Explanatory Statement

Issued by authority of the Assistant Treasurer

Income Tax Assessment (1936 Act) Regulation 2015

Income Tax Assessment Act 1936

Section 266 of the Income Tax Assessment Act 1936 (Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.

The purpose of the Income Tax Assessment (1936 Act) Regulation 2015 (Regulation) is to remake the Income Tax Regulations 1936. The Legislative Instruments Act 2003 (LIA) provides that all legislative instruments, other than exempt instruments, progressively 'sunset' according to the timetable set out in the LIA. Legislative instruments, such as the Income Tax Regulations 1936, made in the ten years before 1940 and were registered on the Federal Register of Legislative Instruments on 1 January 2005, sunset on 1 October 2015. When a legislative instrument sunsets, it is automatically repealed under section 50 of the LIA.

A sunsetting review of the Income Tax Regulations 1936 was conducted in three stages. Stage one made amendments to the primary legislation as part of the Treasury Legislation Amendment (Repeal Day) Act 2015. Stage two made amendments to the Regulations and other related regulations including repealing redundant regulations as part of the Treasury Laws Amendment (2015 Measures No. 1) Regulation 2015.

The Regulation concludes stage three of the sunsetting review by remaking the Income Tax Regulations 1936, simplifying language, restructuring provisions to improve readability and updating the Regulation for modern instrument drafting techniques.

Consequential amendments to the Regulation are in the Income Tax and Other Laws (Repeal and Consequential Amendments) Regulation 2015. This instrument updates cross-references as a result of the remaking of the Income Tax Regulations 1936 as the Regulation.

Further details of the Regulation are set out in the Attachment.

The Act does not specify any conditions that need to be met before the power to make the Regulation may be exercised.

The Regulation is a legislative instrument for the purposes of the LIA.

An exposure draft of the amendments made in stage one of the sunsetting review was released between 27 August 2014 and 17 September 2014. An exposure draft of the amendments made in stage two of the sunsetting review was released between 17 December 2014 and 6 February 2015. Due to the nature of the changes and that public consultation was conducted in both stages one and two of the sunsetting review, the Regulation was not released for public consultation.

Prior to the making of the Regulation and in accordance with the Office of Best Practice Regulation's Guidance Note on sunsetting instruments, the Department of the Treasury self-assessed that the Income Tax Regulations 1936 were operating effectively and efficiently, and therefore a Regulation Impact Statement was not required. This assessment was informed by the public consultation process conducted in stages one and two of the sunsetting review.

The Regulation commences on the day after registration and applies to the 2015-16 year of income and later years of income.

ATTACHMENT

Details of the Income Tax Assessment (1936 Act) Regulation 2015

All references are to the Income Tax Assessment (1936 Act) Regulation 2015 (Regulation) unless otherwise stated.

The Regulation remakes the Income Tax Regulations 1936 and simplifies language, restructures provisions to improve readability and updates the Regulation for modern instrument drafting techniques. For example, provisions in new principal instruments are now referred to as 'sections' rather than 'regulations', and principal instruments are now referred to as 'Regulation' rather than 'Regulatio ns'.

Finding tables are also included at the end of this Attachment to assist in identifying those provisions in the Regulation that correspond to provisions in the Income Tax Regulations 1936, and vice versa (where relevant). The finding tables at the end of this Attachment should be read in conjunction with the finding tables in the Attachment to the Explanatory Statement to the Treasury Laws Amendment (2015 Measures No. 1) Regulation 2015, which repealed, from 1 July 2015, a number of redundant provisions in the Income Tax Regulations 1936.

Part 1 - Preliminary

Section 1 - Name of Regulation

This section provides that the title of the Regulation is the Income Tax Assessment (1936 Act) Regulation 2015.

Section 2 - Commencement

This section provides that the Regulation commenced on the day after the instrument is registered.

Section 3 - Authority

This section provides that the Regulation is made under the Income Tax Assessment Act 1936 (Act).

