Senate

Explanatory Memorandum

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

Chapter 6 - Gifts

This chapter explains the rewritten provisions under which income tax deductions are allowed for gifts.

These provisions are contained in new Division 30 in Schedule 1 to the Tax Law Improvement Bill 1997.

Transitional and consequential amendments for the rewritten provisions are contained in Schedule 9 to the Bill.

Overview of this chapter

This chapter covers:

•

the rewritten provisions in Division 30 (Gifts or contributions) in Schedule 1 to the Tax Law Improvement Bill 1997; and

•

the transitional provisions and consequential amendments for those rewritten provisions, which are in Schedule 9 to the Bill.

Division 30 rewrites the provisions of the 1936 Act that allow deductions for gifts and contributions. The corresponding provisions of the 1936 Act are sections 78, 78AA and 78AB.

The rewritten provisions will be in Division 30 of the 1997 Act.

Part A of this chapter summarises new Division 30.

Part B explains the changes proposed to the content of Division 30.

Part C explains why some provisions of the 1936 Act have not been rewritten.

Part D explains the transitional provisions which set out how and when the rewritten provisions will apply. These provisions are located in Part 1 of Schedule 9 to the Bill.

Part E explains the amendments that need to be made to the 1997 Act, the 1936 Act and other Commonwealth legislation, as a consequence of the rewriting of the provisions of the 1936 Assessment Act. These provisions are located in Parts 2 to 4 of Schedule 9 to the Bill.

A. Summary of the new law

Guide to Division 30: Gifts or contributions

What the Division will do

This division sets out the rules for working out deductions for certain gifts or contributions

Guide to Subdivision 30-A: Deductions for gifts or contributions

What the Subdivision will do

Subdivision 30-A allows deductions of a non-testamentary gift or contribution to a recipient listed in the following table, subject to any conditions and valuation rules [section 30-15]

Guide to Subdivision 30-B: Tables of recipients for deductible gifts

What the Subdivision will do

It contains lists of potential recipients of a deductible gift and any special conditions that may need to be satisfied. The lists are grouped as follows:

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Health [section 30-20]

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Education [sections 30-25 to 30-35]

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Research [section 30-40]

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Welfare and rights [section 30-45]

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Defence [section 30-50]

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Environment [sections 30-55 and 30-60]

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Industry, trade and design [section 30-65]

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The family [sections 30-70 and 30-75]

•

International affairs [sections 30-80 and 30-85]

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Sports and recreation [section 30-90]

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Philanthropic trusts [section 30-95]

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Cultural organisations [sections 30-100 and 30-110] .

Guide to Subdivision 30-C: Rules applying to particular gifts of property

What the Subdivision will do

It contains special rules for working out how much can be deducted for a gift of property to a public library, museum or art gallery, the Australiana Fund, Artbank or a National Trust body [items 4, 5 and 6 in the table in section 30-15] .

The general rule is

The deduction is the average of the market values specified in the written valuations from approved valuers.

Subdivision 30-C sets out:

(a)

how a person becomes an approved valuer; and

(b)

the exceptions to the general rule; and

(c)

the situations when you must reduce the amount you can deduct, for example if the recipient did not receive immediate and unconditional control of the property; and

(d)

how much can be deducted if the property is jointly owned.

Guide to Subdivision 30-D: Testamentary gifts under the Cultural Bequests Program

What the Subdivision will do

It allows a deduction for a testamentary gift of property under the Cultural Bequests Program.

Guide to Subdivision 30-E: Register of environmental organisations

What the Subdivision will do

It requires the establishment of a register of environment organisations. It sets out certain conditions that such organisations must meet. Section 30-15 allows you to deduct a gift that you make to a fund that is on the register.

Guide to Subdivision 30-F: Register of cultural organisations

What the Subdivision will do

Requires the establishment of a register of cultural organisations. It sets out certain conditions that such organisations must meet. Section 30-15 allows you to deduct a gift that you make to a fund that is on the register.

