SENATE

REPLACEMENT Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE House of Representatives TO THE BILL AS INTRODUCED

General Outline and Financial Impact

The Taxation Laws Amendment Bill (No.2) 1993 will amend the Income Tax Assessment Act 1936 and the Fringe Benefits Tax Assessment Act 1986(FBTAA) by making the following changes:

Fringe Benefits Tax - Extension of Child Care Exemptions

•

Extends the exemption which is currently available to priority of access payments to eligible child care centres to priority of access payments (made for similar purposes) to Family Day Care, Outside School Hours Care and Vacation Care; and

•

Includes a transitional provision which reflects the change of name of the program known as Services for Families with Children to the Children's Services Program.

Date of effect: On or after 1 July 1993

Proposal announced: Announced by the Prime Minister in the "Investing in the Nation Statement" of 9 February 1993.

Financial impact: The estimated cost to revenue in 1993-94 will be $0.5m, $1.5m in 1994-95, $2.2m in 1995-96 and $3.0m in 1996-97.

Amendments to improve the readability of section 78

•

Restructures the gift provisions to improve accessability and readability.

•

Transitional arrangements will also be in place to ensure that funds, authorities or institutions that have already been approved will continue to hold that approval under the new legislation.

Date of Effect: 1 July 1993.

Proposal announced: Not previously announced.

Financial impact: None

Amendments relating to migration information

•

Amends section 16 to permit the Commissioner of Taxation to furnish information to the Secretary to the Department of Immigration and Ethnic Affairs for the purpose of locating persons who are unlawfully in Australia.

Date of effect: Date of Royal Assent.

Proposal announced: Minister of Immigration, Local Government and Ethnic Affairs Media Release 79/92 of 17 December 1992.

Financial impact: None.

Income tax exemption for Defence Force and Federal Police personnel serving in certain areas

•

Exempts from income tax the pay and allowances of members of the:

-

Australian Defence Force allotted for duty with Operation Restore Hope and the United Nations Operation in Somalia;

-

Australian Defence Force allotted for duty with the United Nations peacekeeping force in the area formerly known as Yugoslavia; and

-

Australian Federal Police serving with the United Nations Transitional Authority in Cambodia.

Date of effect: - Former Yugoslavia area from 1991-92 year of income

-

Somalia from 1992-93 year of income

-

Cambodia from 1991-92 year of income

Proposal announced: Not previously announced.

Financial impact: Approximately $13m and $1m for the 1992-93 and 1993-94 income years respectively.

General Investment Allowance

•

Provides an incentive for investment in new plant used wholly and exclusively in Australia in producing assessable income. The incentive (the "general investment allowance") consists of a deduction equal to 10% of the capital cost of qualifying plant. This allowance may be additional to both depreciation and the development allowance.

Date of effect: The amendment applies to qualifying plant acquired under a contract entered into after 8 February 1993 and before 1 July 1994, or if constructed by the taxpayer, where construction commenced during that period. The plant must be first used to produce assessable, or installed ready for such use, before 1 July 1995.

Proposal announced: Announced in the Prime Minister's "Investing in the Nation Statement" of 9 February 1993.

Financial impact: The following is the estimated cost to the revenue of this measure:

The Taxation of Foreign Investment Funds

The proposed amendments to the taxation of foreign investment funds (FIFs) will:

•

make changes to the controlled foreign company (CFC) measures to:

•

exclude from the FIF income of a CFC certain dividends paid by a FIF out of comparably taxed profits;

•

provide ordering rules to deal with the interaction of attribution accounts under the CFC measures and attribution accounts under the FIF measures; and

•

clarify that the income of a CFC that is attributed to resident taxpayers who hold interests in the CFC is not to include a distribution paid by a FIF out of profits which have been taxed under the FIF measures;

•

modify the operation of the market value method for determining FIF income to:

•

provide a more equitable basis of taxation where a taxpayer changes from using the deemed rate of return method of calculating FIF income to the market value method;

•

ensure that double taxation of income will not occur in relation to interests in a FIF which are disposed of by a taxpayer during an accounting period of the FIF;

•

enable taxpayers to determine the market value of an interest in a company FIF by reference to the redemption price of the interest; and

•

allow taxpayers to elect irrevocably to compute FIF income and losses for all of their FIF interests on a basis that takes foreign currency gains and losses into account annually;

•

modify the rules which govern when the calculation method for determining FIF income may apply by:

•

preventing taxpayers who cease to use the calculation method for calculating FIF income for interests in a FIF from using the calculation method again in relation to interests in that FIF (including where interests are acquired in the FIF at a future time);

•

enabling taxpayers to use the calculation method for the notional accounting period of a FIF which is in progress at the time the election was made; and

•

allow Regulations to be made to prescribe the amortisation rate for a class of property prescribed for the purposes of subparagraph 570(1)(a)(iii);

•

ensure that amounts which are exempt from tax because they are paid out of profits which have been taxed under the FIF measures are not treated as exempt income for the purposes of calculating capital gains and losses under the capital gains tax provisions;

•

ensure that amounts upon which a beneficiary of a foreign trust estate is taxed under the FIF measures are not taxed again in the hands of a transferor of property to the foreign trust estate or the trustee of the foreign trust estate;

•

ensure that the FIF measures will not apply for the purposes of calculating the taxpayer's share of the net income of a trust estate if the FIF measures do not apply to the beneficiary's interest in that trust estate because of the country fund exemption;

•

ensure that the FIF measures do not apply to a taxpayer who is both a resident of Australia and another country where a double taxation agreement (DTA) treats the taxpayer as a resident solely of that other country;

•

ensure that the exemption for certain FIF interests that are trading stock can apply in relation to all interests in FIFs which would normally be treated as trading stock for the purposes of the Act;

•

provide that the exclusion from passive income of amounts that arise from an asset necessarily held by a taxpayer in connection with an insurance business actively carried on by the taxpayer has effect from the 1992-93 year of income;

•

provide that profits of a FIF computed under the calculation method will take into account amortisation of assets of a class prescribed in the regulations at the rates set out in those regulations; and

•

correct technical problems with the drafting of paragraphs 160AFCK(2)(b), 509(b) and section 523.

Proposal announced: A number of the amendments were announced by the Treasurer in a press release of 9 October 1992. The remainder have not been announced.

Financial impact: The amendments will have minimal effect on revenue.

Company Tax Instalment System

•

The Bill will amend the Income Tax Assessment Act 1936 to implement revised company tax collection arrangements.

Proposal announced: "Investing in the Nation Statement" by the Prime Minister on 9 February 1993.

Financial impact: The estimated gain to revenue is $0.6 billion in 1994-95, $1.6 billion in 1995-96 and $1.7 billion in 1996-97.

Company Tax Rates Reduction

•

Amends the Income Tax Rates Act 1986 to reduce the rate of company tax from 39 per cent to 33 per cent. It will also reduce the concessional tax rate applying to the income of Pooled Development Funds from 30 per cent to 25 per cent.

Date of effect: To apply in respect of assessments for 1993-94 and subsequent years of income.

Proposal announced: Prime Minister's statement of 9 February 1993 and Treasurer's Press Release No.21 of 25 March 1993.

Financial impact: The reduction in the company tax rate will cost the revenue $0.4 billion in 1993-94, $1.8 billion in 1994-95, $1.6 billion in 1995-96 and $1.7 billion in 1996-97. The Pooled Development Fund rate cut will cost an additional $3.0 million in 1994-95.