Section 4 - Definitions

This section contains defined terms or signposts to defined terms in the Regulation. A number of defined terms used in the Regulation (but not defined in section 4) are defined in the Act.

Part 2 - Liability to taxation - general

Section 5 - Class of persons serving with an armed force under the control of the United Nations

Section 23AB of the Act exempts from tax the income of certain prescribed persons serving with an armed force under the control of the United Nations.

Section 5 prescribes that for subsection 23AB(2) of the Act, members of the Australian Federal Police who are members of the force, created by the United Nations, for keeping peace in Cyprus are a prescribed class of persons.

Australian Federal Police officers have been serving on the United Nations Peacekeeping Force in Cyprus since May 1964.

Section 6 - Defence Force members performing certain overseas duty - eligible duty

Section 23AD of the Act exempts from tax pay and allowances of Australian Defence Force members performing certain overseas duty where that duty declared to be 'eligible duty'.

Section 6 declares the following duty to be eligible duty:

Part 3 - Income

Section 7 - Annuities and superannuation pensions - Life Tables

Section 27H of the Act includes certain annuities and payments related to annuities in the assessable income of a taxpayer. In calculating the amount to be included in assessable income, the 'life expectation factor' is relevant.

Section 7 prescribes that for subsection 27H(4) of the Act, the 'life expectation factor' is ascertained by reference to the Australian Life Tables for the relevant period. For annuities first commencing to be payable on or after 1 July 1993, the relevant Australian Life Tables are the most recently published before the year in which the annuity first commences to be payable. The Australian Life Tables are published by the Australian Government Actuary every five years. The most recent publication was the Australian Life Tables 2010-12, which reported on the mortality of Australians based on the 2011 Census.

Part 4 - Deductions

Section 8 - Excluded car parking facilities

Section 51AGA of the Act provides that no deduction is allowed for car parking expenses where the expenses are in respect of car parking facilities used by an employee at their primary place of employment, the car was used for travel between the employee's residence and primary place of employment, and the car parking facilities are not excluded by the regulations.

Section 8 excludes, for the purposes of paragraph 51AGA(1)(e) of the Act, car parking facilities provided to an employee if the employee is entitled to use a disabled persons' car parking space under the law of a State or Territory, the employee is the driver of, or a passenger in the car, and a valid disabled persons' car parking permit is displayed on the car.

Part 5 - Rebates

Division 1 - Tax rebate for low income aged persons and pensioners

Section 9 - Key concepts

Purpose of section 9

Sections 160AAAA and 160AAAB of the Act provide a tax rebate for low income aged persons and pensioner taxpayers (both for individuals and where a trustee is assessed in respect of a beneficiary).

Section 9 defines the concepts of 'base rebate amount' and 'rebate threshold' that are relevant to working out whether an individual or trustee taxpayer is entitled to a low income aged persons and pensioners tax rebate, and the amount of the rebate.

Base rebate amount

Eligibility for and the amount of the rebate is calculated by reference to the base rebate amount.

The base rebate amount, for the rebate, is as follows:

Spouses that are living separately and apart on a permanent basis are treated, for the purposes of items 1 and 2 of the table, as not being spouses of each other. That is, where an individual is living separately and apart from their spouse on a permanent basis, the item 1 base rebate amount applies.

If more than one item in the table applies to the individual, the item that gives the greatest rebate entitlement applies. For example, a person who has a spouse for part of a year of income but not for the remainder of the year of income has a base rebate amount under item 1 of the table.

The description of the 'class of individual' in the Regulation has been amended from the description in the Income Tax Regulations 1936 to more accurately describe each class of individual. The amendment is not intended to change the policy or administration of this provision.

Spouse of an individual is defined in section 995-1 of the Income Tax Assessment Act 1997 to include:

(a) another individual (whether of the same sex or a different sex) with whom the individual is in a relationship that is registered under a State law or Territory law prescribed for the purposes of section 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section; and

(b) another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple.

