Senate

Explanatory Memorandum

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

General outline and financial impact

Capital gains tax - exemption on the sale of a small business for retirement

Inserts new Division 17B of the Income Tax Assessment Act 1936 to provide small business taxpayer's with an exemption from tax on capital gains made on the disposal of some or all of their active assets if the proceeds are used for retirement.

Date of effect: This measure will apply to assets disposed of on or after 1 July 1997.

Proposal announced: 1996-97 Budget and Treasurers press release, 20 August 1996.

Financial impact: The estimated revenue cost for this measure in 1998-99 and 1999-2000 is $50million.

Compliance cost impact: It will be necessary for small business taxpayers electing for the CGT retirement exemption to keep records of capital gains deemed to be, or paid out as, eligible termination payments. Companies and trusts will also need to keep additional records to establish that an individual is a controlling individual. The retention of these extra records is likely to increase the compliance cost. In addition, there may be some additional costs involved for small business taxpayers who must roll-over the ETP.

Sale of mining rights

Amends the income tax law to ensure that the Senate amendment of 12December 1996 to paragraph 23(pa) of the Income Tax Assessment Act 1936 is given its intended effect. The amendments will also ensure that the Income Tax Assessment Act 1997 continues that effect from 1 July 1997.

Date of effect: The amendments will commence from Royal Assent and will apply to income derived from the sale, transfer or assignment of mining rights under a contract entered into after 20 August 1996.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: None.

Family tax initiative

Amends the Income Tax Assessment Act 1936 to allow taxpayers with exempt foreign earnings the proper amount of family tax assistance.

Date of effect: 1 January 1997.

Proposal announced: Not previously announced.

Financial impact: Negligible cost to revenue.

Compliance cost impact: No additional compliance costs as a result of these measures, over and above those already associated with family tax assistance.

Dividend imputation and tax exempt entities

Amends the income tax law to ensure that franking surpluses of taxable companies which are wholly owned by tax exempt entities are not able to be passed to third parties.

Date of effect: Applies to entities that cease to be wholly owned by tax exempt entities on or after 3 July 1995.

Proposal announced: Foreshadowed in the Government's 1996-97 Budget Statement. Most of the measures dealing with transitional issues of tax exempt entities which become taxable were introduced in Taxation Laws Amendment Bill (No. 3) 1996.

Financial impact: Difficult to quantify due to the generic nature of the legislation. Any revenue impact would need to be determined on a case by case basis.

Compliance cost impact: The amendments are not expected to impose any additional compliance costs on taxpayers as taxpayers will not be required to keep additional records.

Principal residence exemption from CGT

Amends the income tax law to extend the principal residence exemption to alleviate hardship associated with the disposal of a deceased's principal residence by beneficiaries and trustees of deceased estates, and to reduce the compliance costs associated with the principal residence exemption.

The amendments will:

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extend the period beneficiaries and trustees of deceased estates have to dispose of a principal residence without affecting the principal residence exemption from 12 months to 2 years;

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provide a partial CGT exemption for trustees and beneficiaries of deceased estates where the deceased never used the dwelling as a principal residence but beneficiaries of the deceased do so;

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treat a beneficiary or trustee who acquires a dwelling as a result of a death as having acquired the dwelling at its market value on the date of death if it was (or is deemed to be) wholly the principal residence of the deceased at the time of death; and

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require the use of market value as the cost base where a person's principal residence is first used for income producing purposes.

Date of effect: The amendments will apply as follows:

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the extension of the 12 month period to 2 years applies to disposals after 7.30 pm, 20 August 1996 (by legal time in the Australian Capital Territory);

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the new partial CGT exemption applying when a dwelling that was never used by the deceased as a principal residence, applies to dwellings disposed of after 7.30 pm, 20 August 1996 (by legal time in the Australian Capital Territory);

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the new CGT rules treating beneficiaries and trustees of deceased estates as acquiring the deceased's principal residence at market value will apply when the deceased's principal residence was acquired by the beneficiary or trustee after 7.30pm, 20 August 1996 (by legal time in the Australian Capital Territory); and

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the use of a market value as the cost base of a dwelling will apply to dwellings that are used for the first time by the taxpayer for income producing purposes after 7.30 pm, 20August 1996 (by legal time in the Australian Capital Territory).

