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. 5) will amend various taxing Acts (unless otherwise indicated all amendments refer to the Income Tax Assessment Act 1936 - the Act) by making the following changes:

Capital Gains Tax

. Improves the readability of the Capital Gains Tax provisions of Part IIIA, and to provide an index of the key concepts relevant to the operation of those provisions.

Date of effect: The amendments will not affect the operation of the law.

Proposal announced: Not previously announced.

Financial impact: None

Gifts

Australia-United States Coral Sea Commemorative Council Incorporated

. Allows, for a limited period, income tax deductions for gifts made to the Australia-United States Coral Sea Commemorative Council Incorporated.

Date of effect: On or after 26 November 1991 and on or before 30 June 1992.

Proposal announced: Treasurer's Press Release No.97 of 1992.

Financial impact: Insignificant.

Gifts to gift funds of environmental organisations

•

Introduces new arrangements for gifts to gift funds of environmental organisations.

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Requires five environmental organisations, presently listed in the income tax gift provisions, to satisfy two new requirements as from the year commencing 1 July 1993.

Date of effect: The amendments to include the Register of Environmental Organisations apply to gifts made from the date the Bill receives Royal Assent.

The amendments to compel five organisations presently listed in paragraph 78(1)(a) to satisfy two new requirements apply from the year commencing 1 July 1993.

Proposal announced: 1992/93 Budget.

Financial impact: The nature of the measure is such that a reliable estimate can not be provided. However, it is unlikely to have a substantial impact on revenue.

Provisional Tax

•

Ensures that the provisional tax uplift factor is reduced from 10% to 8% in ascertaining provisional tax for the 1992-93 year of income and 10% for later years of income

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Increases the margin for error allowed, when varying down provisional tax, in estimating taxable income or PAYE tax instalment deductions without incurring additional tax from 10% to 15%

•

Ensures that, in ascertaining the amount of provisional tax payable, credit is given for tax deducted from investment income

Date of effect: Applies to the ascertainment of provisional tax for the 1992-93 year of income and later years of income.

Proposal announced: Treasurer's Press Release No.110 of 1992

Financial impact: The estimated cost to revenue is expected to be $250 million in the 1992-93 financial year.

Zone and related rebates

•

Increases the current fixed dollar amounts in these rebates by 12.5% for assessments in respect of the 1992-93 year of income and by 25% for assessments in respect of the 1993-94 and subsequent years of income.

Date of effect: The amendments will apply to assessments for the 1992-93 and subsequent years of income.

Proposal announced: 1992/93 Budget.

Financial impact: The estimated cost of increasing the zone and related rebates is $5 million in 1992-93, $19 million in 1993-94 and gradually increasing in subsequent years.

Deductibility of losses on disposal of traditional securities

•

Denies deductions for capital losses on the disposal or redemption of traditional securities in circumstances where the disposal is made in anticipation of the issuer not being able to meet all its obligations to pay out the security.

•

Ensures that deductions are not allowable for losses on the forgiveness of a loan that would qualify as a traditional security.

Date of effect: To disposals or redemptions of traditional securities on or after 1 July 1992.

Proposal announced: Treasurer's Press Release, No. 108, 30 June 1992.

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

Reduced accelerated write-down for horse breeding stock

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Reduces the special valuation option available to horse breeders for valuing horse breeding stock on hand at the end of a year of income. The amount of write-down will be:

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male horse breeding stock - up to a maximum of 25% of cost; and

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female horse breeding stock - on prime cost so that the value is not less than $1 by the end of the year in which the horse is aged 12. The amount written-down in any year is not to exceed 33 1/3% of cost.

Date of effect: The amendments will apply to horse breeding stock acquired under a contract entered into on or after 19 August 1992.

Proposal announced: 1992/93 Budget.

Financial impact: The savings from this measure are expected to be $7 million in 1993-94, $8 million in 1994-95 and $5 million in 1995-96.

Environment protection expenditure

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Allows a deduction for certain environment protection expenditure and allows depreciation of plant and equipment and amortisation of the capital cost of structures, structural improvements and buildings used for environment protection purposes.

Date of effect: 19 August 1992.

Proposal announced: 1992/93 Budget.

Financial impact: a reliable costing of this measure cannot be made.

Research and Development expenditure

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Continues the research and development (R & D) concession at the rate of 150 per cent indefinitely.

Date of effect: 1993-94 year of income

Financial impact: The estimated cost to revenue is $110 million in 1994-95 and $125 million in 1995-96.

•

Removes the $10 million limit applying to pilot plant.

Date of effect: Plant acquired or commenced to be constructed on or after 19 August 1992:

Financial impact: The cost to revenue is unlikely to be significant.

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Denies the (R & D) concession to companies where they are involved in syndicates, or other financing schemes, which include government bodies or their associates, and there are guaranteed returns in place.

Date of effect: 19 August 1992 - for companies which are registered or seeking registration under sections 39J or 39P of the Industry Research and Development Act 1986 on or after that day.

Financial impact: The savings to the revenue are expected to be $115 million in 1993-94, $140 million in 1994-95 and $167 million in 1995-96.

(Industry Research and Development Act 1986 )

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Denies registration, or authorises the issue of a certificate that will have the effect of denying the tax concession, to companies undertaking or proposing to undertake research and development activities where there is (or was) an ineligible finance scheme in relation to those activities; and

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Authorises the Industry Research and Development Board to develop and publish guidelines that will specify the criteria for assessing whether any finance schemes that companies enter into to fund research and development are ineligible.

Date of effect: For the year of income ended 30 June 1993.

Financial impact: There will be no measurable financial impact.

Proposals announced: 1992/93 Budget.

Deductibility of interest on borrowings to finance superannuation contributions and life insurance premiums

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Denies an income tax deduction for interest and other borrowing expenses on moneys borrowed to finance personal superannuation contributions and certain life insurance premiums.

Date of effect: On or after 19 August 1992.

Proposal announced: 1992/93 Budget.

Financial impact: The proposals will reduce the potential for future losses to the revenue.

Amendments to extend the concept of Crown leases for the purposes of the depreciation provisions

•

Extends the meaning of Crown lease under the plant depreciation provisions to include commercial leases, easements and other interests in land that are granted by governments or tax-exempt government authorities.

Date of effect: The amendments apply from the same time as the existing measures. That is, they apply to expenditure incurred after 26 February 1992 in installing plant on Crown leases. They also apply to expenditure incurred on or before that date, based on notional written down values on 27 February 1992.

Proposal announced: Press Release of 25 September 1992.

Financial impact: The amendments give effect to Government policy announced in the One Nation statement and involve no further cost to the revenue.

Amendments to extend the concept of eligible lessees entitled to deductions for capital expenditure on buildings and structural improvements

•

Extends deductions to taxpayers for capital expenditure they incur on the construction of buildings and other structural improvements on land over which they hold a "Crown lease" within the meaning of the plant depreciation provisions.

Date of effect: Applies where construction commences after 26 February 1992.

Proposal announced: Press Release of 25 September 1992.

Financial impact: The amendments give effect to Government policy announced in the One Nation statement and involve no additional cost to the revenue.

Development allowance on property installed on leased Crown land

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Gives the development allowance for expenditure which would be denied the allowance only because the plant in respect of which the expenditure is incurred is installed on leased Crown land.

Date of effect: 26 February 1992.

Proposal announced: One Nation Statement of 26 February 1992 and Press statement of 5 April 1992.

Financial impact: The amendment is expected to have some impact on revenue. The original estimates of the cost of the development allowance to revenue included the cost of this amendment.

Research and Development rollover relief

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Provides rollover relief for intra company group transfers of property to which the research and development provisions have applied.

Date of effect: The measure will apply in respect of disposals occurring after 6 December 1990.

Proposal announced: Not previously announced.