Note that the base rebate amount may be affected by the provisions that allow for the transfer of an unused base rebate amount between spouses or a spouse's trustee.

Rebate threshold

Eligibility for and the amount of the rebate is also calculated by reference to the rebate threshold.

The rebate threshold is worked out as follows (formula 1):

Tax-free threshold + [(159N rebate maximum amount + Base rebate maximum amount) / Lowest marginal tax rate]


The following terms are defined in section 4:

•

Tax-free threshold: has the same meaning as in the Income Tax Rates Act 1986. The tax-free threshold for the 2015-16 year of income is $18,200.

•

159N rebate maximum amount: means the maximum amount of rebate allowable under section 159N of the Act.

Section 159N of the Act provides a rebate for certain low-income taxpayers, known as the low-income tax offset (LITO). The maximum value of the LITO in the 2015-16 year of income is $445, which is reduced at a rate of 1.5 cents for every dollar of taxable income over $37,000. LITO is not available where taxable income is equal to or greater than $66,667.

•

Base rebate amount for the rebate: has the meaning given by subsection 9(2) (see above).

•

Lowest marginal tax rate: in relation to a year of income, means the rate that is:

(a)

the lowest rate specified in the table in Part I of Schedule 7 to the Income Tax Rates Act 1986, in the application of the table to that year; and

(b)

expressed as a decimal fraction.

The lowest marginal tax rate for the 2015-16 year of income is 19 per cent.

However, if the amount worked out under the rebate threshold in formula 1 above is greater than the amount at which the rebate of tax under section 159N of the Act is reduced (159N rebate reduction threshold), currently $37,000, the rebate threshold is worked out as follows (formula 2):

[(Lowest marginal tax rate * Tax-free threshold) + 159N rebate maximum amount + Base rebate amount for the rebate + Amount worked out using the formula in subsection (7)] / [159N rebate reduction rate + Second lowest marginal tax rate]


The subsection (7) formula is:

159N rebate reduction threshold * [159N rebate reduction rate + Second lowest marginal tax rate - Lowest marginal tax rate]


Second lowest marginal tax rate: in relation to a year of income, means the rate that is:

(a)

the second lowest rate specified in the table in Part I of Schedule 7 to the Income Tax Rates Act 1986, in the application of the table to that year; and

(b)

expressed as a decimal fraction.

The second lowest marginal tax rate for the 2015-16 year of income is 32.5 per cent.

Example 1

Jill is a 67 year old individual who did not have a spouse in the 2015-16 year of income.

For the 2015-16 year of income, the tax-free threshold is $18,200, the lowest marginal tax rate is 19 per cent and Jill's taxable income is $30,000.

Jill's rebate threshold is calculated as follows (formula 1, rounded up to the nearest whole dollar):

$18,200 + [($445 + $2,230) / 0.19] = $32,279

As the rebate threshold calculated in accordance with formula 1 is less than the amount at which the LITO is reduced ($37,000 for the 2015-16 year of income), formula 2 does not apply.

Note that the rebate threshold may be affected by the provisions that allow for the transfer of an unused base rebate amount between spouses or a spouse's trustee.

Section 10 - Entitlement to rebate

In determining an entitlement to the rebate:

•

In a subsection 160AAAA(3) of the Act case: the taxpayer's rebate income (defined in subsection 6(1) of the Act) for the year of income must be less than an amount ascertained in accordance with the regulations;

•

In a subsection 160AAAB(3) of the Act case: the beneficiary's amount applicable (defined in section 160AAAB of the Act) for the year of income must be less than an amount ascertained in accordance with the regulations.

Section 10 provides that the amount is ascertained in accordance with the following formula:

[Base rebate amount for the rebate / 0.125] + Rebate threshold for the rebate


Example 2

Following on from example 1 above, Jill's threshold for her entitlement to the rebate is ascertained as follows:

($2,230 / 0.125) + $32,279 = $50,119

Assuming Jill's taxable income equals her rebate income ($30,000), Jill is entitled to a rebate as her rebate income is less than the amount ascertained of $50,119.

Section 11 - Amount of the rebate

Once an entitlement to the rebate is determined, the amount of the rebate is (unless affected by the provisions that allow for the transfer of an unused rebate amount between spouses or a spouse's trustee):

(a)

the base rebate amount for the rebate; or

(b)

where the rebate income of the taxpayer, or the rebate income of the beneficiary (as the case requires) exceeds the rebate threshold for the rebate - the base rebate amount is reduced by 12.5 cents for each $1 of the amount of the excess.

Example 3

Following on from examples 1 and 2 above, the amount of Jill's rebate is $2,230 for the 2015-16 year of income, because her rebate income ($30,000) does not exceed her rebate threshold ($32,279).

Section 12 - Transfer of unused base rebate amount from individual taxpayer to spouse or spouse's trustee

Section 12 enables the amount of an individual's unused rebate to be transferred to their spouse or spouse's trustee in certain circumstances.

Example 4

Fred and Mary are spouses and are both entitled to a rebate under section 160AAAA of the Act for the 2015-16 year of income.

Fred's taxable income is $5,000 and Mary's taxable income is $45,000.

Fred's tax payable on $5,000 is $0 and therefore has an excess rebate of $1,602. This amount is available to be transferred to Mary and the amount of Mary's rebate is recalculated to take account of Fred's transferred amount.

Division 2 - Rebate in respect of certain benefits etc

Section 13 - Amount of rebate

Section 160AAA of the Act provides for a rebate of tax in respect of certain benefits known as 'rebatable benefits' (for example certain social security benefits). This ensures that taxpayers that receive such rebatable benefits pay a reduced amount of tax on these types of benefits.

Section 13 calculates the amount of the rebate based on a taxpayer's rebatable benefit amount. The rebatable benefit amount is the amount of rebatable benefit included in the taxpayer's assessable income of the year, rounded down to the nearest whole dollar.

Where a taxpayer's rebatable benefit amount is less than or equal to the threshold at the upper conclusion of the lowest marginal tax rate, that is, the amount at which the second lowest marginal tax rate cuts in, the amount of the rebate is worked out as follows (formula 1):

0.15 * [Rebatable benefit amount - $6,000]


However, if the taxpayer's rebatable benefit amount is greater than the threshold at the upper conclusion of the lowest marginal tax rate, the amount of the rebate is worked out as follows (formula 2):

0.15 * [Rebatable benefit amount - $6,000] + 0.15 * [Rebatable benefit amount - Threshold at the upper conclusion of the lowest marginal tax rate]


If the amount worked out using either formula 1 or 2 is not an amount in whole dollars, the amount must be rounded up to the nearest whole dollar.

Example 5

In the 2015-16 year of income, Zoe receives a parenting payment that is PP (partnered) of $11,700 under the Social Security Act 1991, which is not exempt under Division 52 of the Income Tax Assessment Act 1997. The payment is a rebatable benefit under paragraph 160AAA(1)(aa) of the Act.

The threshold at the upper conclusion of the lowest marginal tax rate for the 2015-16 year of income is $37,000, therefore formula 1 applies to determine the amount of the rebate, as follows:

0.15 x ($11,700 - $6,000) = $855

Example 6

In the 2015-16 year of income, Ashley receives three different types of rebatable benefits that total $39,000.

The threshold at the upper conclusion of the lowest marginal tax rate for the 2015-16 year of income is $37,000, therefore formula 2 applies to determine the amount of the rebate, as follows:

0.15 × ($39,000 - $6,000) + 0.15 × ($39,000 - $37,000) = $5,250

Part 6 - Returns and assessments

Section 14 - Amendment of assessments

Section 170 of the Act provides for timeframes of amendment of an assessment for particular entities. For an individual, a company that is a small business entity or a person acting in the capacity of a trustee of a trust that is a small business entity, the time of amendment of an assessment is the two years after the day on which the Commissioner gives notice of the assessment to the taxpayer.

