment of provisional tax. The definition is in two parts.

Paragraph (a) is relevant only to the calculation of a "final instalment" (a defined term) for a year. By sub-paragraph (a)(i), if at the issue date of the final instalment notice - the "instalment notice date" (also a defined term) - a provisional tax amount (the "varied provisional tax amount" - see the note on that definition) has been determined in accordance with section 221YDA for that year of income, the applicable provisional tax amount is that amount. By sub-paragraph (a)(ii), if sub-paragraph (i) does not apply, the final instalment of provisional tax will be calculated by reference to the amount of provisional tax ascertained in accordance with section 221YC for that year of income (i.e., the "basic provisional tax amount" - see the note on that definition).

Where the instalment is not a final instalment, paragraph (b) will apply. Sub-paragraph (b)(i) is in the same terms as sub-paragraph (a)(i). If sub-paragraph (b)(i) does not apply, sub-paragraph (b)(ii) provides that the applicable provisional tax amount will be the lesser of any current year basic provisional tax amount then existing and the "previous year's provisional tax amount" (a defined term explained later in these notes). In cases where the current year's basic provisional tax amount is not available at the instalment notice date - and sub-paragraph(b)(i) does not apply - sub-paragraph (b)(iii) specifies that the applicable provisional tax amount is the previous year's provisional tax amount as at that date.

"basic provisional tax amount" is a term used in sub-paragraphs (a)(ii) and (b)(ii) of the definition of "applicable provisional tax amount" and in paragraph (b) of the definition of "previous year's provisional tax amount" (see the notes on those definitions). It means the amount of provisional tax ascertained as at an instalment notice date in a year of income in accordance with section 221YC, or where relevant that section as modified by section 221YDC or 221YG, and notified by the Commissioner of Taxation to the taxpayer on or before that date. Paragraph (a) of the definition applies where the preceding year's provisional tax was payable in a lump sum - in which case the term is used in the definition of "previous year's provisional tax amount" so that that basic provisional tax amount is used in the calculation of the current year's instalments of provisional tax. In these cases, the alternative notification methods are set out in existing sub-sections 221YD(1) and 221YG(1). Paragraph (b) applies where provisional tax for a particular year (either the preceding year or the current year) is payable by instalments. In the case of the preceding year, the basic provisional tax amount again feeds into the calculation of the "previous year's provisional tax amount". In the case of the current year, the basic provisional tax amount is adopted, under sub-paragraph (a)(ii) or (b)(ii) of the definition of "applicable provisional tax amount", in calculating the current year's instalments - in which case the methods of notifying a taxpayer of the basic provisional tax amount are set out in proposed sub-section 221YD(1A). The various forms of notification of the basic provisional tax amount are recited in paragraphs (c) and (d) of the definition.

"final instalment" is a term used in proposed sub-sections 221YCA(3) and (4) and in the definition of "applicable provisional tax amount". Paragraph (a) refers to the third instalment payable in the 1987-88 year, paragraph (b) to the fourth instalment in any other year and paragraph (c) to the second instalment payable by a taxpayer to whom the "seasonal income" two-instalment rule applies in any year.

"instalment estimate" means a statement to the Commissioner of Taxation by which a taxpayer may cause instalments of provisional tax to be calculated by reference to the taxpayer's provisional tax liability for the year ascertained under section 221YDA. A statement may be furnished in response to each "instalment notice" (see the note on that definition below) in accordance with sub-section 221YDA(1) of the Principal Act as proposed to be amended by paragraph (a) of clause 21. Each such statement must contain the taxpayer's estimates of the same matters (such as taxable income and rebates for the particular year of income) as are required to be estimated under the existing sub-section 221YDA(1).

"instalment notice" means a notice served under sub-section (1) of new section 221YDAA (see clause 20) advising a taxpayer of the amount payable as an instalment of provisional tax and the date on which the instalment is due and payable.

"instalment notice date" , which has a self-explanatory meaning, is a term used in the definition of "applicable provisional tax amount" and in other provisions forming part of the provisional tax instalment system.

"instalment of provisional tax" , also a self-explanatory term, is defined by reference to the liability established under new section 221YBA to pay (depending on the circumstances) 2, 3 or 4 provisional tax instalments.

"penalty period" is a term used in new sub-section 221YDB(1AA) (see clause 22) to describe, broadly, the period over which additional tax may accrue at a rate of 20% per annum where a taxpayer has made an instalment estimate containing an estimate of taxable income that proves to be less than 90% of the taxpayer's actual taxable income. There is a separate penalty period for each instalment that is calculated by reference to the underestimate. By paragraph (a) of the definition, the penalty period for an instalment other than the final instalment for a year is the time from the due date for payment of the relevant instalment to the due date for payment of the next instalment. In the case of a final instalment, paragraph (b) provides that the penalty period is the time from the due date for payment of that final instalment to the due date for payment of the tax payable on assessment in respect of the taxable income of the year of income. The penalty period is not affected by any extensions of time for payment allowed by the Commissioner of Taxation (see the note on proposed sub-section 221YDB(1AB) to be inserted by clause 22). See also the note on proposed sub-section 221YDB(1AC).

"previous year's provisional tax amount" is an amount that may, in certain circumstances, be used as the applicable provisional tax amount (see the note above on that definition) in calculating the amount of an instalment of provisional tax other than the final instalment for a year. It is defined as the amount of provisional tax payable by a taxpayer, as at a particular date, in respect of the previous year's income. This amount may be either the "varied provisional tax amount" (a defined term - see the note below) for that preceding year (paragraph (a)) or, where there is no varied provisional tax amount, the "basic provisional tax amount" (a defined term) for that preceding year (paragraph (b)).

"relevant percentage" is a component of the calculation of both the amount of an instalment of provisional tax (under new sub-section 221YCA(1)) and the amount of additional (penalty) tax where a taxpayer's "instalment estimate" (a defined term) in respect of an instalment is deficient (under new sub-section 221YDB (1AA)). The relevant percentage increases for successive instalment calculations in a particular year so that the sum of the amounts of instalments to that stage of the year equals the relevant percentage of the applicable provisional tax amount at that stage of the year. For example, the relevant percentage for the calculation of the third of four instalments will be 75%. Once that cumulative instalment total is calculated, the relevant instalment is that total less the sum of the previous instalments (if any) payable for that year. The only difference in the use of the expression in the penalty calculation - where the term is component B in the formula in sub-section 221YDB(1AA) - is that its purpose there is to ascertain, in effect, the hypothetical instalment that would have been calculated if no instalment estimate had been made.

Paragraph (a) of the definition sets the percentages for the 1987-88 income year - as 50% for the first instalment (sub-paragraph (i)) (which reflects the fact that the first instalment in that year is not payable before 1 December 1987 and is effectively equal to the first two quarterly instalments of an ordinary year), 75% for the second instalment (sub-paragraph (ii)) and 100% for the third instalment (sub-paragraph (iii)). For the 1988-89 and subsequent income years, paragraph (b) provides that the percentages will be 25% for the first instalment (sub-paragraph (i)), 50% for the second instalment (sub-paragraph (ii)), 75% for the third instalment (sub-paragraph (iii)) and 100% for the fourth instalment (sub-paragraph (iv)). For taxpayers entitled to the so-called "seasonal income" concession (see the notes on proposed paragraph 221YBA(2)(c) and sub-sections 221YBA(5) to (10)), paragraph (c) specifies that the percentages will be 50% for the first instalment (sub-paragraph (i)) and 100% for the second instalment (sub-paragraph (ii)).

