Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)
The main features of the Income Tax Assessment Amendment Bill (No. 5) 1983 are as follows :
An intended feature of the investment allowance is that the deduction should be available only in respect of plant that is used exclusively by the end-user for the purpose of producing assessable income.
To preserve that concept, it is proposed to make the investment allowance unavailable where it is clear that the plant in question, although legally owned by taxable entities, is effectively controlled and used by a tax-exempt body.
Accordingly, the investment allowance is not to apply to plant that is being used to provide goods or services, where those goods or services are for the use of a tax-exempt organisation and where that organisation has the effective control and use of the plant. Correspondingly, a deduction will not be allowable where an exempt organisation that has effective control of the use of the plant in the provision of goods or services to others does not derive assessable income in providing those goods and services.
The investment allowance will be withdrawn in those circumstances in respect of otherwise eligible plant acquired by a taxpayer under a contract entered into after 18 December 1981 or constructed by the taxpayer where construction commenced after that date.
Under amendments proposed by the Bill, deductions attributable to the ownership of property that has been acquired under a contract entered into after 1 p.m. on 24 June 1982, or the construction of which commenced after that time, will not be allowable where the acquisition or construction is predominantly financed by a non-recourse debt (as in a leveraged lease) and the property is used overseas by non-residents or in tax-exempt activities, or where the lessee or real end-user of the property was the previous owner.
Broadly, a non-recourse debt is one in respect of which the lender's rights in the event of default in repayment by the owner of the property are effectively limited to the property itself or income generated by the property. That is, the lender would not have the usual rights of access to the general assets of the taxpayer in an action by him for recovery of the debt. Certain other arrangements that would have the effect of similarly limiting the real risk of the borrower may also cause a debt incurred by the taxpayer in acquiring that property to be treated as a non-recourse debt.
Where the ownership of property has been financed in that way, deductions will be denied where the property is either leased by the taxpayer to another person or where another person has effective control of the use of the property, and either -
- the lessee or end-user is a non-resident and the property is used principally outside Australia;
- the lessee or end-user uses the property in tax-exempt activities; or
- the lessee or end-user was the owner of the property before it was acquired by the taxpayer under a sale and lease-back arrangement.
However, where a lessee or end-user uses the property partly for the purpose of producing assessable income, including, for example, a case where the lessee or end-user is a partnership of which only some of the partners are exempt from income tax, the owner of the property will be able to obtain deductions on a proportionate basis.
The owner of property that has been the subject of a sale and lease-back arrangement will not lose his entitlement to deductions in a case where the property had been first put into use by the lessee within 6 months preceding the lease and, at the time of that first use, there was an arrangement that it would be the subject of such a sale and lease-back.
The Bill provides for the introduction of special provisions which will authorise depreciation, in equal instalments over 5 years, in respect of the cost of eligible Australian trading ships, as well as the extension of the investment allowance to such ships used either outside or in Australia. The new rules will apply to eligible ships constructed or acquired new by the owner and first commissioned on or after 29 July 1977.
For the purposes of the new provisions, an eligible trading ship will, broadly, be a ship which is -
- engaged exclusively in the coastal and/or overseas carriage of cargo or passengers;
- wholly owned and used by persons who are residents of Australia;
- used wholly and exclusively for the purpose of producing assessable income;
- registered under the Shipping Registration Act 1981;
- manned by persons who are either residents of Australia or non-residents whose engagement for a specified period is authorised by the Secretary to the Department of Transport; and
- manned at a level that does not exceed the manning level determined for that ship by the Secretary to the Department of Transport.
The new rules will not apply unless the owner, and any lessee, of the ship makes an election that all income derived from the use of the ship will be assessable income for Australian tax purposes. The effect of the election will be to make income derived from sources outside Australia, which might otherwise be exempt from Australian income tax, subject to that tax. Where the taxpayer is personally liable for tax on the income under the law of another country, the taxpayer will be allowed a credit, against the Australian tax, of an amount equal to the overseas tax paid or the Australian tax payable, whichever is the lesser.
The commencement date of the new depreciation allowances will vary according to the date upon which the ship is first commissioned and the date upon which all the qualifying conditions are satisfied for the ship to be an eligible Australian ship. Broadly, the new allowances will first apply in the year of income in which the ship becomes an eligible Australian ship and will be calculated on the depreciated value of the ship at the commencement of that year. Special rules will, however, apply where a ship qualifies as an eligible Australian ship within a period of 90 days after the date on which the amending Act comes into operation (in the case of a ship commissioned before that date), or after the commissioning date of the ship (in any other case). For these categories, the new allowances will first apply in the year of income in which the ship is commissioned, unless it was commissioned in a year earlier than the 1982-83 income year, in which case the new rate will apply from the beginning of the 1982-83 year.