Guide to Subdivision 30-G: Index to this Division

What the Subdivision will do

Contains an index of all potential recipients of deductible gifts.

B. Discussion of changes

Removal of discretions

Change

Omit Commissioner's discretions which are inconsistent with self-assessment principles.

Explanation

As rewriting of the income tax law proceeds, many of the discretions that the Commissioner of Taxation may exercise are being removed. This allows the new law to more fully reflect the principles of the self assessment system.

The following changes are being made in the context of reviewing the gift provisions (references are to the 1936 Act):

Section 30-15 Deductions for gifts or contributions

The provision sets out the rules for working out deductions for certain gifts.

Change

Simplify the rules for deductions for gifts of trading stock outside the ordinary course of business.

Explanation

This will remove a minor anomaly and allow the law to be more simply expressed.

The current law allows a deduction for a gift of trading stock to which subsection 36(1) of the 1936 Act applies. That subsection requires the value of trading stock to be included in assessable income if it is disposed of outside the ordinary course of business (because the cost of acquiring an item of trading stock is normally a deduction).

However, a deduction is not allowable if the donor elects to take advantage of certain provisions that allow a reduction in the amount included in assessable income. This applies to elections under subsection 36(3) and section 36AAA, but not to a similar election under section 36AA:

•

subsection 36(3) allows a reduction in the amount included in assessable income if live stock is disposed of because of a natural disaster, the expropriation of land, or tick control;

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section 36AAA is a similar concession for the disposal, death or compulsory destruction of live stock by reason of fire, drought or flood; and

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section 36AA allows a reduction in the amount to be included in assessable income in certain cases of compensation resulting from death, disposal or compulsory destruction of live stock.

Section 30-15 will apply to all the elections, thus ensuring a consistent and simple rule. In practice a gift of trading stock would rarely arise in the circumstances covered by section 36AA.

Section 30-200 Getting written valuations

This provision requires valuations of some gifts of property. The valuations are required to work out how much can be deducted for a gift of property to a public library, museum or art gallery, the Australiana Fund, Artbank or a National Trust body.

Change

Remove the requirement that the valuations must be given to the Commissioner.

Explanation

This requirement is no longer enforced. This allows the new law to more fully reflect the principles of the self assessment system.

C. Provisions of the old law that have not been rewritten

Subsection 78(25A) of the 1936 Act provides that guidelines and determinations made in relation to a testamentary gift under the Cultural Bequests Program are disallowable instruments for the purposes of section 46A of the Acts Interpretation Act 1901 . The Legislative Instruments Bill 1996 (currently before Parliament) will ensure that these guidelines and determinations are legislative instruments. They will be subject to review under the Legislative Instruments Bill 1996. The Bill will also remove the former section 46A of the Acts Interpretation Act . Accordingly, it is no longer necessary to specifically state that these guidelines and determinations are disallowable instruments.

D. Transitional arrangements

Part 1 of Schedule 9 of the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this chapter.

Part 1 will insert in Chapter 2 of the Income Tax (Transitional Provisions) Act 1997 new Part 2-5, Divisions 25 and 30. New Divisions 25 and 30 will set out how and when the rewritten sections will apply.

The rewritten provisions will apply to assessments for the 1997-98 or later income years. [Schedule 9, Part 1: section 30-1, Transitional Provisions Act]

Transitional provisions will ensure that any declarations, instruments, certificates, guidelines and gift registers in force under the Income Tax Assessment Act 1936 will continue to remain in force for the purposes of the Income Tax Assessment Act 1997 . [Schedule 9, Part 1: sections 30-5, 30-15, 30-20 and 30-25, Transitional Provisions Act]

Section 30-10 will ensure that any applications for the approval of a testamentary gift that have not yet been decided will be treated as an application under the rewritten provisions. [Schedule 9, Part 1: section 30-10, Transitional Provisions Act]

E. Consequential amendments

Amendments of the Income Tax Assessment Act 1997

Part 2 of Schedule 9 to the Bill will amend the 1997 Act to:

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update references to provisions of the 1997 Act that have been rewritten in Division 30 and section 25-50 in Schedule 1; and

•

insert additional definitions in the Dictionary (section 995-1) of terms that are used in the rewritten provisions in Division 30 in Schedule 1.