"varied provisional tax amount" is used in sub-paragraphs (a)(i) and (b)(i) of the definition of "applicable provisional tax amount" and in proposed sub-section 221YDA(1AAA) (see the notes on that definition and sub-section) and means the amount of provisional tax ascertained (or last ascertained if there is more than one "instalment estimate" - a defined term) under section 221YDA, or that section as modified by section 221YDC or 221YG, as at the date of issue of an instalment notice. Paragraph (a) of the definition applies where the preceding year's provisional tax was payable in a lump sum - in which case the term is used in the definition of "previous year's provisional tax amount" so that that varied provisional tax amount for the previous year is used by way of sub-paragraph (b)(ii) or (iii) of the definition of "applicable provisional tax amount" in the calculation of the current year's instalments of provisional tax. Paragraph (b) applies where provisional tax for a particular year (either the preceding year or the current year) is payable by instalments. In the case of the preceding year, the varied provisional tax amount again feeds into the calculation of the "previous year's provisional tax amount". In the case of the current year, the varied provisional tax amount is used in sub-paragraph (a)(i) or (b)(i) of the definition of "applicable provisional tax amount" in calculating the current year's instalments.

Paragraph (f) of clause 14 will amend sub-section 221YA(1A) to ensure that overpaid instalments of provisional tax, in being credited in payment of income tax payable by the taxpayer, can be credited in payment of any further tax payable under section 94 of the Principal Act on the taxpayer's share of partnership income which is not under the real and effective control of the relevant partner.

Instalments may be overpaid as a result of -

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cancellation of an instalment following a switch from the three-instalment or four-instalment system to the two-instalment "seasonal income" system (sub-section 221YBA(5)); or

•

reduction of an instalment because -

• .

the sum of the instalments payable before the date of the next instalment exceeds the total provisional tax payable for the year (sub-section 221YCA(2)); or

• .

the Commissioner of Taxation, after the final instalment issues, alters the total provisional tax payable for the year under existing section 221YG (reduction under proposed sub-section 221YCA(3)).

Paragraph (g) proposes the insertion of two new sub-sections in section 221YA. New sub-section 221YA(2A) will ensure as a general rule that, except in the provisions of Division 3 itself, any reference in the Principal Act or in any other law of the Commonwealth to provisional tax will be treated as also being a reference to instalments of provisional tax. Where that rule is to apply to any provision of Division 3 - for example, those that credit provisional tax in payment of tax assessed (section 221YE), limit the circumstances in which provisional tax may be imposed (section 221YF) or set down evidentiary rules (section 221YH) - the relevant provision is being specifically amended to that effect (see the notes on the relevant clauses). As an example of the general application of proposed sub-section (2A), the Act which entitles a taxpayer to interest on certain overpayments of provisional tax (the Taxation (Interest on Overpayments) Act 1983) will apply equally to provisional tax paid by instalments. Where a provision of Division 3 is not specifically amended, it will continue to apply only to lump sum provisional tax to reflect the fact that the calculation, notification, payment, etc. of lump sum provisional tax will remain in a legislative stream separate from, but parallel to, the corresponding processes for instalments of provisional tax - although ultimate total annual liabilities under both streams will be the same.

New sub-section (2B) is a drafting measure which will remove any doubt that, where the amount of an instalment is nil, the instalment will still be regarded as due and payable on a particular date, the date being that specified in the instalment notice. As a result, it will be possible - for example, where a taxpayer underestimates an instalment - for additional tax to be imposed at a rate (20%) per annum from that date (see the note on the proposed insertion of sub-section 221YDB(1AA) by clause 22). The provision will not apply where, for some reason, the Commissioner of Taxation does not serve the relevant notice on the taxpayer (for example, later instalment notices where the taxpayer's self-assessment on the first instalment reduces it to nil). Proposed sub-section 221YDAA(7) (to be inserted by clause 20) will then deem certain due dates to apply (see the note on that sub-section).

Paragraph (h) of clause 14 will insert new sub-section (4A) in section 221YA to secure the application to instalments of provisional tax of -

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provisions of the Principal Act governing extensions of time for payment of, penalty for late payment of, and recovery of, provisional tax;

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provisions in Division 3 confirming that the ascertainment of an instalment of provisional tax is not an assessment within the meaning of the Principal Act (especially Part V, Division 2 - Reviews and Appeals) and that instalments are to be calculated to the nearest dollar.

Clause 15: Liability to provisional tax

This clause amends sub-section 221YB(3) of the Principal Act, which declares that provisional tax in respect of the income of a year of income is not payable unless the Act imposing income tax upon taxable income of that year provides that provisional tax is to be payable. Because the first instalment of provisional tax for a year of income will generally be due and payable prior to the date on which the Act imposing tax for that year receives the Royal Assent, the amendment will extend the operation of sub-section 221YB(3) so that provisional tax for a year will be payable where the Act imposing income tax for that year or the previous year provides that provisional tax is payable. A complementary amendment is being proposed to the Income Tax Act 1986 by the accompanying Income Tax Amendment Bill 1986.

Clause 16: Liability to pay instalments of provisional tax

This clause will insert new section 221YBA in the Principal Act. A major role of section 221YBA will be to make taxpayers who would be liable to pay lump sum provisional tax under the existing law liable to pay instalments of provisional tax. By proposed new sub-section 221YDAA(4), however, which is to be inserted in the Principal Act by clause 20, only taxpayers who have not already been required to pay the year's provisional tax in a lump sum or whose provisional tax liability for the preceding year exceeds $2000 will be liable to pay instalments of provisional tax in the current year.

Sub-section 221YBA(1) is effectively an application provision stating that instalments of provisional tax will be payable in the 1987-88 year of income and all subsequent years of income.

New sub-section 221YBA(2) is a central provision formulating taxpayers' liability to pay instalments of provisional tax. By paragraph (a), three instalments of provisional tax will be payable in respect of income of the 1987-88 year of income. Paragraph (b) provides for the payment of four instalments for the 1988-89 and each subsequent year of income. By paragraph (c), provisional taxpayers who satisfy the Commissioner of Taxation that more than 75% of their assessable income of a year of income will be derived after 1 December in that year will be required to pay two instalments for that year. Rules governing the operation of paragraph (c) are set out in proposed sub-sections 221YBA(5) to (10) and explained in the notes on those provisions. The earliest dates on which instalments may be made due and payable are specified in proposed sub-section 221YDAA(3) (clause 20).

Sub-section 221YBA(3) provides that an instalment of provisional tax will not be payable unless the Commissioner has served an instalment notice on the taxpayer in accordance with new section 221YDAA, being inserted by clause 20. Section 221YDAA sets out the requirements of the law in respect of the contents and effectiveness of instalment notices and their due dates. Of particular relevance to sub-section 221YBA(3) is sub-section 221YDAA(7), which is a technical measure effectively deeming certain nil instalment notices that are not in fact served to have been served, with a deemed date of issue and a deemed due date for payment (see the note on that sub-section).

Sub-section 221YBA(4) makes it clear that a taxpayer who is liable to pay instalments of provisional tax will not be liable to pay provisional tax by the existing lump sum method. Correspondingly, it follows that where instalments are not payable - because of the joint operation of sub-section (3) and proposed sub-section 221YDAA(4) or (5) - provisional tax will continue to be payable in accordance with existing section 221YB in a lump sum.

New sub-section 221YBA(5) deals with the situation where an instalment notice has already been served (paragraph (a)) on the standard four-instalment (three-instalment in 1987-88) basis (paragraph (b)) but, because the taxpayer subsequently satisfies the Commissioner that the so-called "seasonal income" test (see the note on paragraph 221YBA(2)(c)) is met (paragraph (c)) - so that only two instalments are payable (the first not due before 1 February) - the instalment is superseded. In such cases, the superseded instalment is deemed never to have been payable (paragraph (d)) and the taxpayer will not be liable to pay instalments on that other basis (paragraph (e)) but will be liable to pay only two instalments with due dates not earlier than 1 February and 1 June respectively (paragraph (f)).

