House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

General Outline and Financial Impact

The Taxation Laws Amendment Bill (No. 2) 1992 will amend the income tax law by making the following changes:

Depreciation Amendments

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Provide higher rates of depreciation for depreciable property with effective lives of five or more years.

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Simplify the calculation of most depreciation rates once effective life is known.

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Proposal announced: Economic Statement of 26 February 1992.

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Financial impact: The following is the estimated cost to revenue:

1991-92	1992-93	1993-94	1994-95	1995-96
$M	$M	$M	$M	$M
-	30	215	360	490

Capital Gains Tax Goodwill Exemption

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Increase the capital gains tax exemption for gains realised on the disposal of the goodwill of a business from 20% to 50%. The exemption will be available where the net business interests of the taxpayer are worth less than $2 million and the exemption threshold will be indexed annually from the 1993-94 year of income.

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Proposal announced: Economic Statement of 26 February 1992

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Financial impact: The estimated cost to revenue is $5.0m in 1992-93, and $10.0m per year in subsequent years.

Capital Gains Tax Amendments

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Correct some minor deficiencies in the principal residence exemption provisions;

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Allow companies to claim or to transfer only current year capital losses following ownership changes on satisfaction of a same-business test;

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Overcome technical problems which could unfairly prevent some taxpayers from obtaining CGT rollover relief following the destruction of an asset;

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Modify the anti-avoidance rules which prevent value-shifting advantages arising on the transfer of assets between companies under common ownership, by extending the effective discretions which can reduce otherwise harsh applications of the provisions;

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Clarify the application of transitional provisions contained in section 160ZZS;

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Provide that the consideration for disposal of an asset that expires is not deemed to be an amount greater than the actual consideration;

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Allow CGT rollover relief following the death of a taxpayer for asset transfers that occur pursuant to deeds of family arrangement;

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Provide that CGT is payable where non-taxable Australian assets owned by a deceased Australian resident are inherited by a non-resident beneficiary;

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Provide that payments made to a lessee for the variation of a post-19 September 1985 lease in excess of the lessee's indexed cost base are taxed as a capital gain;

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Ensure that the CGT exemption for motor vehicles extends to interests held in motor vehicles;

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Overcome double tax problems for employee share trusts;

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Ensure that the provisions which provide an (effective) rollover on the conversion of a convertible note into a share or a unit, apply only for CGT purposes;

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Extend the rollover relief currently available on the breakdown of a marriage to the breakdown of a de facto marriage;

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Prevent the use of rollover provisions available for share splits and consolidations as a means of avoiding the bonus share rules; and

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Prevent the rollover of an asset which is trading stock in the hands of the transferee and therefore outside the scope of the CGT provisions of the law.

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Proposals announced: Not previously announced

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Financial Impact: These amendments are unlikely to have any significant impact on revenue.

Deductions for Superannuation Contributions on behalf of Employees to Three Superannuation Funds

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Enable deductions for contributions to three superannuation funds to provide benefits for employees where one of those funds was established by a law of the Commonwealth, a State or Territory;

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Proposal announced: 17 January 1992 (Treasurer's Press Release No. 5 of 1992)

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Financial impact: The impact on revenue is not expected to be substantial.

Deductions for Superannuation Contributions by Substantially Self-Employed People

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Enable substantially self-employed people with minimal employer support to receive the same level of tax deductions for personal superannuation contributions as self-employed people and employees without superannuation support.

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Proposal announced: 1991-92 Budget.

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

The Taxation of Foreign Source Income

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Correct anomalies in the calculation of a resident company's share of the net income of a partnership or trust where that net income includes foreign branch income.

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Exclude from tainted sales income of a controlled foreign company (CFC) proceeds from the sales of goods purchased from or sold to related parties by the CFC where the goods sold were manufactured, produced or substantially altered by the directors or employees of the CFC, and removes the requirement that the CFC substantially enhance the market value of the goods sold by it before the proceeds of those sales may be excluded from tainted sales income.

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Ensure that an election made by a CFC for capital gains tax roll-over relief for an asset disposal is binding when calculating the amount of a capital gain arising on a subsequent disposal of that asset.

