House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

General outline and financial impact

GST amendments to third party payment adjustment provisions

Schedule 1 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 to ensure the third party payment adjustment provisions operate appropriately where there are third party payments relating to a supply by the payer that is not taxable or a supply to the payee that is goods and services tax (GST)-free, not connected with Australia or subject to a refund under the Tourist Refund Scheme.

Date of effect: 1 July 2010.

Proposal announced: This measure was announced in the then Assistant Treasurer's Media Release No. 119 of 26 May 2010.

Financial impact: Nil.

Compliance cost impact: Low.

Capital gains tax treatment of water entitlements and termination fees

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to provide a capital gains tax (CGT) roll-over for taxpayers who replace an entitlement to water with one or more different entitlements.

This Schedule will also allow taxpayers to include any termination fees they incur in relation to an asset in the asset's cost base.

Date of effect: The water entitlement roll-over applies to CGT events that happen in the 2005-06 and later income years. However, taxpayers will be able to choose whether they obtain the roll-over if the relevant transactions qualifying for the roll-over happen in the period from the 2005-06 income year to the day that the amendments receive Royal Assent.

The termination fee cost base changes apply to CGT events happening on or after 1 July 2008. However, taxpayers will be able to choose whether they include a termination fee in the asset's cost base if the relevant CGT event happens in the period from 1 July 2008 to the day that the amendments receive Royal Assent.

The retrospective date of effect ensures that taxpayers who have undertaken specific transactions before the amendments receive Royal Assent may qualify for the relief. However, the optional nature of these rules ensures that this retrospectivity does not disadvantage taxpayers.

Proposal announced: On 27 February 2009, the then Assistant Treasurer and Minister for Competition Policy and Consumer Affairs announced in Media Release No. 011 that the Government would provide a CGT roll-over for transformation arrangements and allow termination fees to be included in an asset's cost base.

On 2 December 2009, the then Assistant Treasurer and the then Minister for Climate Change and Water jointly announced in Media Release No. 102 that the Government would extend the CGT roll-over for transformation arrangements to water entitlements more generally.

Financial impact: These amendments will have a small but unquantifiable revenue impact.

Compliance cost impact: Low. This impact comprises a low implementation impact and a low decrease in ongoing compliance costs relative to the affected group.

Amendments to the taxation of financial arrangements provisions

Part 1 of Schedule 3 to this Bill amends Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997) and the consequential and transitional provisions inserted by the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (TOFA Act 2009) to make minor policy refinements and technical amendments and corrections to the provisions.

Part 2 of Schedule 3 to this Bill extends the transitional arrangements relating to the application of the debt/equity rules made by the New Business Tax System (Debt and Equity) Act 2001 (Debt and Equity Act 2001) to 1 July 2010 for Upper Tier 2 instruments issued before 1 July 2001.

Date of effect: The amendments to Division 230 of the ITAA 1997 and other provisions inserted by the TOFA Act 2009 apply for income years commencing on or after 1 July 2010, unless a taxpayer elects to apply Division 230 for income years commencing on or after 1 July 2009.

The amendments to the debt/equity transitional provisions commence from Royal Assent and apply to Upper Tier 2 instruments that are issued before 1 July 2001.

Proposal announced: The amendments to Division 230 of the ITAA 1997 and other provisions inserted by the TOFA Act 2009 were announced in the then Assistant Treasurer's Media Release No. 043 of 4 September 2009.

The amendments to the debt/equity transitional provisions were announced in the then Assistant Treasurer's Media Release No. 066 of 20 April 2010.

Financial impact: The revenue impact of the TOFA Act 2009 was unquantifiable. As these amendments make minor policy refinements to the provisions inserted by the TOFA Act 2009 and otherwise ensure the provisions operate as intended, the revenue impact is unquantifiable but not expected to be significant.