Paragraph (g) will counter exploitation of this situation by taxpayers who might have chosen to delay applying to have the two-instalment system apply for a particular year beyond, say, the end of December and, in the meantime, to not pay the superseded instalment or instalments. The paragraph will expose such a non-payment to additional tax for late payment under section 207 of the Principal Act for the period from 1 February (or, if the superseded instalment has a later due date, that later date) to the due date for payment of the first of the two instalments payable as a "seasonal income" taxpayer.

By paragraph (h), if the taxpayer has paid all or part of a superseded instalment, the amount so paid is to be credited first in payment of any unpaid instalments of provisional tax payable for the year of income (for example, the first of the two "seasonal income" instalments) (sub-paragraph (h)(i)) and then in payment of any income tax payable by the taxpayer (sub-paragraph (h)(ii)). Any amount not applied in accordance with those sub-paragraphs is to be refunded to the taxpayer.

To ensure that the so-called "seasonal income" test of paragraph 221YBA(2)(c) (i.e., satisfying the Commissioner of Taxation that more than 75% of a taxpayer's assessable income of a year of income will be derived after 1 December in that year) is applied only in respect of assessable income that is subject to provisional tax and is not subject to tax at source, and to ensure that the test is properly applied to all such income (by authorising the Commissioner to determine the time at which certain income, such as a partner's share of partnership net income, is derived), a number of rules are set out in proposed sub-sections 221YBA(6) to (10). If the test is satisfied, only two instalments of provisional tax are payable for the year - not earlier than 1 February and 1 June respectively.

Sub-section 221YBA(6) lists three types of income that will not be included in assessable income for the purposes of the "seasonal income" test and provides for the Commissioner to determine the timing of the derivation of certain other income. In order that, effectively, the test will apply only in respect of assessable income that is subject to provisional tax, paragraph (a) provides that, for the purposes of the test, assessable income is not to include salary or wages (sub-paragraph (a)(i)), prescribed payments that are subject to deduction at source under Division 3A (sub-paragraph (a)(ii)) or any net capital gain (sub-paragraph (a)(iii)).

Paragraph (b) enables the Commissioner to decide the time at which certain income is to be deemed to be derived for the purposes of the test. Assessable income derived by a taxpayer -

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as a share of the net income of a partnership or trust estate (sub-paragraph (b)(i));

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as income that was not derived at any identifiable time during a year of income - such as amounts included in assessable income under sub-section 28(2) (trading stock) or 59(2) (disposal of depreciated property) of the Principal Act (sub-paragraph (b)(ii)); or

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as income from property (other than income to which sub-paragraph (i) applies) derived by a taxpayer from an "associate" (defined in sub-section (9)) (sub-paragraph (b)(iii)),

is deemed to have been derived at such time, or at such times and in such proportions, as the Commissioner considers reasonable. For this purpose, the Commissioner is required, by sub-paragraph (b)(iv), in the case of a share of the net income of a partnership or trust estate, to have regard to the time, or times, at which the partnership or trust estate derived its income. In other words, the Commissioner will be able to treat a partner, for example, as having derived the share of net income of the partnership rateably throughout the year, notwithstanding that the law might otherwise have regarded it as being derived when the partnership accounts were taken. In the case of income from property derived from an associate (to which sub-paragraph (b)(iii) applies), sub-paragraph (b)(v) provides that the Commissioner is to have regard to the time, or times, when income was derived by the associate. For example, if a taxpayer arranged to derive certain rental income from an associate after 1 December in circumstances where the associate derived rents under a sub-lease of the same property evenly over the year, the Commissioner would be able to treat the income as having been derived evenly over the year by the taxpayer. Sub-paragraph (b)(vi) requires the Commissioner to take any relevant matters into consideration in any of the cases specified in sub-paragraphs (i), (ii) and (iii). For example, income with an unidentifiable time of derivation, such as the amount of an excess of closing stock over opening stock (sub-section 28(2)) would generally be treated as having been derived evenly over the year. In the case of a balancing charge included in assessable income under sub-section 59(2), the Commissioner would be able to take into account also the time of sale or disposal of the depreciated property.

Sub-section 221YBA(7) has two functions. First, it will counter arrangements (defined in sub-section (8)) designed to manipulate the time of derivation of partnership or trust estate income, where that time would be relevant to the application of sub-paragraph (b)(iv) of sub-section (6). Paragraph (a) enables the Commissioner to treat such income as having been derived by the taxpayer at such time, or at such times and in such proportions, as the Commissioner considers would have been the case, or might reasonably be expected to have been the case, but for the arrangement. By sub-paragraph (a)(i), the arrangement can extend beyond the direct derivation of income by the partnership or trust estate and it may have been entered into before these amendments become law. Sub-paragraph (a)(ii) states that the paragraph applies only where the Commissioner forms the opinion that the dominant purpose (see paragraph (8)(c)) of the arrangement is to have the "seasonal income" 2-instalment system apply.

The second function of sub-section (7) is, by paragraph (b), again where relevant to the application of sub-paragraph (b)(iv) of sub-section (6), to deem income from property derived by a partnership or trust estate from an associate of the partnership or of the trustee to be derived at such time or times, and in such proportions, as the Commissioner considers reasonable, having regard to the time or times when income was derived by the associate (sub-paragraph (b)(i)) and any other relevant matters (sub-paragraph (b)(ii)).

Sub-section 221YBA(8) relates to arrangements referred to in sub-section (7). By paragraph (a) the term "arrangement" is given an extended meaning, common to other provisions of the Principal Act, so as to include any agreement, arrangement, understanding, promise or undertaking (sub-paragraph (a)(i)), or any scheme, plan, proposal, action or course of action or conduct (sub-paragraph (a)(ii)). Paragraph (b) makes it clear that a reference to the carrying out of an arrangement by a person includes a reference to the carrying out of an arrangement by that person together with other persons. Paragraph (c) ensures that a reference to an arrangement being entered into or carried out by a person for a particular purpose includes an arrangement entered into or carried out for more than one purpose where that particular purpose is the dominant purpose.

Sub-section 221YBA(9) defines the term "associate" to have the same meaning as that term has in section 26AAB of the Principal Act by reason of the definition contained in sub-section 26AAB(14). That definition specifies who is an associate in relation to a natural person, a company, a trustee of a trust estate or a partnership and, in broad terms, refers to those persons who, by reason of family or business connections, might appropriately be regarded as being associated with a particular person.

For the purpose of determining whether a person is an associate of another person, sub-section 221YBA(10) gives the term "relative", which is used in the definition of "associate" in sub-section 26AAB(14) (see the preceding note), a wider meaning than that given the term by its definition in sub-section 6(1). In that sub-section, a relative of a person means the spouse of that person, the parent, grandparent, brother, sister, uncle, aunt, nephew niece, lineal descendant or adopted child of that person or of his or her spouse and the spouse of any of those other persons. Sub-section 221YBA(10) specifies that those references to a spouse of a person include references to another person who, although not legally married to the person, lives with the person on a bona fide domestic basis as the husband or wife of the person.

Clause 17: Amount of provisional tax

This clause makes a technical amendment of section 221YC of the Principal Act by inserting sub-section (6) to ensure that, where a taxpayer is liable to pay instalments of provisional tax, the provisions that facilitate the calculation of the amount of an instalment can conveniently refer to the amount of provisional tax payable that is referred to in that section, notwithstanding that, in terms of proposed sub-section 221YA(2A), references in section 221YC to provisional tax would not otherwise cover instalments of provisional tax. Similar amendments of other sections are proposed by other clauses.