Updated references

Section 12-5 of the 1997 Act lists all the provisions of both the 1936 and the 1997 Acts that contain rules about specific types of deductions. Part 2 of Schedule 9 to the Bill will update references to provisions in the 1936 Act that have been rewritten in Division 30 and section 25-50 in Schedule 1, so that the lists refer to the rewritten provisions. [Schedule 9, Part 2, items 3 to 5]

Part 2 of Schedule 9 will also update references to the 1936 Act gift provisions that appear in other provisions that have already been rewritten. These references occur in sections 26-55 and 165-55 of the 1997 Act. [Schedule 9, Part 2: items 6 to 13]

Dictionary terms

Part 2 of Schedule 9 to the Bill will insert definitions of terms used in the rewritten provisions in Division 30 in Schedule 1.

In one case, the label used and the meaning of the definition have not changed from the existing law. This is the case for the following definition:

Cultural organisation. The definition is the same as that in subsection 78AA(1) of the 1936 Act. [Schedule 2, Part 2: item 14]

There is one new defined term.

New definition: Environmental organisation [Schedule 2, Part 2: item 15]

Commentary: The definition is based on the requirements set out in subsections 78AB(2) and (7). This results in no change to the law.

Application of amendments

The amendments made by Part 2 of Schedule 9 apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill 1997] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the gift provisions.

Amendments of the Income Tax Assessment Act 1936

Part 3 of Schedule 9 to the Bill will amend the 1936 Act to:

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insert references to the rewritten provisions (contained in Division 30 in Schedule 1) where the 1936 Act refers to the existing provisions; and

•

close off the application of provisions of the 1936 Act that have been rewritten in Division 30 and section 25-50 in Schedule 1, so that the existing provisions apply only to the 1996-97 and earlier income years.

Inserting references to rewritten provisions

Part 3 of Schedule 9 will insert in the 1936 Act references to the rewritten provisions contained in Division 30 where the 1936 Act refers to the existing provisions. There are two categories of these amendments as discussed below.

The first category will add a reference to a rewritten provision in a section of the 1936 Act where a reference to a provision in the 1936 Act currently appears, so that provisions in both the 1936 and 1997 Acts are referred to. This is necessary for the reference to subsections 78(4) and (5) in paragraph (aa) of the definition of apportionable deductions in subsection 6(1) of the 1936 Act. This definition has not yet been rewritten and closed off, and can apply to amounts relating to more than one income year (including an income year before the 1997-98 income year). This makes it necessary to refer to both the existing and rewritten provisions in the 1936 and the 1997 Acts. [Schedule 9, Part 3: items 16]

The second category will omit the reference to an existing provision in a section of the 1936 Act and replace it with the rewritten provision. This is necessary for those sections of the 1936 Act that:

•

have not yet been rewritten and closed off; and

•

can apply to amounts that relate to only one income year at a time, being the 1997-98 or a later income year. [Schedule 9, Part 3: items 33 to 40]

Closing off the application of existing provisions

Part 3 of Schedule 9 will insert new provisions into the 1936 Act that will close off the application of existing provisions that have been rewritten. [Schedule 9, Part 3: items 17 to 32]

In these cases, the existing provisions need to be closed off so that they only apply to the 1996-97 and earlier income years. This complements the transitional provisions in Part 1 of Schedule 9 which ensure that the corresponding rewritten provisions apply to the 1997-98 and later income years.

Application of amendments

The amendments made by Part 3 of Schedule 9 apply to assessments for the 1997-98 and later income years. [clause 4, Tax Law Improvement Bill 1997] This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the gift provisions.

Amendments of other Commonwealth legislation

Part 4 of Schedule 9 to the Bill will add or substitute references to the rewritten gift provisions in the following Commonwealth Acts: