House of Representatives

Supplementary Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan Mp

Chapter 1 - Assistance to individuals and communities affected by the Victorian bushfires and North Queensland floods

Outline of chapter

1.1 These Government amendments introduce Schedule 5 to the Bill.

1.2 Part 1 of Schedule 5 amends the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) to make the income recovery subsidy exempt from income tax, and to ensure the subsidy is not included in separate net income for the purposes of calculating an entitlement to certain tax offsets.

1.3 Part 2 of Schedule 5 amends the ITAA 1997 to provide that the Treasurer may declare an event as a disaster for the purposes of establishing Australian disaster relief funds. The declaration of a disaster by the Treasurer will allow Australian disaster relief funds to receive tax deductible donations, and provide money for the relief of people in Australia in distress as a result of the disaster. Public benevolent institutions, which must normally operate for direct relief efforts, will also be able to establish Australian disaster relief funds for longer term recovery and community reconstruction efforts.

1.4 Part 2 of Schedule 5 also specifically lists the 2009 Victorian Bushfire Appeal Trust Account as a deductible gift recipient (DGR) in Division 30 of the ITAA 1997. This will ensure that the fund can use tax deductible donations for a wide range of activities, including recovery and community reconstruction efforts in communities affected by the 2009 Victorian bushfires, as well as providing direct benevolent relief to affected communities.

Context of amendments

Income recovery subsidy

1.5 The income recovery subsidy will provide financial assistance to employees, small business owners and farmers who can demonstrate they have experienced a loss of income as a direct result of the 2009 Victorian bushfires or North Queensland floods.

1.6 The Prime Minister announced the income recovery subsidy in Parliament on 10 February 2009.

1.7 The income recovery subsidy is administered by Centrelink, and is equivalent to the maximum rate of the Newstart allowance.

1.8 A payment received by a taxpayer as replacement for lost salary, wages or income is generally taxable. A legislative amendment is required to make the payment exempt from income tax.

1.9 Such payments would also normally be included in the calculation of separate net income. The calculation of separate net income can affect a taxpayer's eligibility for certain tax offsets.

1.10 Exempting these payments from income tax and separate net income will lessen the financial hardship experienced by those individuals and communities affected by the 2009 Victorian bushfires or North Queensland floods.

Australian disaster relief funds

1.11 Subsection 30-15(2) of the ITAA 1997 allows a tax deduction to taxpayers who make a gift or contribution to a fund, authority or institution covered by the tables in Subdivision 30-B, subject to certain conditions. Entities able to receive tax deductible gifts are known as DGRs.

1.12 There are more than 35 existing general DGR categories. Organisations which meet the criteria under these categories can apply to be endorsed by the Commissioner of Taxation (Commissioner) as a DGR. Gifts of $2 or more in cash or property to DGRs may be tax deductible.

1.13 A public fund is eligible to be endorsed by the Commissioner as a DGR under the Australian disaster relief fund category where it is established and maintained for charitable purposes solely to provide funds for the relief (including assistance to re-establish a community) of people in Australia who have suffered a disaster.

1.14 For an event in Australia to be recognised as a disaster under the current DGR provisions, it must be declared to be a disaster, or give rise to a declaration of a state of emergency, by the relevant Minister of a State or Territory.

1.15 Taxpayers can claim a tax deduction for a donation to an Australian disaster relief fund endorsed as a result of a declared disaster if it is made within two years from the first day of the event as specified in the declaration, or if no day is declared, within two years of the declaration.

1.16 Organisations endorsed as public benevolent institutions (PBIs) must operate for the direct relief of poverty, sickness, suffering, distress, misfortune, disability or helplessness. PBIs would not generally be able to support longer term recovery or community reconstruction efforts.

Victorian Government reconstruction fund - specific listing as a DGR

1.17 In order to be a DGR, an organisation must either be specifically listed by name in the gift provisions of the ITAA 1997 or fall within one of the general DGR categories set out in those provisions.

1.18 Entities are specifically listed in the most exceptional circumstances, and where the entity provides a broad public benefit.

1.19 As a result of the 2009 Victorian bushfires, the 2009 Victorian Bushfire Appeal Trust Account was established in partnership with the Commonwealth Government and the Australian Red Cross. The 2009 Victorian Bushfire Appeal Trust Account was established under section 19 of the Victorian Financial Management Act 1994 .

1.20 This fund will receive monies collected from the Victorian Bushfire Appeal 2009, a public appeal for donations coordinated by the Australian Red Cross. It may also receive donations from other entities.

Summary of new law

Income recovery subsidy

1.21 This measure amends:

•

subsection 159J(6) of the ITAA 1936 to exclude the income recovery subsidy from the definition of separate net income; and

•

section 51-30 of the ITAA 1997 to make the income recovery subsidy exempt from income tax.

Australian disaster relief funds

1.22 This measure amends:

•

subsection 30-45(1) of the ITAA 1997 to ensure that a PBI may operate an Australian disaster relief fund; and

•

that an Australian disaster relief fund may be established as a result of a disaster event declared by the Treasurer.

Victorian Government reconstruction fund - specific listing as a DGR

1.23 This measure amends the table in subsection 30-45(2) of the ITAA 1997 to provide that gifts made to the 2009 Victorian Bushfire Appeal Trust Account are tax deductible, if the gift is made after 7 February 2009, and before 6 February 2014.

Detailed explanation of new law

Income recovery subsidy

Exclude the income recovery subsidy from the definition of separate net income

1.24 A taxpayer may be eligible to certain tax offsets when they contribute to the maintenance of a dependant, but eligibility for an offset, or the amount of that offset, may be reduced as a dependant's separate net income increases.

1.25 The amendment to subsection 159J(6) of the ITAA 1936 will exclude the income recovery subsidy from the definition of separate net income. [Schedule 5, item 1, paragraphs 159J(6)(e) and (f)]

1.26 The amendment will mean that an individual otherwise entitled to a tax offset, will still be entitled to the same amount of offset, despite any income recovery subsidy payments received by their dependants.

Exempt the income recovery subsidy from income tax

1.27 Section 51-30 of the ITAA 1997 lists welfare recipients and payments that are exempt from income tax.

1.28 The amendment to section 51-30 of the ITAA 1997 will make the income recovery subsidy exempt from income tax. [Schedule 5, item 3, items 5.2 and 5.3 in the table in section 51-30]

1.29 Section 11-15 of the ITAA 1997 lists income which is exempt from income tax only if it is derived by certain entities. This list will be amended to include the income recovery subsidy as an exempt payment. [Schedule 5, item 2, section 11-15]

Australian disaster relief funds

Ensure that a PBI may operate an Australian disaster relief fund

1.30 Subsection 30-45(1) of the ITAA 1997 sets out the general DGR categories of welfare and rights, including Australian disaster relief funds.

1.31 The amendment to item 4.1.5 in the table in subsection 30-45(1) of the ITAA 1997 will ensure that a PBI may operate an Australian disaster relief fund. [Schedule 5, item 7, item 4.1.5 in the table in subsection 30-45(1)]

1.32 PBIs which collect donations for relief work as a result of a disaster recognised under the DGR provisions may pass these funds to another DGR fund established for relief or recovery work as a result of that disaster.

Provide that an event may be declared as a disaster by the Treasurer for DGR purposes

1.33 The amendment to item 4.1.5 in the table in subsection 30-45(1) of the ITAA 1997 will provide that Australian disaster relief funds may be established as a result of an event which is declared by the Treasurer as a disaster. [Schedule 5, item 7, item 4.1.5 in the table in subsection 30-45(1)]

1.34 The Treasurer may declare an event as a disaster for DGR purposes if he or she is satisfied that it developed rapidly, and it resulted in the death, serious injury or other physical suffering of a large number of people, or in widespread damage to property or the natural environment. [Schedule 5, item 9, subsection 30-45A(1)]

1.35 The Treasurer's declaration of an event must be in writing, specify the first day of the event, and be published on the Internet or by another method. [Schedule 5, item 9, subsection 30-45A(2)]

1.36 Australian disaster relief funds established as a result of a disaster declared by the Treasurer will be subject to the same conditions as Australian disaster relief funds established under the current provisions. The current provisions require that an event must be declared to be a disaster, or give rise to a declaration of a state of emergency, by the relevant Minister of a State or Territory.

Victorian Government reconstruction fund - specific listing as a DGR

1.37 Subsection 30-45(2) of the ITAA 1997 sets out specific welfare and rights DGR recipients.

1.38 The amendment to the table in section 30-45(2) will make the 2009 Victorian Bushfire Appeal Trust Account a DGR. [Schedule 5, item 8, item 4.2.41 in the table in subsection 30-45(2)]

1.39 The 2009 Victorian Bushfire Appeal Trust Account will use donated monies for recovery and community reconstruction efforts, as well as providing direct relief, for communities affected by the 2009 Victorian bushfires.

Application and transitional provisions

Income recovery subsidy

1.40 The income recovery subsidy amendments apply for the 2008-09 income year. [Schedule 5, item 14]

1.41 As the amendments only apply for the 2008-09 income year, they will be repealed on 1 July 2011, by which time the amendments would have become inoperative. [Schedule 5, items 4 to 6]

Australian disaster relief funds

1.42 These amendments apply to gifts made in the 2008-09 income year and later income years.

Victorian Government reconstruction fund - specific listing as a DGR

1.43 These amendments apply to gifts made after 7 February 2009 and before 6 February 2014.