Compliance cost impact: Division 230 of the ITAA 1997 lowered ongoing compliance costs by providing greater coherency, clarity and certainty, using financial accounting concepts from relevant financial accounting standards, basing the tax treatment of financial arrangements on the functional purpose, and removing uncertainties about relevant tax timing treatments. These amendments are intended to further clarify the law, make refinements and correct minor errors in Division 230 and will contribute to the lowering of ongoing compliance costs.

Amendments to the foreign currency gains and losses provisions

Part 3 of Schedule 3 to this Bill amends Division 775 (foreign currency gains and losses provisions) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the scope of a number of compliance cost saving measures, and to make technical amendments to ensure that the provisions operate as intended.

Date of effect: These amendments apply from 17 December 2003.

Proposal announced: The Treasurer and the then Assistant Treasurer and Minister for Competition Policy and Consumer Affairs, announced in Media Release No. 054 of 13 May 2008 that the Government would proceed with these amendments. The amendments were initially announced by the previous government on 5 August 2004, and were to have effect from 1 July 2003.

Financial impact: The revenue impact of these amendments is unquantifiable but they are expected to have a low or no revenue impact.

Compliance cost impact: These amendments extend the scope of a number of compliance cost saving measures in the law and make technical amendments to ensure that the provisions operate as intended. Therefore, these amendments will contribute to the lowering of compliance costs. The amendments were developed following extensive industry consultation on the implementation of the provisions.

Scrip for scrip alignment

Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 to make it easier for takeovers and mergers regulated by the Corporations Act 2001 to qualify for the capital gains tax (CGT) scrip for scrip roll-over.

Date of effect: These amendments apply to CGT events that happen on or after 6 January 2010.

Proposal announced: This measure was announced in the then Assistant Treasurer's Media Release No. 004 of 6 January 2010.

Financial impact: These amendments are expected to have an insignificant revenue impact.

Compliance cost impact: Low. This impact comprises a low implementation impact and a low decrease in ongoing compliance costs relative to the affected group.

Increase in the medical expenses tax offset claim threshold

Schedule 5 to this Bill amends the Income Tax Assessment Act 1936 to increase the threshold above which a taxpayer may claim the medical expenses tax offset and commence annually indexing the threshold to the consumer price index.

Date of effect: These amendments apply to the income year starting on or after 1 July 2010.

Proposal announced: This measure was announced by the Treasurer on 11 May 2010 as part of the 2010-11 Budget.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Low. This comprises a low implementation impact and no change to the ongoing compliance costs relative to the affected group.

Deductible gift recipients

Schedule 6 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to update the list of deductible gift recipients (DGRs) to make two entities deductible gift recipients, extend the period of listing of one entity and change the name of another entity.

Date of effect: The changes generally apply to gifts received after the day the organisation is notified of its specific listing or changes to its specific listing.

Proposal announced: The listing of One Laptop per Child Australia Ltd as a DGR was announced in the then Assistant Treasurer's Media Release No. 122 of 27 May 2010. The listing of the Mary MacKillop Canonisation Gift Fund as a DGR was announced by the Prime Minister, the then Parliamentary Secretary for Social Inclusion and Parliamentary Secretary for the Voluntary Sector and the then Assistant Treasurer in a joint Press Release on 5 August 2010. The extension of the listing of Xanana Vocational Educational Trust was announced in the 2010-11 Budget.

Financial impact: This measure will have the following revenue implications:

Compliance cost impact: Negligible.

Extending gift deductibility to volunteer fire brigades

Schedule 7 to this Bill adds three new general deductible gift recipient (DGR) categories into the Income Tax Assessment Act 1997 .

This measure widens the accessibility of tax deductible donations to all entities providing volunteer based emergency services, including volunteer fire brigades. This measure also extends DGR status to all state and territory government bodies that coordinate volunteer fire brigades and State Emergency Services.

Date of effect: These amendments commence from the date of Royal Assent.

Proposal announced: This measure was announced in the then Assistant Treasurer's Media Release No. 032 of 28 February 2010.

Financial impact: This measure is estimated to have the following revenue implications:

Compliance cost impact: Low.