House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon Ralph Willis, M.P.)

General Outline and Financial Impact

The Taxation Laws Amendment Bill (No.4) will amend various taxing Acts (unless otherwise indicated all amendments refer to the Income Tax Assessment Act 1936) by making the following changes:

Depreciation Amendments

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Inserts a definition of effective life into the Act.

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Allows 100% depreciation for depreciable plant where the value of the unit of property does not exceed $300 or the estimated effective life of the item is less than 3 years.

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Reduces the number of depreciation rates to seven basic rate classes.

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Standardises the loading at 20%.

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Enables taxpayers to pool depreciable items with the same depreciation rate.

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Proposal announced: The measures were announced in the March Industry Statement and on 26 September 1991.

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Financial impact: The estimated cost of broadbanding of rates and immediate expensing is $100m in 1992-93, with a declining cost in later years.

Anti-avoidance Measures - Deduction Recoupment

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Amends a number of the capital allowance provisions to correct a technical deficiency which permits avoidance of tax on recoupments of deductions allowed under those provisions.

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Proposal announced: Not previously announced.

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Financial impact: The amendments will prevent a significant but unquantifiable loss of revenue.

Balancing Adjustment Roll-over Relief

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Makes available optional balancing adjustment roll-over relief for intra group company transfers of property (to which the capital allowance provisions have applied) occurring after 6 December 1990 and before [day after date of introduction]. Announced by former Treasurer on 8 December 1990.

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Applies balancing adjustment roll-over relief for disposals of assets (to which the capital allowance provisions have applied) to other persons if capital gains tax roll-over relief is obtained for the disposal.

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Makes available optional balancing adjustment roll-over relief for disposals of property (to which the capital allowance provisions have applied) that are taken to occur as the result of part changes in the ownership of that property.

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Proposal announced: The latter two amendments have not been previously announced.

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Financial impact: The amendments are likely to have some revenue cost; however, their nature is such that a reliable estimate of the revenue impact cannot be made.

Dividend Rebates: Company Beneficiaries and Partners

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Amends the Income Tax Assessment Act 1936 to allow a rebate of tax on dividends paid on shares that are beneficially owned by a company but are registered in the name of a trustee or partnership.

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Proposal announced: Not previously announced.

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Financial impact: This amendment will have no impact on the revenue.

Deferral of Deductions for Trading Stock Purchases Involving Prepayments

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Ensures that deductions for expenditure on goods to be used as trading stock are not allowable until the goods actually become part of the buyer's trading stock.

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Proposal announced: Not previously announced.

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Financial impact: There will be a significant but unquantifiable benefit to the revenue.

Tax File Number (TFN) Amendments

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Streamlines the application of the TFN arrangements to securities lending arrangements and unregistered "cum-dividend" and "cum-interest" sales of securities.

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Requires investors in securities having a "books closing time" to quote their TFN before that time.

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Prevents certain nominee companies (entrepot nominee companies) used by securities dealers from being treated as investment bodies for TFN purposes.

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Corrects a technical deficiency in the law which prevented the proper application of the TFN arrangements to unit trusts.

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Proposals announced: Not previously announced.

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Financial impact: The cost of these amendments is not expected to be significant.

Capital Gains Tax Roll-over Relief for Partnerships

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Corrects a deficiency in the CGT roll-over provisions for transfers of partnership assets to wholly-owned companies, by ensuring that the cost bases of shares received as consideration for such transfers reflect the amount of partnership liabilities assumed by the company.

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Applies to transfers of assets after 6 December 1990.

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Proposal announced: Not previously announced.

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Financial impact: The amendment will avoid an unintended cost to revenue.

Capital Gains Tax (Publishing Indexation Factors)

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Replaces the requirement that the Treasurer publish the indexation factors to be applied in calculating the motor vehicle depreciation limit and the Capital Gains Tax (CGT) cost base limit for major capital improvements with a requirement that the Commissioner of Taxation publish the relevant factors.

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Proposal announced: Not previously announced.

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Financial impact: The amendments will have a nil effect on revenue.

The Taxation of Foreign Source Income

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Reduces the income of a controlled foreign company that is attributed to resident taxpayers by dividends paid by the company to unrelated parties on certain widely distributed finance shares.

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Proposal announced: The proposal was announced by the Treasurer on 28 June 1991.

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Financial Impact: This amendment will relieve taxpayers from an unintended liability to tax. A reliable estimate of its revenue cost cannot be made.

Foreign Exchange Gains and Losses

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Ensures that a deduction for a foreign exchange loss of a capital nature on a contract will be reduced by a gain on an underlying, hedging, or other contract if that gain is not included in assessable income.

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Proposal announced: Not previously announced.

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Financial impact: This amendment is to ensure that the provision operates as intended and will protect the revenue against any unintended leakages.

Rehabilitation of Mining, Quarrying and Petroleum Sites

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Clarifies the operation of the rehabilitation provisions in respect of partial restoration and expenditure on plant or articles. The amendments make it clear that the rehabilitation provisions apply to partial restoration, including restoration of part only of a site, and apply to revenue expenditures on plant or articles such as repairs.

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Proposal announced: Not previously announced.

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Financial impact: These amendments, being clarifying in nature, will have a nil effect on revenue.

Research and Development Amendments

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Allows a maximum deduction of upto 150% of expenditure, for qualifying plant expenditure claimed over three years in three equal instalments, for each year if that plant is first used prior to 30 June 1993.

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Limits deductions in respect of core technology expenditure to an arm's length amount.

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Excludes expenditure on core technology from the calculation of the deduction to be allowed in the case where there are guaranteed returns to investors. This modification will ensure that the calculation of the reduced deduction is not diluted by the inclusion of core technology which already only attracts a deduction of 100%.

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Proposal announced: Not previously announced.

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Financial impact: The cost of the first amendment is estimated to be $50 million for the 1993-94 and 1994-95 years. The gain to the revenue of the other two amendments is not quantifiable.

Fringe Benefits Tax - Substantiation Discretion

(Fringe Benefits Tax Assessment Act 1986)

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Provides the Commissioner with a discretion, in certain circumstances, to accept something less than the strict level of substantiation required under the fringe benefits law.

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Proposal announced: Not previously announced.

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Financial Impact: No significant impact on revenue.

Education Entry Payment

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Ensures that the education entry payment to be paid to sole parent pensioners from 1 January 1992 will be taxed.

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Proposal announced: Not previously announced

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Financial impact: The impact of the proposal on revenue in each financial year is expected to be less than $100,000.

Carry Forward of Excess Foreign Tax Credits

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Makes a technical amendment to clarify the operation of the provisions that deal with the carry forward of excess foreign tax credits.

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Proposal announced: Proposal announced in Treasurer's Press Release dated 12 November 1991.

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Financial impact: As the amendment will only clarify the operation of the provisions, a reliable estimate of the revenue impact cannot be made.

Income Tax (International Agreements) Act 1953

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Makes a technical correction to Schedule 32 of the Income Tax (International Agreements) Act 1953 to accurately reflect the text of the Australia-Fiji comprehensive taxation agreement.

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Proposal announced: Not previously announced.

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Financial impact: The amendment is not expected to have a significant effect on revenue.