Clause 18: Amount of instalment of provisional tax

This clause will insert section 221YCA in the Principal Act. Broadly, the function of the section is to provide rules for ascertaining the amount or altered amount of an instalment of provisional tax.

Sub-section 221YCA(1) prescribes a single formula for calculating the amount of an instalment. As explained in the notes on the definitions of "relevant percentage" and "applicable provisional tax amount" in sub-section 221YA(1) and in the introductory note to clauses 14-30, the legislative formula for calculating the amounts of successive instalments for a year is to ascertain the cumulative instalment total sought to be charged to date (including the instalment being calculated) and to deduct the sum of any instalments charged before the one being calculated. This "target" cumulative instalment total, from instalment to instalment, is an increasing "relevant percentage" of an "applicable provisional tax amount" which, as explained in the note on the latter definition, can itself change from instalment to instalment.

Paragraph 221YCA(1)(a) applies this formula in respect of the three instalments payable for the 1987-88 income year. By sub-paragraph (i), the first instalment for that year is to be 50% of the applicable provisional tax amount. Sub-paragraph (ii) sets the amount of the second instalment at 75% of the applicable provisional tax amount less the amount of the first instalment and sub-paragraph (iii) sets the amount of the third instalment as the applicable provisional tax amount less the sum of the first two instalments.

The amounts of instalments for the 1988-89 and subsequent income years are to be calculated under paragraph 221YCA(1)(b). By sub-paragraph(b)(i), the first instalment is to be 25% of the applicable provisional tax amount. Sub-paragraph (ii) makes the second instalment 50% of the applicable provisional tax amount less the amount of the first instalment and sub-paragraph (iii) makes the third instalment 75% of the applicable provisional tax amount less the sum of the amounts of the first and second instalments. The fourth instalment, calculated in accordance with sub-paragraph (iv), is to be the applicable provisional tax amount less the sum of the amounts of the first three instalments.

Paragraph 221YCA(1)(c) specifies the amounts that are to be due and payable by "seasonal income" taxpayers (see the note on paragraph 221YBA(2)(c)). By sub-paragraph (i), the first instalment is to be 50% of the applicable provisional tax amount. Sub-paragraph (ii) makes the second and final instalment for such taxpayers the applicable provisional tax amount less the amount of the first instalment.

Sub-section 221YCA(2) will apply where a taxpayer has become liable to pay instalments of provisional tax and a determination of the total amount of provisional tax payable by the taxpayer for the year (under section 221YC, 221YDA, 221YDC or 221YG of the Principal Act as appropriate) has subsequently - but prior to the final instalment issuing - been made. The sub-section will ensure, where the sum of those instalments exceeds the total amount payable, that, in the course of calculating the amount of the next instalment as nil, the amounts of the prior instalments are adjusted in a particular order and that any overpayment is applied in a particular way.

Paragraphs 221YCA(2)(a), (b) and (c) set out the conditions to be met before the sub-section applies. The first condition (paragraph(a)) states the truism that a nil instalment will exist in the circumstances described in paragraph (a), in order to establish reference points for paragraphs (b) and (c). Paragraph (b) requires that the sum of the instalments charged before the nil instalment exceed the "applicable provisional tax amount" (see the note on that definition) on a date ascertained in accordance with either sub-paragraph (b)(i) or (ii). The date is, broadly, the time at which the nil instalment is calculated. Sub-paragraph (i) applies where the applicable provisional tax amount is ascertained in circumstances where the taxpayer has not made an instalment estimate under section 221YDA. The date for ascertaining the applicable provisional tax amount is then the date of issue of the nil instalment (see also the note on sub-section 221YDAA(7)). Sub-paragraph (b)(ii) covers the situation where a taxpayer has furnished an instalment estimate in relation to the nil instalment and is consistent with proposed sub-section 221YDA(2AB). If the Commissioner of Taxation substitutes an estimate under sub-section 221YDA(4) for the taxpayer's estimate, the applicable provisional tax amount is to be ascertained as at the day after the date on which the Commissioner serves a notice under sub-section 221YDA(4) (sub-sub-paragraph (b)(ii)(A)). Where the Commissioner accepts the taxpayer's estimate, the applicable provisional tax amount is to be ascertained as at the day after the date on which the taxpayer furnishes the estimate (sub-sub-paragraph (b)(ii)(B)). Paragraph (c) reflects the fact that, as explained in the note introducing this sub-section, excess earlier instalments are only to be reduced and overpayments refunded or applied where the instalments exceed the taxpayer's ultimate total provisional tax liability (estimated or actual). Consequently, the sub-section will not apply where the applicable provisional tax amount at that stage is the previous year's provisional tax amount. It will apply only where the applicable provisional tax amount is either the varied provisional tax amount (sub-paragraph (b)(ii)) or, where the taxpayer has not made an estimate, the basic provisional tax amount (sub-paragraph (b)(i) and paragraph (c)) for that year.

In the event that excess instalments or parts thereof arise in the above circumstances, the amounts payable as instalments will be reduced in the reverse order to the order in which they became payable (paragraph (d)). If, following the reduction, an overpayment is revealed (paragraph (e)), the amount overpaid will be credited under sub-paragraph (e)(i) first against any unpaid provisional tax instalments for the year (sub-sub-paragraph (A)) and then against any income tax payable (sub-sub-paragraph (B)). Any amounts not so credited will be refunded to the taxpayer (sub-paragraph (e)(ii)).

Sub-section 221YCA(3) ensures that where, after the final instalment for a year has been issued, the Commissioner of Taxation alters the taxpayer's total provisional tax liability for the year in accordance with section 221YG - for example, to give effect to an amendment of the preceding year's income tax assessment - the appropriate adjustments can be made to the taxpayer's instalments. (If the section 221YG alteration occurs before the final instalment issues, the change will be taken up in the calculation of the "applicable provisional tax amount" (see the note on that definition) in relation to the next instalment.) Paragraph (a) makes it clear that this sub-section only applies where the section 221YG alteration occurs after notice of a final instalment (a defined term) issues. Paragraph (b) provides, as a drafting mechanism, reference points for the rest of the sub-section. Sub-paragraph (b)(i) refers to the case where the sum of the instalments exceeds the altered total liability and sub-paragraph (ii) to the other case - that is, where the altered total liability exceeds the sum of the instalments. Where the sum of the instalments exceeds the taxpayer's total provisional tax liability for the year as altered under section 221YG, paragraph (c) states that the consequences are to be the same as those described in the notes on paragraphs 221YCA(2)(d) and (e) (sub-paragraphs 221YCA(3)(c)(i) and (ii) respectively). That is consistent with existing paragraph 221YG(2)(b). Where the altered total liability exceeds the sum of the instalments, paragraph (d) increases the final instalment by the excess (sub-paragraph (d)(i)) and makes it clear that the excess is due and payable on the date shown in the notice required under the existing section 221YG but not earlier than 30 days after service of the notice (cf. existing sub-section 221YG(1) and paragraph 221YG(2)(a) of the Principal Act). It is also relevant that, for the purposes of section 221YDB, the increased final instalment is deemed to have been due and payable on the original due date for that instalment (see the note on proposed sub-section 221YDB(1AC) being inserted by clause 22).

