SENATE

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Tax rebate for low income aged persons

Inserts two new sections to provide an income tax rebate for persons who are:

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of age pension age; and

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not in receipt of the age pension; and

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considered to be residents for age pension purposes; and

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in receipt of taxable income below the pensioner rebate cut-out threshold.

Date of effect: Applies for the income year 1996-97 and subsequent income years. Half only of the normal pensioner rebate will be available for the 1996-97 income year.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: The estimated reduction in revenue will be $10 million in 1996-97, $48 million in 1997-98, $65 million in 1998-99 and the following year.

Compliance cost impact: Some compliance costs will arise with taxpayers understanding of the taxation and social security entitlement rules for the rebate and the provision of extra information in tax returns. The rules will be explained in Tax Pack.

The rebate will be available on assessment. However, from the 1996-97 year of income, taxpayers can choose to vary their provisional tax, or apply to the Commissioner to reduce their tax instalment deductions, to take account of entitlements to the rebate. This would involve some costs to taxpayers and employers would incur some costs in keeping records and varying payroll systems.

Rebatable annuities

Amends the definition of 'qualifying annuity' in subsection 27A(1) of the Income Tax Assessment Act 1936 to ensure that, subject to exceptions for certain annuities purchased on or before 9 December 1987, only annuities purchased wholly with funds accumulated within the superannuation system are treated as eligible termination payment (ETP) amounts on commutation or termination. The purpose of the amendment is to prevent the conversion of ordinary annuities to rebatable annuities and pensions.

Date of effect: Applies to annuities commuted or terminated on or after 15 June 1996.

Proposal announced: By the Assistant Treasurer in Press Release No. AT15 on 14 June 1996.

Financial impact: No additional revenue is expected. However, failure to correct the anomaly poses a potentially significant threat to the revenue.

Compliance cost impact: The amendments are not expected to impose any additional compliance costs on taxpayers because taxpayers will continue to be able to commute these annuities and there will be no additional paperwork requirements.

Medical expenses rebate

Amends the income tax law to raise the threshold above which the medical expenses rebate applies.

Date of effect: Applies for the income year 1996-97 and subsequent income years.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: This measure is expected to raise $26 million in

1997-98, $23 million in 1998-99 and $24 million in 1999-00.

Compliance cost impact: There will be no additional compliance costs in regard to this measure as taxpayers will not be required to keep additional records. To qualify for the rebate taxpayers will have to keep records of medical expenses as they do under the existing law.

Sale of mining rights

Amends the income tax law to remove the exemption from tax on income derived from the sale, transfer or assignment of rights to mine for gold or for any prescribed metal or mineral.

Date of effect: Where the sale, transfer or assignment is under a contract entered into after 31 December 1996.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: The estimated revenue saving is $2 million in 1997-98, $20 million in 1998-99 and $40 million per year thereafter.

Compliance cost impact: Bona fide prospectors will now be required to declare income previously exempt with a resultant increase in their cost of compliance.

Equity investments in small-medium enterprises

Amends the income tax law to change the taxation treatment of eligible investments from being on revenue account to being subject to capital gains tax.

Date of effect: Applies to eligible equity investments made after 30 June 1996.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: The revenue impact is not quantifiable.

Compliance cost impact: There will be no real impact on compliance costs because institutions will still need to maintain records so that they can calculate any capital gain or loss on disposal.

Co-operative companies

Repeals paragraph 120(1)(c) of the Income Tax Assessment Act 1936 to remove the tax deduction for loan repayments in respect of certain loans made to co-operatives by governments. Loans already in existence at 7.30pm Eastern Standard Time on 20 August 1996 will continue to be eligible for the deduction.

Date of effect: The amendment applies, subject to certain transitional arrangements, to loans entered into after 7.30pm Eastern Standard Time on 20 August 1996, and to existing loans where their terms are altered after this time.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: The measure is expected to save the revenue $2million in 1997-98, $4 million in 1998-99 and $6 million in 1999-00.