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

Financial impact: Estimated revenue loss of $7 million in 1997-98, $8million in 1998-99 and $8 million in 1999-2000.

Compliance cost impact: Overall compliance costs will be reduced. Taxpayers who inherit principal residences will not have to inquire or rely on the deceased to have kept proper records. Taxpayers who first begin to use a principal residence for income producing purposes will not have to obtain records of costs and expenditures incurred before that use (eg. cost of improvements to the residence). This reduction in compliance costs may be partially offset by taxpayers having to obtain or compute their own market valuations of their principal residences.

Treatment of payments made under the firearms surrender arrangements

Amends the income tax laws to provide for the taxation treatment of compensation payments made under the firearms surrender arrangements.

Date of effect: The amendments will apply to assessments for the income years during which compensation payments are made under the firearms surrender arrangements, commencing in the 1996-97 year of income.

Proposal announced: The Compensation for the Surrender of Prohibited Firearms Guidelines issued by the Commonwealth Law Enforcement Board as a result of the meeting of State and Territory Police Ministers held on 10 May 1996. Treasurer's Press Release 24 July 1996.

Financial impact: The cost to revenue from surrendering firearms that are held as trading stock is estimated at $8 million for the 1997-98 income year and $2 million for the 1998-99 income year. The estimated cost to revenue from taxpayers for loss of business is $60 million and $10 million in the 1997-98 and 1998-99 income years respectively. It is expected that claims for loss of business will be made beyond 1998-99. The cost to revenue from exempting farmers and professional shooters is estimated at $4 million in 1997-98 and $1 million in 1998-99. The cost to revenue from exempting individuals and collectors from capital gains tax is expected to be negligible.

Compliance cost impact: There will be no compliance costs imposed on individual gun owners. Taxpayers who hold firearms as trading stock in the business will need to know the acquisition cost of trading stock in order to comply with the proposed amendments. It is expected that, in situations where stock has been revalued, this information should be available from business records.

Remote area housing

Amends the fringe benefits tax law to make housing fringe benefits provided by primary producers in remote areas exempt from FBT where the housing fringe benefit is provided in respect of primary production employment.

Date of effect: From 1 April 1997.

Proposal announced: This measure was announced in the 1996-97Budget.

Financial impact: The cost of this measure to the revenue is expected to be $10 million in 1997-98; $5 million in 1998-99 and $5 million in 1999-2000.

Compliance cost impact: This measure will reduce compliance costs for primary producers who provide remote area housing fringe benefits. They will no longer be required to keep records for these benefits. However, they will have to keep records for any free or subsidised residential fuel provided in connection with these benefits.

Depreciation of lessors' fixtures

Amends the income tax law to treat lessors of depreciable plant or articles under a chattel lease as retaining ownership notwithstanding that the leased equipment may be a fixture on another person's land. To be treated as an owner, the lessor must retain an effective right to recover the leased property.

Date of effect: Applies to depreciable plant and equipment first used for income producing purposes by a lessor on or after 1 July 1996.

Proposal announced: Treasurer's Press Release No 25 of 1996, dated 11June 1996.

Financial impact: The amendments are likely to have minimal revenue cost because, in general, lessors claim depreciation deductions in relation to leased chattels that may or may not become fixtures during the term of the lease.

Compliance cost impact: There will be only slight impact on compliance costs. By treating eligible fixtures in the same manner as chattels, the amendments will eliminate some existing administrative and compliance difficulties.

Increase in age limit for superannuation contributions

Amends the income tax law to increase the threshold for which employers are no longer required to provide superannuation support for their employees. The threshold will be increased from age 65 to age 70.

Date of effect : 1 July 1997.

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

Financial impact: Estimated cost to the revenue of $9 million in 1998-99 and $7 million in 1999-2000.

Compliance cost impact: Employers will face compliance costs in providing superannuation support for employees who are over age 65 but under 70. These costs are the same as employers currently face in providing superannuation support for employees under 65 years. This measure is not expected to have any effect on compliance costs of individuals, since no additional obligations are imposed. Superannuation funds will face minor compliance costs in making the necessary changes to their trust deeds.

Rebate for superannuation contributions made on behalf of a low-income or non-working spouse

Amends the income tax laws to provide a rebate for a person contributing to superannuation on behalf of a low- income or non-working spouse.

Date of effect: The rebate will be available for contributions made on or after 1 July 1997.

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

Financial impact: The cost to revenue for the 1998-99 year is $38million. The cost to revenue for the 1999-2000 year is $38 million. In each of the financial years, the cost to revenue to provide the rebate to taxpayers whose spouse's assessable income does not exceed $10,800 is $35 million. There is an additional revenue cost of $3 million associated with the shade-out of the rebate where the spouse's assessable income is greater than $10,800 but less than $13,800.

Compliance cost impact: The compliance costs imposed on taxpayers will be minimal. The taxpayer will be required to keep a record of superannuation contributions made on behalf of the spouse and to know the assessable income of the spouse.

Research and development

Amends the research and development (R & D) provisions of the income tax law to:

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ensure the same limitations on core technology deductions apply to companies in partnership as apply to other companies;

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disallow deductions for companies registered jointly under section 39P of the Industry Research and Development Act 1986 (syndicates) where an extension of the joint registration has been granted under section 39PB and the Industry Research and Development Board, having determined that the syndicate has breached a condition of that extension, issues a certificate to the Commissioner of Taxation under subsection 39PB(6);

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ensure that, where a taxpayer conducts different R & D activities in one year, the formula used to calculate deductible 'residual feedstock expenditure' properly reflects the R & D activity to which the particular feedstock expenditure relates;

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ensure a deduction for core technology expenditure is allowable in the year the expense was first incurred;

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make provision for a balancing adjustment where post 23 July 1996 pilot plant is disposed of prior to the completion of the R & D activity;

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change a heading in the depreciation table in subsection 73B(4H) for post 23 July 1996 pilot plant; and

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correct a paragraph citation.

Date of effect: The amendment to the core technology provisions will apply to core technology expenditure incurred under contracts entered into on or after 8.30pm, by standard time in the Australian Capital Territory, on 13 December 1996. The remaining amendments will apply as originally intended and announced, from 5.00pm by standard time in the Australian Capital Territory on 23July1996.

Proposal announced: In the Parliament on 13 December 1996, the Treasurer foreshadowed amendments to prevent partnerships being used to recreate the effects of R & D syndication.

Financial impact: The amendments should largely restore the expected revenue gains from the R & D measures proposed in Taxation Laws Amendment Bill (No. 3) 1996.

Compliance cost impact: The extension of the deduction rules for core technology will require companies in partnership to do more computation and record keeping.

Sales tax - telecommunication and audio visual equipment

Amends the Sales Tax (Exemptions and Classifications) Act 1992 to ensure goods of a kind ordinarily used in the provision of telecommunication and audio visual services cannot be exempt from sales tax as electrical fittings.

Date of effect: 7.00 pm Australian Eastern Summer Time on 7November1996.

Proposal announced: Treasurer's Press Release No. 109 of 7November1996.

Financial impact: This measure will prevent possible decreases in revenue from sales tax as follows:

1996-97 - less than $5 million

1997-98 - less than $10 million

1998-99 - less than $10 million.

Compliance cost impact: This measure seeks to restore the tax base with respect to goods of a kind ordinarily used in the provision of telecommunication and audio visual services. Accordingly there will be no change in compliance costs for affected taxpayers; taxpayers' obligations to determine taxable values, keep accurate records and remit sales tax will remain the same as it was prior to 7 November 1996.