Like sub-section 221YCA(3), proposed sub-section 221YCA(4) can apply only after the final instalment of provisional tax for a year has been issued. Its function is to provide a mechanism for passing into the instalment system the full liability for the increase in a taxpayer's total provisional tax liability upon notification under sub-section 221YDA(4), after the final instalment, that the Commissioner has adopted different figures from those shown in an instalment estimate by the taxpayer for an earlier instalment. Without a provision such as this, only the earlier instalment estimate could (under new sub-section 221YDA(2AB) - see notes on clause 21) be adjusted to reflect the relevant proportion of the total increase in provisional tax. Sub-section 221YCA(4) will cause the balance of the increase to become payable in the form of an increase in the final instalment. Any instalment between the one for which the estimate was made and the final instalment will not be altered. Both instalment increases (i.e., under this sub-section and sub-section 221YDA(2AB)) will be due and payable on the same day. If the sub-section 221YDA(4) notification occurs before the final instalment issues, the change will be taken up in the calculation of the "applicable provisional tax amount" (a defined term) in relation to the next instalment.

Paragraph (a) of sub-section 221YCA(4) makes it clear that the sub-section applies only where the Commissioner serves a notice under sub-section 221YDA(4) after the final instalment has been issued and that the instalment estimate in response to which the Commissioner has taken the action was not in respect of the final instalment (if it was, proposed sub-section 221YDA(2AB) would make the necessary adjustment to the final instalment). Paragraph (b) provides, in effect, that the sub-section only applies where the final instalment would have been greater had the applicable provisional tax amount used (under sub-section 221YCA(1)) in its calculation been the provisional tax amount later notified in the sub-section 221YDA(4) notice. Where paragraphs (a) and (b) are satisfied, the final instalment is increased to the hypothetical amount referred to in paragraph (b) (paragraph (c)). In addition, the sub-section 221YDA(4) notice referred to in paragraph (a) is (under paragraph (d)) to show the increase in the final instalment (as well as the total increase in provisional tax for the year, in accordance with the existing law, and the increase in the previous instalment referred to in paragraph (a), in accordance with proposed sub-section 221YDA(4A)) and the increase in the final instalment is to be due and payable not less than 14 days after service of the notice - that is, the same date as that on which the increase in the previous instalment is due for payment in accordance with proposed sub-section 221YDA(6A) (paragraph (e)).

Clause 19: When provisional tax payable

Existing section 221YD of the Principal Act declares that provisional tax may be notified either on the notice of assessment of income tax for the preceding year or in a separate notice served on the taxpayer, and that the provisional tax so notified is due and payable on the date specified in the notice of assessment or separate notice, but in any event not earlier than 31 March in that year (existing sub-sections 221YD (1) and (2)). This clause inserts two new sub-sections in section 221YD.

Paragraph (a) of the clause inserts new sub-section 221YD(1A) to authorise notification to instalment taxpayers of the amount that would be the lump sum provisional tax payable in accordance with section 221YC, or where relevant that section as modified by section 221YDC or 221YG, if instalments were not payable. Notification will be required notwithstanding any prior application of section 221YDA in respect of an instalment notice, to enable section 221YDB to apply where relevant (see the note on clause 22). The methods mirror those in the existing sub-section 221YD(1) described above - viz., on the notice of assessment for the preceding year (paragraph (a)) or on a separate notice (paragraph (b)). As the amount is not payable as such, there is no need for rules concerning due dates that would match those in existing section 221YD. Rules governing the notification and due dates of instalments of provisional tax are provided in proposed section 221YDAA (see the note on that section). See also the following note.

Paragraph (b) of the clause inserts new sub-section 221YD(2A) to formally declare that an instalment of provisional tax is due and payable on the date specified in the instalment notice. The new provision reflects the fact that sub-sections (1) and (2) do not apply to instalments of provisional tax (cf. proposed sub-section 221YA(2A)).

Clause 20: Notification of instalments of provisional tax

This clause will insert section 221YDAA in the Principal Act. The section sets out the requirements of the law concerning the notification of instalments of provisional tax and the contents and effectiveness of instalment notices and provides a time table of due dates for payment of instalments.

Sub-section 221YDAA(1) authorises the Commissioner of Taxation to serve a notice on a taxpayer who is liable under proposed section 221YBA to pay an instalment of provisional tax specifying the amount of the instalment (paragraph (a)) and its due date for payment (paragraph (b)). The sub-section complements sub-section 221YD(1), which does not apply to instalments of provisional tax (cf. proposed sub-section 221YA(2A)).

Proposed sub-section 221YDAA(2) will remove any doubt that, where it is convenient and appropriate to do so, the Commissioner of Taxation will be able to consolidate a notice of assessment and an instalment notice. This could happen where, for example, a notice of assessment in respect of a year of income was ready for issue at the same time (say, late January or late April) as the third or fourth instalment notice for the following year, particularly in circumstances where that notice of assessment was also notifying the taxpayer in accordance with proposed sub-section 221YD(1A) (see the note on that section) of the amount that would be the taxpayer's lump sum provisional tax liability if the instalment system did not apply and that amount was the "applicable provisional tax amount" (see the note on that definition) in relation to the instalment being notified.

Sub-section 221YDAA(3) provides that the due date to be specified in an instalment notice under sub-section (1) is to be at least 30 days after the date of service of the notice (complementing paragraph 221YD(1)(b) for non-instalment taxpayers) and not earlier than -

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for the 1987-88 year of income - 1 December for the first instalment, 1 March for the second instalment and 1 June for the third instalment (paragraph (a));

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for the 1988-89 and subsequent years of income - 1 September for the first instalment, 1 December for the second instalment, 1 March for the third instalment and 1 June for the fourth instalment (paragraph (b)); and

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for "seasonal income" taxpayers - 1 February for the first instalment and 1 June for the second instalment (paragraph (c)).

New sub-section 221YDAA(4) specifies the two sets of circumstances in which taxpayers will not be liable to pay provisional tax by instalments. It does this by stating that, in those circumstances, an instalment notice in respect of the first instalment will be of no effect - so that, in accordance with new sub-section 221YBA(3) (see clause 16), that first instalment will not be payable. Proposed sub-section 221YDAA(5) (see below) has a similar operation for subsequent instalments. The first situation in which instalments will not be payable is where, prior to what would be the date of issue of the first instalment notice for the year of income, the taxpayer has received notice requiring payment of provisional tax for that year in a lump sum (paragraph (a)). Sub-paragraph (a)(i) refers to the circumstance covered by existing paragraph 221YD(1)(a) - that is, where the lump sum provisional tax has been notified on the preceding year's notice of assessment. Sub-paragraph (a)(ii) covers the case where a separate notice under paragraph 221YD(1)(b) has called for payment of the lump sum provisional tax. Paragraph (4)(b) describes the second situation in which provisional tax will not be payable by instalments - viz, where, at the proposed date of issue of the first instalment notice, the "previous year's provisional tax" (a defined term) is $2000 or less.

By making instalments after the first also of no effect if the first was of no effect, sub-section 221YDAA(5) complements sub-section (4) (see the note above) in its function of freeing taxpayers, in the two situations referred to in sub-section (4), from liability to pay instalments of provisional tax. The sub-section also has the practical function of ensuring that taxpayers cannot be brought onto the instalment system during a year of income except by the issue of a first instalment notice (albeit at any time, as long as the due date complies with the requirements of the relevant sub-paragraph of sub-section (3)). For example, if a particular taxpayer's first instalment notice for 1988-89 is not served as part of a bulk issue of such notices by, say, mid-August 1988 because an assessment in respect of the 1986-87 year of income has not been made - so that 1987-88 provisional tax has not been calculated - it will be possible for that notice to be served when that 1986-87 assessment is later made, provided that, at that time, the assessment for the 1987-88 year of income has not been made and the provisional tax for 1987-88, calculated in the course of making the 1986-87 assessment, is greater than $2000.