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Provide wider capital gains tax roll-over relief for an asset disposal when determining whether a CFC passes the active income test.

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Reduce the income of a controlled foreign company that is attributed to resident taxpayers by dividends paid by the company to another company on certain transitional finance shares.

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Eliminate the unintended double taxation on a taxpayer in respect of certain types of dividends derived by a CFC.

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Correct an inappropriate exemption provided to a life assurance company in relation to life assurance policies issued to non-residents who are not associates of the company.

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Proposals announced: Not previously announced.

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Financial impact: The first, second, third and fourth amendments to the Foreign Source Income measures are likely to have negligible impact on revenue.

The fifth amendment will relieve taxpayers from an unintended * taxation liability. A reliable estimate of the cost to revenue cannot be made.

The sixth amendment will relieve taxpayers from an unintended liability to tax. The nature of this amendment is such that a reliable estimate of the cost to the revenue cannot be made.

The seventh amendment is likely to give rise to a reasonable gain to revenue. However, a reliable estimate of the impact on revenue cannot be made.

Deferral of Initial Payments of Company Tax for 1991-92

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Defer the initial payment of income tax for the 1991-92 income year for companies, superannuation funds, approved deposit funds and pooled superannuation trusts (all referred to as companies), from the 28th day of the month following balance date to the 28th day of the third month following balance date.

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Proposal announced : Economic Statement of 26 February 1992

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Financial Impact : There will be no long term impact on revenue as the income tax collected under the deferral arrangements will be the same as that which would have been collected under the existing law. However, revenue of approximately $10 million from the initial payments of company tax, will be deferred from the financial year ending 30 June 1992.

Exemption from clawback provisions of grants or recoupments made under the Co-operative Research Centres Program.

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Prevents the application of the research and development (R & D) clawback provisions to certain eligible companies where a grant or recoupment is made by the Commonwealth under the Co-operative Research Centres Program;

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Ensure that an eligible company, which is a partner in a partnership designated as a Co-operative Research Centre (CRC), which is eligible for an R & D deduction as a result of expenditure incurred under the Program, is excluded from the application of the R & D clawback provisions; and

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Provide that an eligible company which is a partner in a partnership not designated as a CRC, which is eligible for an R & D deduction as a result of expenditure incurred under the Program, is not excluded from the application of the clawback provisions.

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Proposal announced : 17 January 1992 by the former Treasurer, Mr Kerin, and the Minister for Science and Technology, Mr Free.

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Financial impact : The cost of the amendment is estimated to be $2.0m in 1991/92, $4.0m in 1992/93, $4.0m in 1993/94 and $5.0m in 1994/95.

Gift Provisions - World Wide Fund for Nature Australia

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Reflect a change in name for the World Wildlife Fund Australia which is listed in the income tax gift provisions.

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Proposal announced: Not previously announced.

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Financial Impact: This change will have no impact on revenue.

Exemption of the Pay and Allowances of Members of the Defence Forces serving in Cambodia

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Exempt from income tax the pay and allowances of members of the Australian Defence Forces allotted for duty with the United Nations Advance Mission in Cambodia and the United National Transitional Authority in Cambodia.

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Proposal announced: 30 October 1991 by the Minister for Defence, Science and Personnel, Mr Gordon Bilney

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Financial impact: $1.0m for the 1991-92 income year.

Definition of "Resident" or "Resident of Australia"

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Amend definition of "resident" or "resident of Australia" to include as residents Commonwealth public servants who are covered by the new Public Sector Superannuation Scheme (PSS).

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Proposal announced: Not previously announced.

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Financial impact: Nil.

Medicare Levy Relief: Blind Pensioners and Sickness Beneficiaries

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Amend the Income Tax Assessment Act 1936(the Act) to make that Act reflect the Government's initial intention to limit a concession on account of holding a health card to blind pensioners and recipients of sickness allowance.

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Proposal announced: Not announced. The amendments are consequential on an earlier amendment of the Act.

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Financial Impact: The amendment of the Act will avoid an additional unintended cost to revenue.