House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Fringe benefits tax: exemption for certain free travel on public transport by police officers

Part 1 of Schedule 1 to this Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to exempt from fringe benefits tax (FBT) certain free public transport provided to police officers.

Date of effect: This amendment will apply from the FBT year commencing 1 April 2000 and later years.

Proposal announced: Mid-Year Economic and Fiscal Outlook 2000-2001.

Financial impact: $5 million per annum.

Compliance cost impact: Nil.

Application of fringe benefits tax to nominated State and Territory bodies

Part 2 of Schedule 1 to this Bill will amend the FBTAA 1986 to provide the States and Territories with FBT treatment that is consistent with the treatment given to the Commonwealth. From the FBT year commencing 1 April 2001 and all later years of tax, the States and Territories will be able to devolve the administration and payment of FBT to nominated State or Territory bodies.

Date of effect: These measures will apply from the FBT year commencing 1 April 2001 and all later years.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: Nil.

Special rules about the tainting of share capital accounts

Schedule 2 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to allow all resident companies, not only those falling within the scope of Schedule 5 to the Company Law Review Act 1998 , to transfer genuine share premiums and capital redemption reserves to their share capital account without tainting that account provided certain criteria are satisfied.

Date of effect: The amendments will apply to transfers from 1 July 1998.

Proposal announced: Assistant Treasurers Press Release No. 47 of 15 September 2000.

Financial impact: Due to the nature of the amendments a reliable estimate cannot be made. However, these amendments are designed to clarify the law and preserve the taxation treatment of companies and their shareholders prior to changes in their legal status. Therefore, the amendments only prevent an unintended gain to revenue.

Compliance cost impact: The proposed amendments are concessional and will not increase compliance costs for taxpayers.

Life assurance companies

Schedule 3 to this Bill amends the ITAA 1936 to correct certain anomalies in the dividend imputation provisions that apply to life assurance companies by limiting the extent to which life assurance companies can apply a payment of franking deficit tax (FDT) or deficit deferral tax (DDT) to offset their income tax assessment liability.

The amendments also provide a transitional rule that will provide an alternative treatment in certain circumstances where a liability for FDT or DDT arose before 4 May 1999.

Date of effect: The amendments apply in respect of assessments and amended assessments served on or after 4 May 1999.

Proposal announced: Assistant Treasurers Press Release No. 22 of 4 May 1999.

Financial impact: This is a revenue protection measure. That is, it will prevent a loss to revenue that would otherwise arise if life assurance companies exploited the loophole in the law.

Compliance cost impact: Negligible.

Charitable institutions

Schedule 4 to this Bill will amend the FBTAA 1986, the Income Tax Assessment Act 1997 (ITAA 1997), the ITAA 1936 and the Sales Tax (Exemptions and Classifications) Act 1992 to extend the taxation treatment currently given to public benevolent institutions to certain charitable institutions.

Charitable institutions whose principal activity is promoting the prevention or control of disease in humans will be entitled to:

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concessional FBT treatment;

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status as tax deductible gift recipients; and

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exemption from sales tax on goods for use by the charitable institution (prior to the introduction of the goods and services tax (GST)).

Date of effect:

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FBT - benefits provided from the FBT year commencing 1 April 1998, and all later years, by certain charitable institutions are exempt benefits;

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deductions for gifts or contributions - gifts made to certain charitable institutions are tax deductible under the ITAA 1997 from the 1997-1998 income year and later years and under the ITAA 1936 from the 1996-1997 income year and earlier years; and

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sales tax - goods for use by certain charitable institutions are exempt from sales tax from 28 October 1992.

Proposal announced: Treasurers Press Release No. 55 of 22 June 2000.

Financial impact: No significant impact on revenue.

Compliance cost impact: Nil.

Technical corrections to the franking rebate provisions for superannuation funds and other entities

Schedule 5 to this Bill amends the ITAA 1936 to make technical corrections to the franking rebate rules so that complying superannuation funds, pooled superannuation trusts and life assurance companies continue to be entitled to the franking rebate, and refunds of excess imputation credits for dividends and distributions that are exempt current pension income or certain other exempt income.

A further correction will ensure that registered charities and gift-deductible organisations are eligible for refunds of imputation credits in respect of indirect distributions through a trust.

Date of effect: The amendments are to apply to income derived on or after 1 July 2000.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: The proposed amendments are corrections and will not have any impact on compliance costs for taxpayers.

Miscellaneous amendments

Schedule 6 to this Bill will amend the Income Tax Rates Act 1986 (ITRA 1986) and the ITAA 1936. It will:

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decrease the upper limit of the shading-in range for trustees of certain resident deceased estates;

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increase the existing monthly allowance of tax-free threshold; and

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replace a superseded term in the definition of separate net income in respect of dependant rebates.

Date of effect: The decrease in the upper limit of the shading-in range and the increased monthly allowance of tax-free threshold will apply from the 2000-2001 year of income and later years of income. The definition of separate net income will apply from the 1999-2000 year of income and later years of income.

Proposal announced: Tax Reform: not a new tax, a new tax system : the Howard Governments Plan for a New Tax Systempolicy document.

Financial impact: The measure will result in no cost to the revenue as the cost was included in the A New Tax System (Personal Income Tax Cuts) Act 1999 .

Compliance cost impact: Negligible.