House of Representatives

Explanatory Memorandum

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

Chapter 3 Tax exemption for recovery grants for the 2010-11 floods and Cyclone Yasi

Outline of chapter

3.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide an exemption from income tax for Category C Natural Disaster Relief and Recovery Arrangements grants paid to small businesses and primary producers, where the Category C grant relates to flooding that occurred in Australia on or after 29 November 2010 and those small businesses and primary producers affected by Cyclone Yasi.

Context of amendments

3.2 The Australian Government and several State Governments have announced that they will be providing clean up and recovery grants under the Natural Disaster Relief and Recovery Arrangements to small businesses and primary producers who have been directly affected by recent flooding and Cyclone Yasi.

3.3 The grants vary from $5,000 up to $25,000.

3.4 Generally, such grants are treated as assessable income under the income tax law.

3.5 This measure was announced in the Assistant Treasurer and Minister for Financial Services and Superannuation's Media Release No. 016 of 21 January 2011 and in the Deputy Prime Minister and Treasurer, the Premier of Queensland and the Minister Assisting the Attorney-Generals' Joint Media Release No. 010 of 16 February 2011.

3.6 The Government is ensuring that the clean up and recovery grant payments for flood and Cyclone Yasi affected small businesses and primary producers receive the same tax treatment as the 'Clean up and restoration' grants that were paid to small businesses and primary producers who were affected by the 2009 Victorian bushfires.

Detailed explanation of new law

3.7 This measure defines certain Category C Natural Disaster Relief and Recovery Arrangements payments made to small businesses and primary producers affected by flooding on or after 29 November and by Cyclone Yasi as 'non-assessable non-exempt income'. This approach ensures that the grant is not subject to income tax, while avoiding interactions with the income tax law. Specifically, if the grant was treated as exempt income, taxpayers with losses brought forward from previous years would be required to first reduce these losses by the value of the exempt grant income (and any other exempt income) before they could apply any remaining losses to other income. For 'non-assessable non-exempt' income this treatment is not required, providing a more advantageous outcome for those in a carried forward loss position by retaining the losses that would otherwise be used up if the grant was treated as exempt income. [Schedule 2, item 2]

3.8 While the Government has announced a number of measures to assist both individuals and businesses to recover from the recent flooding and from Cyclone Yasi, this measure only applies to the grants paid to small businesses and primary producers for clean up and recovery.

Consequential amendments

3.9 The table in section 11-55 of the ITAA 1997 is amended to add the Category C Natural Disaster Relief and Recovery Arrangements grants to the list of payments that are non-assessable non-exempt income. [Schedule 2, item 1]

3.10 A technical amendment is made, to ensure that the tax exemption of grant payments made following the 2009 Victorian bushfires continues as originally intended. [Schedule 2, item 3]

Application and transitional provisions

3.11 Given the short period for which the grants would be paid, a sunsetting clause is inserted to repeal this measure with effect on 1 July 2014. [Schedule 2, items 4 and 5]