House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Small business CGT provisions

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 , the Income Tax Assessment Act 1936 and the Income Tax (Transitional Provisions) Act 1997 to reduce the compliance costs for small business and increase the availability of the small business capital gains tax (CGT) concessions.

These amendments also replace the controlling individual 50 per cent test with a significant individual 20 per cent test that can be satisfied either directly or indirectly through one or more interposed entities.

Date of effect : These amendments apply to CGT events that happen in the 2006-07 and later income years. One amendment is to insert a transitional provision to ensure that the small business roll-over operates as intended for CGT events that happen in the 1998-99 to 2005-06 income years.

Proposal announced : The amendments that are in response to the Board of Taxation recommendations, and the change to the controlling individual test were announced in the 2006-07 Budget (Treasurer's Press Release No. 038 of 9 May 2006). The remaining changes have not been announced.

Financial impact : The announced amendments will have these revenue implications:

The cost of the additional measures is unquantifiable but expected to be minimal.

Compliance cost impact : Minimal.

Summary of regulation impact statement - for the significant individual test

Regulation impact on business

Impact : An individual can operate a small business either directly or through a company or trust structure. In the case where a small business is operated through a company or a trust it is necessary to establish the percentage of active participation the individual has in the business.

The law replaces the controlling individual 50 per cent test with a significant individual 20 per cent test which establishes the participation percentage of an individual for this purpose.

A regulation impact statement was prepared in respect of the significant individual 20 per cent test. Taxpayers affected by this amendment are those who carry on a small business through a company or a trust and who currently would not satisfy the controlling individual 50 per cent test.

Main points :

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This measure will increase the number of individual's who will be able to access the small business concessions because of the reduced participation percentage of 50 per cent (controlling individual test) to 20 per cent (significant individual test).

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Further, access to the concessions is increased as the 50 per cent test was based on direct ownership of interests in a company or trust, whereas the new 20 per cent test incorporates both direct and indirect ownership of such interests.

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There will be minimal administrative impacts on those impacted by the measure.

Clarification of exemptions from interest withholding tax

Schedule 2 to this Bill identifies those non-debenture debt interests eligible for exemption from interest withholding tax, for the purposes of sections 128F and 128FA of the Income Tax Assessment Act 1936 . It also introduces regulation-making powers to prescribe further types of eligible debt interests and to exclude from exemption interest payments in certain circumstances.

Date of effect : The amendments limiting eligible debt interests to non-debenture debt interests that are non-equity shares will apply to debt interests issued on or after the date of the introduction of the Bill into the House of Representatives. The amendments establishing regulation-making powers will have effect from the date of Royal Assent.

Proposal announced : This measure has not previously been announced.

Financial impact : Nil.

Compliance cost impact : Negligible.

Streamline gift fund and integrity arrangements for deductible gift recipients

Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 to remove the requirement for certain deductible gift recipients (DGRs) to maintain a gift fund. It also amends the Taxation Administration Act 1953 to include improved integrity arrangements for DGRs listed in tax law.

These amendments allow the Commissioner of Taxation (Commissioner) to review whether a listed DGR in the tax law continues to be eligible to receive deductible gifts reflecting the Commissioner's current power to review the eligibility of endorsed DGR entities. As a further integrity measure these amendments require all DGRs to maintain adequate records.

Date of effect : This measure is to commence operation from the date of Royal Assent.

Proposal announced : The Government announced in the 2006-07 Budget two measures to further enhance philanthropy - removal of gift fund requirements for certain DGRs and to standardise compliance for DGRs.

Financial impact : Nil.

Compliance cost impact : Nil.

Deductible gift recipients

Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 to extend the period for which deductions are allowed for gifts to certain funds that have time limited deductible gift recipient (DGR) status.

Date of effect : This Schedule extends the time period for deductions for gifts to the following organisations that are listed as DGRs:

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Dunn and Lewis Youth Development Foundation Limited until 31 December 2007;

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The Rotary Leadership Victoria Australian Embassy for Timor-Leste Fund Limited until 31 December 2009;

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St George's Cathedral Restoration Fund until 31 December 2007; and

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St Michael's Church Restoration Fund until 23 February 2008.

Proposal announced : The extension of the tax deductibility of gifts to the Dunn and Lewis Youth Development Foundation Limited was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 077 of 30 October 2006.

The extension of the tax deductibility of gifts to The Rotary Leadership Victoria Australian Embassy for Timor-Leste Fund Limited was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 077 of 30 October 2006.

The extension of the tax deductibility of gifts to St George's Cathedral Restoration Fund was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 077 of 30 October 2006.

Financial impact : This measure will have these revenue implications:

Compliance cost impact : Nil.

Effective life of tractors and harvesters

Schedule 5 to this Bill amends the Income Tax Assessment Act 1997 to preserve the current period over which tractors and harvesters used in the primary production sector are depreciated.

Date of effect : These amendments will apply to a depreciating asset if the start time for the asset occurs on or after 1 July 2007.

Proposal announced : The proposal was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 083 of 16 November 2006.

Financial impact : Nil.

Compliance cost impact : Nil.

Farm management deposits

Schedule 6 to this Bill amends the Income Tax Assessment Act 1936 to increase the non-primary production income threshold and the total deposit limit for farm management deposits.

Date of effect : These amendments apply from the income year in which the amendments receive Royal Assent.

Proposal announced : These amendments were announced by the Minister for Agriculture, Fisheries and Forestry in Press Release No. DAFF 06/158PM of 24 October 2006.

Financial impact : This measure will have these revenue implications:

Compliance cost impact : This is expected to have a small transitional cost for the Australian Taxation Office, tax agents and software developers but no increase in ongoing compliance cost.

Capital protected borrowings

Schedule 7 to this Bill:

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amends the Income Tax Assessment Act 1997 to ensure that the capital protection on a capital protected borrowing is treated in the same way irrespective of whether the capital protection is provided explicitly - for example by an actual put option - or implicitly through the term of the arrangement; and

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provides a transitional and a long-term methodology to determine the amount that is reasonably attributable to the cost of capital protection.

Date of effect : The interim methodology will apply to arrangements entered into, on or from 9.30 am, by legal time in the Australian Capital Territory, from 16 April 2003 to 30 June 2007. The long-term methodology will apply to arrangements entered into, from 1 July 2007.

Proposal announced : This measure was announced in the Treasurer's Press Release No. 19 of 16 April 2003. The details of the interim methodology were announced in the then Minister for Revenue and Assistant Treasurer's Press Release C045/03 of 30 May 2003.

Financial impact : The estimated cost to the revenue of determining the cost of capital protection by reference to the personal unsecured lending rate is expected to be nil over the forward years, as the personal unsecured lending rate was also used in the interim approach costing that is currently reported in the forward estimates.

Compliance cost impact : Compliance costs are expected to be lower for both issuers of, and investors in, capital protected borrowings.