Proposed sub-section (6) of section 221YDAA will apply where the Commissioner of Taxation has acted under Subdivision B of Division 3 to neutralise a provisional tax benefit obtained under a tax avoidance arrangement involving compensating variations from year to year in the income shares derived by associated taxpayers from a family partnership or trust. The sub-section will ensure that, where such a taxpayer is liable to pay provisional tax by instalments, any instalments that have been calculated by reference to the taxpayer's "instalment estimate" (a defined term) that prefaced the Commissioner's action will be recalculated to give effect to that action. Paragraph (a) describes one of the two pre-conditions for the operation of the sub-section - viz., that the instalment is calculated by reference to the taxpayer's estimate of taxable income contained in an instalment estimate. The second pre-condition is that the Commissioner has acted under section 221YHAAC or 221YHAAD to cancel the provisional tax benefit otherwise available under an arrangement of the kind described above by increasing the estimated taxable income (paragraph (b)). In these circumstances, the Commissioner is authorised to recalculate the instalment (paragraph (c)) and issue a notice calling for payment of the amount by which the instalment is increased (paragraph (d)). Paragraph (e) has the effect of deeming the instalment, as increased, to have been due and payable on the original due date for payment of the instalment. As a result, additional tax for late payment under section 207, for example, would accrue from that date on the full amount of the instalment as increased under this sub-section.

By proposed sub-section 221YDAA(7), where a notice is not served for a nil instalment (not being a first instalment for a year) (paragraphs (a) and (b)), the notice is deemed to have been served specifying the issue date that would have been specified had the notice been issued (paragraph (c)) and with a deemed due date (paragraph (d)) ascertained as the later of the earliest date on which the instalment could have been made due under sub-section (3) (sub-paragraph (d)(i)) and the due date for payment of the previous instalment (sub-paragraph (d)(ii)) - the latter date could apply where the previous instalment issued very late. This sub-section would apply where, for example, after a taxpayer lodged a first instalment estimate varying total provisional tax for the year to nil, the Commissioner decided for administrative and taxpayer convenience not to issue further instalment notices for the year. Additional tax under section 221YDB would, as a result of this sub-section, be able to be imposed in respect of those subsequent instalments on the shortfall caused by the underestimate in the first instalment estimate.

Clause 21: Provisional tax on estimated income

Under section 221YDA of the Principal Act, a taxpayer may estimate taxable income and its components (i.e., salary or wages, prescribed payments, income from primary production and other income) and other details, such as certain rebates and PAYE deductions, for the current year of income in order that the taxpayer's provisional tax liability may be recalculated on the basis of that estimate. This clause proposes amendments to section 221YDA to provide a basis for provisional tax instalments to be calculated by reference to such estimates. Where provisional tax is payable by instalments, an estimate (defined as an "instalment estimate") will be permitted in respect of each instalment. An instalment estimate will be used both to recalculate the instalment for which the estimate is made and, by way of the definitions of "varied provisional tax amount" and "applicable provisional tax amount" in section 221YA (see the notes on those definitions) and sub-section 221YCA(1), to calculate subsequent instalments of provisional tax.

Existing sub-section 221YDA(1) lists the matters to be estimated and shown in a statement under the section and stipulates the deadline for making the estimate - the due date for payment of the provisional tax notified by the relevant assessment notice or 31 March (or the last day of the ninth month of the accounting period in the case of a substituted accounting period), whichever is the later, or within such further time as the Commissioner of Taxation may allow.

By paragraph (a) of this clause, sub-section 221YDA(1) is to be amended so that it applies both to provisional tax paid in a lump sum and to instalments of provisional tax. Proposed paragraphs (1)(a) and (ba), which repeat the portion of the existing sub-section 221YDA(1) coming before existing paragraph (c), apply to "lump sum" provisional taxpayers. Working in a parallel stream to those new paragraphs, new paragraph 1(b) will allow a taxpayer who receives an instalment notice to make the relevant estimates needed for the purposes of recalculating the total provisional tax liability for the year (see sub-section (8)) and that instalment (see sub-section (2AB)). An instalment estimate may be made for any instalment at any time after receipt of the relevant instalment notice and before the due date for payment of that instalment (paragraph (1)(bb)) or, as with the current system, within such further time as the Commissioner may allow. The remainder of existing sub-section (1) is not changed.

Paragraph (b) of the clause proposes the insertion of a new sub-section - sub-section 221YDA(1AAA) - which has the effect that, for the reason outlined earlier in describing the main features of this Bill and given again below, an instalment estimate in respect of the first instalment for a year (paragraph (a)) will be valid for that instalment only, except in certain specified circumstances. Paragraph (b) provides for the first exception. Where, at the proposed issue date of the second instalment notice, the amount of provisional tax calculated under sub-section 221YDA(2) or (4) following the first instalment estimate is nil, the estimate will remain in force for the rest of the year or until a further estimate is made. In terms of paragraph (c), an estimate in respect of a first instalment will also continue in force for the full income year (unless a further estimate is made) where there are no changes in the law affecting the calculation of provisional tax under sub-section 221YDA(2) between the time of making the first instalment estimate and the issue date of the second instalment notice.

Sub-section 221YDA(1AAA) recognises the fact that first instalments of provisional tax for a year will be due for payment from 1 September and that Budget-initiated legislative changes will often have an impact on the provisional tax calculation for that year. For example, where an instalment estimate is made in respect of a first instalment (typically in August of the particular year), the relevant provisional tax calculated under sub-section 221YDA(2) will generally employ pre-Budget rates of tax and relevant law. If changes in those rates or rules are announced in the Budget and subsequently enacted, the calculation made in respect of the first instalment will no longer be accurate. Accordingly, unless an estimate results in a nil instalment or there are no relevant legislative changes between the first and second instalments, taxpayers who lodge first instalment estimates will need to lodge a further estimate in respect of the second instalment if they wish to have their total provisional tax for the year based upon their estimate of taxable income. It will, of course, be essential for the Commissioner of Taxation to defer the processing of second instalment estimates in these cases each year pending the enactment of any relevant amendments of the law.

By paragraph (c) of this clause, three new sub-sections - sub-sections 221YDA(2AA), (2AB) and (2AC) - will be inserted in the Principal Act.

Sub-section 221YDA(2AA) provides that, where an instalment estimate for a year of income (paragraph (a)) is followed by an instalment estimate in respect of a subsequent instalment for that year (paragraph (b)), total provisional tax for the year (the "varied provisional tax amount" - see the note on this term, which is defined in sub-section 221YA(1)) will, from the date of the subsequent instalment estimate (paragraph (c)), be calculated by reference to the subsequent instalment estimate, overriding from that date the effect of the earlier instalment estimate (paragraph (d)). Further instalments for the year are then based upon the latter instalment estimate, but earlier instalments are not recalculated (see the note on sub-section 221YCA(1)).

Sub-section 221YDA(2AB) provides the method for recalculating the amount of the particular instalment for which an instalment estimate has been made. The sub-section, in effect, reapplies sub-section 221YCA(1), notionally substituting as the applicable provisional tax amount the provisional tax amount ascertained, by reference to the instalment estimate, under sub-section 221YDA(4) (paragraph (a)) or, where the taxpayer's estimates are accepted, under sub-section 221YDA(2) (paragraph (b)).

New sub-section 221YDA(2AC) is based upon existing sub-section 221YDA(2A), which will continue to apply to taxpayers paying provisional tax in a lump sum. That existing sub-section provides that, for the purposes of late payment penalty calculations, the due date for payment of lump sum provisional tax, if calculated on the basis of the taxpayer's estimated income, remains as the due date notified on the original notice or 31 March, whichever is the later, notwithstanding that the Commissioner has allowed the taxpayer further time to lodge the estimate.