Subsidiary company liquidations and capital gains tax

Amends the CGT provisions to reduce a capital gain or loss realised on the cancellation of shares in a company on dissolution of the company where assets are distributed in specie to another company which owns all of the shares in the transferee.

Date of effect: The proposed amendments will extend CGT relief to share cancellations occurring after 7.30pm on 20 August 1996.

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

Financial impact: The revenue impact is not quantifiable.

Compliance impact: Compliance costs are likely to be increased as a result of this measure as a consequence of the additional calculations required to determine any capital gain or loss reduction on cancellation of shares. However, these costs are unavoidable if the relief provided by this measure is to be granted.

Gains and losses

Amends the income tax law to allow companies to offset capital losses against capital gains realised in the same year of income in certain circumstances where there has been a change of majority ownership of the company in the particular year of income. The Bill also makes several related amendments to:

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deal with the capital gains tax treatment of subvention payments;

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rectify anomalies in the loss and bad debt write-off provisions;

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include similar safeguards in the capital loss provisions as are currently contained in the revenue loss provisions to prevent manipulation of a business in order to benefit from the same business test relief; and

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amend the capital loss transfer provisions to give the Commissioner of Taxation unlimited time to amend the assessment of a transferee company where the loss was not in fact incurred by the transferor company.

Date of effect: The amendments relating to current year capital losses and subvention payments will effectively apply from the commencement of the 1996-97 year of income.

The amendments rectifying anomalies in the loss and bad debt write-off provisions will apply to the 1996-97 year of income and later years of income but only to events happening after the 26 March 1997. However, the amendment inserting safeguards into the same business test provisions amendment will apply to manipulations in the scope of a company's business activities that occur after 7.30pm EST 20 August 1996.

The amendment giving the Commissioner unlimited time to amend an assessment will apply from the 26 March 1997 to taxpayers whose assessments are capable of being amended by the Commissioner under the existing law at 26 March 1997.

Proposals announced: 1996-97 Budget (20 August 1996), except for the amendment giving the Commissioner unlimited time to amend an assessment. The latter amendment was not previously announced.

Financial impact: Increased revenue of $7.5 million in 1996-97, $40million in 1997-98 and $30 million in 1998-99 and 1999-2000 is expected.

Compliance cost impact: Where the majority underlying ownership of a company has changed in a year of income and the same business test is failed, a corporate taxpayer who has incurred a capital loss during the year will now be able to carry forward that loss to a future year of income. Thus, it will be necessary for such taxpayers to maintain a record of the amount of the loss and the year in which the loss was incurred.

Corporate taxpayers will also have to keep records of the beneficial ownership of shares and the nature of the business when the loss was incurred. This is to ensure that relevant recoupment tests are satisfied when the loss is subsequently sought to be recouped or transferred. Records relating to the nature of a taxpayer's business will also need to be kept for the purposes of justifying reliance on the same business test relief.

In addition, the amendment giving the Commissioner unlimited time to amend an assessment in certain circumstances means that corporate taxpayers who have had capital losses of group companies transferred to them will be required to keep records of transferred amounts for an unlimited period.

However, these requirements should not result in additional compliance costs because such records are already required to be kept under the existing law relating to the recoupment and transfer of revenue losses.

Taxpayers will also incur compliance costs in familiarising themselves with the new law. However, to the extent that the measures clarify the operation of the law, there will be a reduction in compliance costs.

Deductions for gifts

Amends the income tax law to allow income tax deductions for gifts made to certain funds and organisations.

Proposal announced: The Treasurer announced two of the measures during 1996 (one of which was announced jointly with the Minister for Communications and the Arts) and one in 1997.

Financial impact: The amendments do not have any significant impact on the revenue.

Compliance cost impact: There are no compliance cost impacts.