House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Exempting value received from GST Direct Assistance Certificates

Outline of Chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to exempt any income attributable to GST direct assistance certificates from income tax.

Summary of the amendments

Purpose of the amendments

2.2 The purpose of the amendments is to ensure that the value of GST direct assistance certificates is exempt from income tax which may arise from the receipt or redemption of the certificates.

Date of effect

2.3 The amendments apply to the income years 1999-2000 and 2000-2001.

Background to the legislation

GST direct assistance certificates

2.4 The Government is providing redeemable direct assistance certificates to small and medium businesses and community sector bodies to aid in the implementation of GST. The certificates have a maximum value of $200 and are issued by the GST Start-Up Assistance Office to eligible enterprises which register for GST by 31 May 2000. An enterprise may redeem the certificate with a registered supplier in exchange for goods and services that will assist with the implementation of GST, for example, computer software or accounting services.

Assessable income

2.5 Subsection 6-1(1) of the ITAA 1997 provides that assessable income consists of ordinary income and statutory income. Ordinary income is defined in section 6-5 as income according to ordinary concepts, for example, salary or wages, or proceeds from carrying on a business. Statutory income is defined in section 6-10 as amounts that are not ordinary income but are included in assessable income by the operation of a provision of the law about assessable income. Section 10-5 lists particular classes of assessable income that are not ordinary income, for example, capital gains. A net capital gain is included in assessable income by section 102-5.

2.6 Exempt income is not assessable income under section 6-15. Exempt income is an amount of ordinary income or statutory income that is expressly made exempt by a provision of the ITAA 1997 or another Commonwealth law. Division 11 lists classes of exempt income and Division 51 specifies amounts of ordinary income and statutory income that are exempt income.

Ordinary income

2.7 If a GST direct assistance certificate is a benefit that can be turned to pecuniary account, the value of the certificate would be assessable as ordinary income to a taxpayer engaged in the conduct of a business. In FC of T v Cooke & Sherden
80 ATC 4140 ;
10 ATR 696 the Full Federal Court said (at 4148; 704) that a benefit to be enjoyed by a taxpayer will often be turned to pecuniary account if the benefit be given up, or if it be employed in the acquisition of some other right or commodity. Although the certificate cannot be exchanged for cash, it may be argued that as the certificate is used in acquiring products or services from registered suppliers, it may be a benefit which can be turned to pecuniary account. If so, the certificate would be assessable as ordinary income to a taxpayer engaged in the conduct of a business.

Statutory income

2.8 Section 15-10 provides that assessable income includes a bounty or subsidy that is received in the course of carrying on a business and that is not assessable as ordinary income. Where the certificates are provided by the Government to small businesses to assist them with the implementation of GST, it might be argued that the value of the certificates, if of a pecuniary nature, may be assessable as bounties or subsidies.

2.9 It could also be argued that the taxpayer receives a payment when the certificate is redeemed in that the certificate is used to pay part or all of the expenditure incurred on the GST related item. If so, when the certificate is redeemed the taxpayer may receive a bounty or subsidy which would be assessable under section 15-10.

Capital gains and losses

2.10 When an eligible enterprise receives a GST direct assistance certificate, the recipient acquires the rights contained in the certificate on the happening of CGT event D1. When the certificate is redeemed, CGT event C2 happens. The taxpayer makes a capital gain if the capital proceeds from the ending of the asset exceed the cost base of the asset (subsection 104-25(3)).

2.11 If the payment received on redemption of the certificate were assessable as ordinary income or statutory income, section 118-20 would apply to reduce the capital gain by the amount of assessable income.

Explanation of the amendments

Exempt income

2.12 Schedule 2 to this Bill inserts new section 51-60 in Division 51 (exempt amounts) of the ITAA 1997. New section 51-60will exempt ordinary income and statutory income from income tax for the 1999-2000 and 2000-2001 income years where the income is attributable to a certificate issued by the GST Start-Up Assistance Office, that is, a GST direct assistance certificate. [Schedule 2, item 2]

2.13 GST direct assistance certificates are issued by the GST Start-Up Assistance Office in the Department of the Treasury. The certificates have a maximum value of $200 which may be used by the recipient to purchase goods or services for the implementation of GST.

2.14 The effect of new section 51-60 will be that any income arising from a GST direct assistance certificate, regardless of the nature of that income, will not be assessable. For example, if the income from the certificates is ordinary income, it is expressly exempt from tax under newsection51-60. Likewise, if the income is assessable as a bounty or subsidy - which is statutory income - it is exempt from tax.

2.15 The table in section 11-15 is being updated as a consequence of new section 51-60 [Schedule 2, item 1] . The amendment will guide GST direct assistance certificate recipients to the new section 51-60.

Capital gains and losses

2.16 New section 118-14 is inserted in Division 118 (capital gains and losses - exemptions) of the ITAA 1997. New section 118-14 will operate to disregard a capital gain or capital loss made in the 1999-2000 or 2000-2001 income years from the redemption of a GST direct assistance certificate. [Schedule 2, item 3]