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

Amendments to capital allowance rollover relief

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Amends the various capital allowance rollover relief provisions so that rollover relief is available where:

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assets are disposed of more than once in a single year; or

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assets that were fully written-off at the time they were acquired are disposed of again.

Date of effect: The amendments apply from the same time as the existing provisions; that is:

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to transfers of assets within wholly-owned company groups occurring after 6 December 1990 and before 20 December 1991 where an election is made for the rollover relief to apply;

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to transfers of assets within wholly-owned company groups, to wholly owned companies or between spouses occurring after 19 December 1991 where capital gains tax rollover relief is obtained;

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to disposals that are taken to occur, after 19 December 1991, on the partial change in ownership of property and an election is made by all the persons owning the property both before and after that change.

Proposal announced: Not previously announced.

Financial impact: The amendments give effect to the Government's original policy and there is no further cost to the revenue.

Royalty withholding tax

(Income Tax Assessment Act 1936 , the Income Tax (Dividends and Interest Withholding Tax) Amendment Act 1974 and the Income Tax (International Agreements) Act 1953)

•

Introduces a final withholding tax on royalties paid or credited to non-residents instead of the current assessment basis of taxation.

Date of effect: Commencement of the recipient's 1993/94 income year

Proposal announced: 1992/93 Budget.

Financial impact: There will be an estimated gain to revenue of $50M in 1993-94, $55M in 1994-95 and $60M in 1995-96.

Foreign Source Income amendments

Amendment to limit the clawback provision in subsection 47A(13)

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Provides, in certain cases, a sunset clause for subsection 47A(13) so that a group of companies is not locked into a given company structure indefinitely for fear of triggering the provision in that subsection that creates a tax liability.

Date of effect: 3 June 1990

Proposal announced: Not previously announced

Financial impact: This amendment will have a small but unquantifiable cost to the revenue.

Amendment to limit the clawback provision in subsection 47A(14)

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Limits the clawback provision in subsection 47A(14) so that it will not apply to an acquisition of shares or the payment of calls made before 13 September 1990 unless the Commissioner of Taxation is of the opinion that this had the effect of enabling any taxpayer to avoid tax.

Date of effect: 3 June 1990

Proposal announced: Not previously announced

Financial impact: This amendment will have a small but unquantifiable cost to the revenue.

Offset of Carry Forward Primary Production Losses Against Foreign Income

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Enables taxpayers who have carry forward domestic primary production losses to choose whether to offset those losses against their assessable foreign income.

Date of effect: The election will be available to taxpayers in respect of assessments for the 1991-92 and subsequent years of income.

Proposal announced: Not previously announced

Financial impact: This amendment will have a small but unquantifiable cost to the revenue.

Amendments to the Taxation Administration Act 1953

Method of payment of taxation and child support liabilities

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Permits the making of Regulations that will enable taxpayers to pay their taxation and child support liabilities through the recently introduced BILLPAY or Electronic Funds Transfer systems.

Date of effect: Date of Royal Assent of the amending Act.

Proposal announced: Not previously announced.

Financial impact: Insignificant.

Amendments relating to taxation offences

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Makes technical amendments and to correct an inconsistency in the Taxation Administration Act 1953 in relation to penalties for taxation offences.

Date of effect: Date of Royal Assent of the amending Act

Proposal announced: Not previously announced.

Financial impact: Insignificant

Petroleum Resource Rent Tax technical amendments

(Petroleum Resource Rent Tax Assessment Act 1987)

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Amends the Petroleum Resource Rent Tax Assessment Act 1987, in relation to the transfer of expenditure between persons where there is a sale of interest in a project and between projects held by the one person or company group, to ensure that:

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exploration expenditure incurred on or after 1 July 1990 is taken to be incurred by the purchaser of a vendor's whole entitlement to assessable receipts from a petroleum project; and

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exploration expenditure is still transferable between projects if an interest in the transferring project has been lost only because a project licence or exploration right has ceased to be in force.

Date of effect: 1 July 1991.

Proposal announced: Not previously announced.

Financial impact: None.