The new sub-section adopts the same principle for the instalment system, ensuring that late payment penalty will, if applicable, be calculated from the due date for payment notified on the original instalment notice notwithstanding that further time has been allowed for furnishing an instalment estimate. As a corollary, any penalty arising under section 221YDB (see the note on the proposed amendments of that section by clause 22) for an underestimate of taxable income in an instalment estimate will also apply from that date.

The amendment of sub-section 221YDA(2A) proposed by paragraph (d) of clause 21 substitutes new references consequential upon the amendment of sub-section 221YDA(1) by paragraph (a). It does not affect the operation of sub-section (2A).

Paragraph (e) of the clause proposes the insertion of a new sub-section - sub-section 221YDA(3A) - in the Principal Act. The new sub-section is based upon existing sub-section 221YDA(3), which will continue to apply to non-instalment provisional taxpayers and under which provisional tax based on a taxpayer's estimate is due and payable on the date by which the taxpayer is permitted to furnish the estimate. The new sub-section adopts the same principle for instalments of provisional tax, specifying that instalments based on a taxpayer's instalment estimate will be due and payable on the date by which the taxpayer is permitted to furnish an instalment estimate.

Paragraph (f) of clause 21 will insert new sub-section (4A) in section 221YDA to apply where the Commissioner of Taxation notifies an instalment taxpayer under existing sub-section (4) of the total amount of provisional tax payable for the year as a result of the substitution of a different estimate for the taxpayer's estimate of taxable income (such a notice is required notwithstanding the fact that the taxpayer is paying by instalments - see the note on proposed sub-section (8)). Sub-section (4A) will require that such a notice include notification of the amount of an instalment that has been recalculated under sub-section (2AB) as a result of that action under sub-section (4). See also the note on proposed sub-section (6A).

Paragraph (g) of the clause will insert sub-section 221YDA(6A) to provide that the additional amount of provisional tax in an instalment notified in a notice under sub-section (4) in accordance with sub-section (4A) (see the above note) - that is, the increase over the amount of the instalment previously calculated in reliance upon section 221YDA - is to be due and payable not less than 14 days after the notice, with the due date being notified in the notice.

Paragraph (h) of the clause will insert new sub-section 221YDA(8) for an equivalent purpose to that described in the note on clause 17, which inserts sub-section 221YC(6).

Clause 22: Additional tax where income underestimated

This clause will amend section 221YDB of the Principal Act, under which additional tax may be imposed on a taxpayer who substantially underestimates taxable income in "self-assessing" provisional tax. At present, additional tax is payable where the taxpayer's estimated taxable income, other than the part of it that represents salary or wages, is found on assessment to be less than 90% of the taxpayer's taxable income, again excluding salary or wages. The additional tax is, broadly, a flat 20% of the amount by which the provisional tax on the estimated taxable income falls short of the lesser of the tax payable on the taxable income and the provisional tax originally notified as payable. The Commissioner of Taxation has power to remit additional tax that became payable by reason of circumstances of which the taxpayer was not aware when making the estimate.

The amendments proposed by the clause will not affect the above rules as they apply to taxpayers not liable to pay provisional tax by instalments, but will provide rules for the imposition of additional tax where a person substantially underestimates his or her taxable income in making an instalment estimate. Additional tax liability under the instalment system will be "triggered" under the "90% test" described above but will be imposed in respect of each instalment shortfall over the penalty period for that instalment (see the note on the definition of "penalty period" being inserted by clause 14) at a rate of 20% per annum. Consistent with the existing law, the shortfall in any instalment will be, broadly, the amount by which the instalment liability calculated in reliance on section 221YDA falls short of the hypothetical instalment that would have been payable had the taxpayer not made an instalment estimate. The Commissioner's existing power to remit additional tax will apply to instalments of provisional tax.

Sub-clause (a) of this clause proposes the insertion in the Principal Act of three new sub-sections - sub-sections 221YDB(1AA), (1AB) and (1AC).

Sub-section (1AA) is the central provision imposing additional tax in instalment cases and setting out the rule for its calculation. Paragraph (a) is a forward-referencing provision describing the two applications of section 221YDA by which an instalment of provisional tax (called an "insufficient instalment" in the sub-section) that might attract the operation of the sub-section could be calculated - viz., sub-section 221YDA(2) (sub-paragraph (a)(i)) and sub-section 221YDA(4) (sub-paragraph (a)(ii)). It does not matter whether the instalment estimate referred to in those sub-paragraphs is made in respect of that instalment or an earlier instalment. Paragraph (b) ensures that additional tax is not imposed unless the taxable income estimated by the taxpayer in the instalment estimate referred to in paragraph (a), reduced by any salary or wages included in that estimate, is less than 90% of the taxpayer's actual taxable income for that year, also excluding salary or wages - that is, the same "trigger" test applies as in sub-section 221YDB(1).

Once paragraphs (a) and (b) are satisfied, additional tax will be imposed at the rate of 20% per annum over the penalty period on the amount by which the insufficient instalment falls short of the amount ascertained in accordance with the formula AB-C. Component A is the lesser of the amount that would have been used as the "applicable provisional tax amount" (see the note on that defined term) in the calculation under section 221YCA of the insufficient instalment if the taxpayer had not made an instalment estimate for that year (paragraph (c)) and the actual amount of tax payable on assessment (paragraph (d)), as reduced by any source deductions from salary or wages (sub-paragraph (d)(i)) or prescribed payments (sub-paragraph (d)(ii)) or both (sub-paragraph (d)(iii)). These adjustments to actual tax payable are necessary because the result has to be compared both with the notional applicable provisional tax amount referred to in paragraph (c) and, after conversion through the formula to a hypothetical instalment, with the insufficient instalment. Both of these subjects for comparison automatically reflect anticipated deductions from salary or wages or prescribed payments. Existing paragraph 221YDB(1A)(b) performs a similar function for "lump sum" provisional taxpayers, although the technique adopted there is different. Component B in the formula is the "relevant percentage" (see the note on the definition of that term - clause 14) and component C is the total of any instalments for the year that became due and payable before the due date of the instalment attracting penalty. The formula thus calculates a hypothetical "correct" instalment, against which to measure the insufficient instalment, by a method which mirrors the calculation of the insufficient instalment but which ignores the taxpayer's instalment estimate.

By proposed sub-section (1AB), where under section 206 of the Principal Act any extension of time to pay tax or provisional tax is allowed or payment by instalments permitted, that is to be disregarded when determining the due date for payment of an instalment of provisional tax or of tax payable on assessment for the purposes of the use of the term "penalty period" (see the note on the definition of that term - clause 14) in proposed sub-section (1AA). In other words, the relevant penalty period will commence and end at the original due dates for the relevant instalment or assessment notice, despite an extension of time to pay all or part of the tax.

Proposed sub-section 221YDB(1AC) will avoid undue complexity and provide certainty in cases where, because an instalment is increased after it becomes due and payable (see the notes on the provisions referred to in the sub-section), penalty would otherwise have been payable on different shortfalls for different parts of the same penalty period. The sub-section will ensure that penalty is imposed only on the reduced shortfall existing after the instalment is increased, but for the period commencing on the original due date for payment of the instalment. The operation of section 207 is not affected.

Sub-clause (b) of this clause will amend existing sub-sections 221YDB(1B) and (2) to ensure that requirements concerning the notification and recovery of additional tax for underestimates now in the law will also apply to underestimates by instalment taxpayers.

Paragraph (c) of clause 22 will extend the Commissioner's power to remit additional tax for underestimates, to cover instalment underestimates.

Clause 23: Reduction of provisional tax

This clause will insert new sub-section 221YDC(3) for an equivalent purpose to that described in the note on clause 17, which inserts sub-section 221YC(6).