However, the time of amendment of an assessment for these types of entities does not apply in the circumstances listed in column 3 in the table in subsection 170(1) of the Act. Items 1, 2 and 3, paragraphs (f), (e) and (d) (respectively) in column 3 of the table in subsection 170(1) of the Act, each provide that regulations may prescribe additional circumstances where the time of amendment does not apply.

The table in section 14 prescribes these additional amendment circumstances for an entity that is an individual, a company that is a small business entity or a person acting in the capacity of a trustee of a trust that is a small business entity (the assessed entity).

If a circumstance in an item of the table exists, the Commissioner may amend an assessment of the relevant entity within four years after the day on which the Commissioner gives notice of the assessment to the entity, unless a longer amendment period applies.

The details of each amendment circumstance are listed in the table in section 14.

The language in the table in section 14 has been updated to clarify wording and accord with modern drafting techniques. For example, each item in the table in section 14 has been amended to require the paragraphs in column 2 of the table in section 14 to 'apply', rather than 'exist' for each circumstance, and the references to the entity to which section 14 applies have been standardised as 'assessed entity'. These types of amendments merely update the provision and are not intended to change the policy or administration of the provision.

Part 7 - Public officers

Section 15 - Appointment of a public officer

Section 252 of the Act provides for matters relating to the public officer of a company. Paragraph 252(1)(c) of the Act requires that no appointment of a public officer shall be deemed to be duly made until after notice has been provided in writing, to the Commissioner, specifying the name of the officer and an address for service. Section 15 provides that the notice given to the Commissioner must include a declaration that any information in the notice is true and correct.

Part 8 - Attribution of income in respect of controlled foreign companies

Part X of the Act provides for certain amounts to be included in a taxpayer's assessable income in respect of the attributable income of a controlled foreign company (CFC).

Section 16 - Interpretation

Section 16 provides that words and phrases in Part 8 of the Regulation have the same meanings as they have in Part X of the Act.

Section 17 - Items of designated concession income

Under subsection 317(1) of the Act, the definition of designated concession income, in relation to a listed country, means certain income or profits with particular features, as specified in the regulations.

Section 17 specifies the kind of, and feature of, income or profits that mean the income or profits is designated concession income in respect of a listed country.

The details of each kind of, and feature of, income or profits is listed in the table in section 17.

Section 17 rewrites section 152A, 152B and Schedule 9 of the Income Tax Regulations 1936. The definition of 'ordinary capital gains', 'permanent establishment' and 'passive income' are included in section 17. In respect of the definition of 'ordinary capital gains' in section 17, the label for this definition in section 152A of the Income Tax Regulations 1936 was 'capital gains'. This label has been amended to avoid confusion between this definition and the definition of 'capital gains' in the Act.

Section 18 - Accruals tax laws

Under subsection 317(1) of the Act, the definition of accruals tax law, in relation to a listed country, means a law of the listed country that is declared by the regulations to be an accruals tax law.

Section 18 prescribes particular listed countries and law to be accruals tax law. The detail of each listed country and the law are listed in the table in section 18.

Section 19 - Listed countries

Subsection 320(1) of the Act provides that listed countries are defined as those declared by the regulations to be a listed country for the purposes of Part X of the Act.

The following countries are declared as listed countries in section 19:

(a)

Canada;

(b)

France;

(c)

Germany;

(d)

Japan;

(e)

New Zealand;

(f)

United Kingdom; and

(g)

United States of America.

Section 20 - Capital gains regarded as subject to tax

Section 324 of the Act provides that a particular item of income or profits derived be an entity is taken to be subject to tax in a listed country if foreign tax (excluding withholding tax), is payable under a tax law of the listed country because the item is included in the tax base of that tax law for the relevant period.