Compliance cost impact: The repeal of the paragraph will have no impact on compliance costs.

Tax exempt entities that become taxable

Amends the income tax law to deal with transition issues that arise when a tax exempt entity becomes taxable (for instance when a Government Business Enterprise is sold to private interests). The amendments are designed to allocate income, deductions, gains and losses to the period either before or after loss of exemption. To achieve this the amendments will:

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deny deductions for superannuation payments, bad debts, eligible termination payments, and employee leave entitlements to the extent that they relate to the period when the entity was exempt;

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allocate income and deductions relating to the pre or post transition period in which they were derived or incurred for the purposes of the income tax law and ensure losses of the exempt period are not recognised for the purposes of the income tax law;

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value assets and liabilities of the entity at market value as at the date of transition, so as to allocate gains and losses in relation to those assets and liabilities to the pre or post transition period to which they relate;

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ensure changes in the value of trading stock are calculated from the time the entity becomes taxable;

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ensure that certain expenditure which provides an enduring benefit (eg. mining allowable capital expenditure and depreciation) is notionally written down during the exempt period. It will also ensure that an entity is able to claim remaining deductions for expenditure written off over more than one year where the expenditure was originally incurred by a predecessor government entity (eg. a department of State).;

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ensure no deduction is available for mining exploration and prospecting expenditure incurred before transition.

Date of effect: The amendments will apply to entities which become taxable on or after 3 July 1995.

Proposal announced: Not previously announced. On 3 July 1995 the previous Government announced a 'rule of books' approach to entities in transition from tax exempt to taxable status. Legislation to implement the announcement was introduced in Taxation Laws Amendment Bill (No. 5) 1995. That Bill lapsed with the proroguing of the Parliament.

Financial impact: It is difficult to determine the financial impact of generic legislation, however the amendments are expected to be revenue neutral.

Compliance cost impact: In designing the legislation the Government has been mindful to minimise compliance costs. For example, liability for pre-transition leave, bad debts and superannuation are established on the basis of the amounts determined as at transition. Any future deductions for these items are denied until the amount of this threshold is exceeded.

This avoids the need for employers to keep records of pre and post leave entitlement for each employee, and removes the need for individual apportionment calculations for each employee. No additional cost should be incurred in determining this liability over the cost that would be expected to be incurred upon the disposal of a business.

The proposed amendments are designed to clarify the taxation consequences of an exempt entity becoming taxable. This should reduce compliance costs which would otherwise have been incurred in the absence of the proposed generic legislation.

Taxpayers affected by the amendments will incur costs in gaining an understanding of the proposed new law and in ensuring the correct allocation of income, deductions, gains and losses to the relevant period.

Infrastructure borrowings - amendment of the Development Allowance Authority Act 1992

Prevents certain types of schemes undermining the integrity of the infrastructure borrowings program by breaking the symmetry in the special tax treatments of the payer and receiver of interest. Such schemes enable indirect infrastructure borrowings to be made functionally independent of the financing of an infrastructure project thereby increasing the value of tax benefits to those involved and the cost to revenue without a commensurate increase in the funding for private sector projects. To this end, the amending legislation will require:

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new indirect infrastructure borrowings or refinancing infrastructure borrowings that succeed them to be made only by Australian resident taxpayers; and

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any transfer of rights by a direct infrastructure borrowing lender or repayment of a direct infrastructure borrowing to be accompanied by repayment or parallel transfer of any associated indirect infrastructure borrowing or refinancing infrastructure borrowing that has succeeded the indirect infrastructure borrowing.

Date of effect : 30 October 1995.

Proposal announced : 1996-97 Budget, 20 August 1996. The proposal was previously announced by the former Government on 30 October 1995.

Financial impact : The proposed amendments have the potential to prevent a future loss to the revenue. The amount of potential revenue loss is not quantifiable.

Compliance cost impact: The measures will have no effect on compliance costs.