Clause 24: Provisional tax to be credited against other tax

This clause will amend sub-section 221YE(2) to ensure that instalments of provisional tax that have been paid are applied in accordance with the rules set out in existing sub-section 221YE(1). Broadly, that sub-section requires the Commissioner of Taxation, on making an assessment for, or determining that no income tax is payable for, a year of income to apply provisional tax paid by the taxpayer in respect of the year in payment of (successively) any income tax liability for the year, any provisional tax liability for the year and any other income tax or withholding tax liability of the taxpayer.

Clause 25: Provisional tax not to be notified where tax assessed

This clause will amend section 221YF to prevent the issue of notices of instalments of provisional tax for a year of income where income tax for that year has been assessed.

Clause 26: Alteration of notice of provisional tax

This clause will insert new sub-section 221YG(4) for an equivalent purpose to that described in the note on clause 17, which inserts sub-section 221YC(6).

Clause 27: Notice of provisional tax to be prima facie evidence

Clause 27 inserts new sub-section 221YH(2), which has the effect that provisional tax instalment notices are to be prima facie evidence that the amount of the instalment and all relevant particulars are correct (paragraph (2)(a)) and that, in the case of a notice specifying the amount of provisional tax that would be payable in a lump sum but for the fact that the taxpayer is liable to pay instalments of provisional tax (that is, the sum of the instalments), that notice is prima facie evidence of the correctness of that "shadow" lump sum amount and all relevant particulars (paragraph (b)).

Clause 28: Provisional tax avoidance schemes relating to taxpayers other than taxpayers in the capacity of trustees

Paragraph (a) of clause 28 inserts new sub-section 221YHAAC(2A) to ensure that, in ascertaining whether a taxpayer has obtained a provisional tax benefit under sub-section (2) in connection with an arrangement involving a family partnership or trust estate, the effect of the arrangement on a taxpayer's liability to pay instalments of provisional tax will be taken into account. Paragraph (b) of the clause inserts sub-section 221YHAAC(3A) for an equivalent purpose in relation to sub-section (3) to that described in the note on clause 17 in relation to section 221YC.

Clause 29: Provisional tax avoidance schemes relating to trustees liable to be assessed under section 98

Paragraphs (a) and (b) of this clause will insert sub-sections (2A) and (3A) respectively in section 221YHAAD for the same purposes respectively as those explained in the notes on paragraphs (a) and (b) of clause 28.

Clause 30: Review of decisions

This clause inserts new sub-section (5) in section 221YHAAE to provide for review of decisions by the Commissioner of Taxation to serve notice of the Commissioner's opinion concerning the obtaining of a provisional tax benefit under section 221YHAAC or 221YHAAD in circumstances where the provisional tax is paid by instalments.

Clause 31: Transitional

This clause, which will not amend the Principal Act, is related to the proposed insertion of new sections 46C and 67AA (see earlier notes on clauses 7 and 8) which will, respectively, deny a rebate of tax on, but allow a deduction for, debt dividends on certain short-term share-based financing arrangements. Its purpose is to ensure that in certain limited circumstances a dividend paid on a share issued after 5.00pm Australian Eastern Standard Time (AEST) on 7 April 1986 will be excluded from the operation of new sections 46C and 67AA and will continue to be eligible for a dividend rebate, notwithstanding that the dividend is otherwise a "debt dividend" as defined in those new sections.

Clause 31 will apply only to a dividend paid on a share issued pursuant to provisions in the articles of association of a company as at 5.00pm AEST on 7 April 1986 under which, to enable the company to retain, for a limited period, the amount of cash paid as a dividend in relation to other shares of the company, an obligation is imposed on the company to issue further shares that will be redeemed within 2 years. This clause avoids an element of retrospective application of new section 46C that would otherwise have arisen in relation to this limited type of financing arrangement.

Clause 32: Application of amendments

This clause, which will not amend the Principal Act, contains application provisions relevant to certain of the amendments proposed in Part III of the Bill and a "saving" provision related to the proposed provisional tax instalment system.

In terms of sub-clause (1), the term "amended Act", as used in the clause, means the Income Tax Assessment Act 1936 as proposed to be amended by the Bill.

By sub-clause (2) the amendment proposed by clause 6 of the Bill applies to exempt from tax the income of The British Phosphate Commissioners Banaba Contingency Fund derived before or after the commencement of the sub-clause.

Sub-clause 32(3), which will not amend the Principal Act, specifies that the amendments made by clause 12 of the Bill to the capital gains and capital losses provisions of the Principal Act apply to assessments in respect of the year of income in which 20 September 1985 occurred, (i.e., the day from which those provisions came into effect) and in respect of income of all subsequent years of income.

Sub-clause (4) relates to the amendments being made by clauses 14 to 30 to introduce an instalment system for the payment of provisional tax and, in particular, to amend sub-section 221YDA(1) (clause 21). This sub-clause will ensure that any extension of time granted by the Commissioner of Taxation to a taxpayer to make an estimate of taxable income under sub-section 221YDA(1) that is made before the amending Act receives the Royal Assent will continue in force for the purposes of that sub-section as amended by clause 21 (see the note on paragraph (a) of that clause).

Clause 33: Amendment of assessments

This clause will give the Commissioner of Taxation authority to re-open an income tax assessment made before the Bill becomes law should that be necessary to give effect to the amendments proposed in Part III of the Bill.

PART IV - AMENDMENT OF THE TAXATION (INTEREST ON OVERPAYMENTS) ACT 1983

Clause 34: Principal Act

This clause facilitates reference to the Taxation (Interest on Overpayments) Act 1983 which, in Part IV, is referred to as "the Principal Act".

Clause 35: Entitlement to interest

This clause, which is consequential upon the introduction of an instalment system for the payment of provisional tax (see clauses 14 to 30), amends sub-section 9(5) of the Principal Act. That sub-section provides a method for calculating interest in situations where overpaid provisional tax has been credited against tax assessed for the year to which the provisional tax relates, or has been refunded, before the relevant decision to which the Principal Act applies is made (e.g., a successful objection or appeal against an income tax assessment for the preceding year). The period for which interest on the overpaid provisional tax is payable runs to the date when the provisional tax was credited or refunded.

This clause provides that sub-section 9(5) will also apply where overpaid instalments of provisional tax are credited or refunded under proposed sub-section 221YCA(2) or (3) of the Income Tax Assessment Act (see the note on clause 18) before the relevant decision under the Principal Act is made.

INCOME TAX AMENDMENT BILL 1986

Clause 1: Short title, & c.

By sub-clause (1), this Act will be cited as the Income Tax Amendment Act 1986.

Sub-clause (2) facilitates reference to the Income Tax Act 1986 which, in clause 3, is referred to as "the Principal Act".

Clause 2: Commencement

Under clause 2, the amending Act is to come into operation on the day on which it receives the Royal Assent. But for this clause, the Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Provisional Tax

This clause, which is consequential upon the introduction of an instalment system for the payment of provisional tax (see the earlier notes on clauses 14 to 30 of the accompanying Taxation Laws Amendment Bill (No. 5) 1986), amends section 8 of the Principal Act. That section formally imposes provisional tax for the 1986-87 financial year, a prerequisite to provisional tax being payable under sub-section 221YB(3) of the Income Tax Assessment Act 1936. By this clause, section 8 will be extended to also impose provisional tax for the 1987-88 financial year. This amendment will allow instalments of provisional tax for 1987-88 to be payable before any new Act imposing tax and provisional tax for that year receives the Royal Assent. A complementary amendment is being made to sub-section 221YB(3) of the Income Tax Assessment Act by clause 15 of the Taxation Laws Amendment Bill (No. 5) 1986.