Subsection 324(2) of the Act provides that an item may be treated as if it were subject to tax in the listed country, where the regulations provide that the item is to be so treated.

Subsection 20(1) provides that gains or profits, or other amounts, of a capital nature derived by an entity that:

•

are not subject to tax in a listed country in a particular tax accounting period; and

•

would have been subject to tax in the listed country in the tax accounting period apart from the availability of roll-over relief;

are to be treated as if they were subject to tax in the listed country in the tax accounting period.

Section 20 also provides for the meaning of roll-over relief and compulsory acquisition in relation to a CGT asset.

Section 21 - State foreign taxes that are treated as federal foreign taxes

Section 323 of the Act provides that if a listed or unlisted country has both federal and State foreign tax, the regulations may provide that a specified State foreign tax is to be treated, for the purposes of Part X of the Act, as if it were an additional federal foreign tax of the listed or unlisted country.

Section 21 provides that a foreign tax imposed in Switzerland that is a cantonal tax on income referred to in paragraph 3(b) of Article 2 of the Swiss convention (within the meaning of the International Tax Agreements Act 1953) is to be treated for the purposes of Part X of the Act, as if it were an additional federal foreign tax of Switzerland.

Part 9 - Application and transitional provisions

Section 22 - Application of the Regulation

This section provides that the Regulation applies in relation to the 2015-16 year of income and later years of income.

Section 23 - Application of the Income Tax and Other Laws (Repeal and Consequential Amendments) Regulation 2015

This section provides that the Income Tax and Other Laws (Repeal and Consequential Amendments) Regulation 2015, which contains consequential amendments as a result of the remaking of the Income Tax Regulations 1936, applies in relation to the 2015-16 year of income and later years of income.

FINDING TABLES

In the finding tables, references to the old regulation are to provisions in the Income Tax Regulations 1936, and references to the new regulation are to provisions in the Regulation. Also, in the finding tables:

•

no equivalent means that this is a new provision that has no equivalent in the old regulation. Typically, these provisions are guide material or similar.

•

omitted means that the provision in the old regulation has not been rewritten in the new regulation. Typically, this is because the provision has been removed because it is redundant.

The finding tables below should be read in conjunction with the finding tables in the Attachment to the Explanatory Statement to the Treasury Laws Amendment Regulation (2015 Measures No. 1) Regulation 2015, which repealed, from 1 July 2015, a number of provisions in the Income Tax Regulations 1936.

Finding tables

Table 1.1: New regulation to old regulation

Table 1.2: Old regulation to new regulation

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Income Tax Assessment (1936 Act) Regulation 2015

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview of the Legislative Instrument

The purpose of the Income Tax Assessment (1936 Act) Regulation 2015 (Regulation) is to remake the Income Tax Regulations 1936. The Legislative Instruments Act 2003 (LIA) provides that all legislative instruments, other than exempt instruments, progressively 'sunset' according to the timetable set out in the LIA. Legislative instruments, such as the Income Tax Regulations 1936, made in the ten years before 1940 and were registered on the Federal Register of Legislative Instruments on 1 January 2005, sunset on 1 October 2015. When a legislative instrument sunsets, it is automatically repealed under section 50 of the LIA.

A sunsetting review of the Income Tax Regulations 1936 was conducted in three stages. Stage one made amendments to the primary legislation as part of the Treasury Legislation Amendment (Repeal Day) Act 2015. Stage two made amendments to the Regulations and other related regulations including repealing redundant regulations as part of the Treasury Laws Amendment (2015 Measures No. 1) Regulation 2015.

The Regulation concludes stage three of the sunsetting review by remaking the Income Tax Regulations 1936, simplifying language, restructuring provisions to improve readability and updating the Regulation for modern instrument drafting techniques.

Human rights implications

This Legislative Instrument does not engage any of the applicable rights or freedoms.

Conclusion

This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.