For ships commissioned after 30 June 1983, the proposed amendments will authorise the depreciation of the ship to commence in the year of income preceding the year in which the ship is commissioned. The amount of the deduction will be 20% of the cost of the ship, or the amount expended by the taxpayer in the pre-commissioning year towards the cost of acquiring or constructing the ship, whichever is the lesser amount. This deduction may be allowed before the ship is actually commissioned, in which case it will, initially, be based on the taxpayer's estimate of the cost of the ship. As a safeguarding measure, a deduction will not be available unless the Commissioner of Taxation is satisfied that the ship will satisfy the criteria so as to be an eligible Australian ship within 90 days after commissioning.
Eligible Australian ships which are used outside Australia may also qualify for the investment allowance, including a ship which has previously been denied the allowance because of its use overseas. Generally, the amount of the allowance will be 18% of the written-down value of the ship when it becomes eligible and will be available in the year in which that occurs. The exception to this rule will be a ship which becomes an eligible Australian ship within 90 days after either the amending Act comes into operation or the ship is commissioned. In these cases, the allowance will be calculated on the depreciated value of the ship on its commissioning date or 29 July 1982, whichever is the later date, and will be allowable in the year of income in which that date occurs.
Bonuses and other amounts received in respect of certain short-term life assurance policies (Clauses 6 and 25)
The amendments proposed by clause 6 will subject to tax bonuses, and, as a safeguarding measure certain other amounts that are similar to, or in substitution for, bonuses, received in respect of a policy of life assurance. Amounts which will be taxed under these measures are those received during the first 10 years of a policy of life assurance taken out after the date of introduction of this Bill. These amounts will be included in assessable income in full if received within 8 years of the commencement of the policy and as to two-thirds and one-third respectively if received in the ninth and tenth year after commencement of the policy.
However, in accordance with the proposal announced by the previous Government on 27 August 1982 to tax amounts received in respect of life assurance policies issued after that date, the proposed amendment, in its application to a life insurance policy taken out after 27 August 1982 and on or before the date of introduction of this Bill, will operate in relation to the first 4 years of the policy. During this period, bonuses or similar amounts paid under a policy of life assurance will be included in a taxpayer's assessable income in full, if received within 2 years of the commencement of the policy and as to two-thirds or one-third respectively if paid in the third or fourth year after commencement.
The new measures will not tax amounts received under a policy of life assurance where the amount is received by the taxpayer as a result of the death of, or an accident, illness or other disability suffered by, the person on whose life the policy was effected. Receipts arising from policies that are issued for superannuation purposes will also be outside the scope of the new measures. Nor will an amount received as a result of forfeiture or surrender of a policy, in circumstances arising out of serious financial hardship, be taxed, unless the policy was effected with the view to its being surrendered, forfeited or terminated within 10 years (or 4 years in the case of pre-date-of-introduction policies) of its commencement.
To counter circumvention of the proposed amendments, safeguarding provisions have been incorporated so as to treat, as taxable bonuses, other amounts received by a taxpayer within 10 years (or 4 years as required) of commencement of the policy. Amounts received by the use of such devices as low interest or interest-free loans or returns of capital will, where in the opinion of the Commissioner of Taxation the amount received can fairly be regarded as representing a bonus that has accrued or can reasonably be expected to accrue on the policy, or that is received in substitution for the payment of a bonus that has or will accrue on the policy, be treated as a taxable bonus. The Commissioner will in these cases have authority to treat the whole or a part of the amount received in relation to the life assurance policy as if it were a bonus, according to the circumstances in which the payment of the amount was effected.
A further safeguarding provision is designed to prevent a taxpayer obtaining access to accrued bonuses in a non-taxable form by means of the sale or assignment of a policy, or rights to benefits under the policy, within 10 years (or 4 years) of its commencement. The amendment will treat the proceeds from the sale or assignment to be an amount received under the policy from the assurer. A final anti-avoidance provision guards against the possibility of satisfying the period for which a policy is to be held in order that bonuses will be tax-free by the payment of merely nominal premiums in the earlier year, followed by substantially larger premiums in the later years. Where this occurs, the commencement date of the policy will be treated as starting afresh in any year in which the premiums increase by more than 25% over the immediately preceding year.
Clause 25 will allow a taxpayer a rebate of tax, at the standard rate of tax, in respect of any amount included in assessable income under the amendments being made by clause 6 where the amount is received in respect of a policy issued by a life assurance company, the investment income of which is not exempt from income tax. This will ensure that bonuses, on which tax has been paid by a life assurance company, will not be subject to a form of double taxation when paid to policyholders in the form of bonuses during the taxable period of a policy.
By amendments proposed in this Bill, the operation of the special income tax concessions available in respect of eligible investments in qualifying Australian films is to be modified to -
- permit an investor who does not presently qualify for the concessions under the arrangements applying to film investments contracted for after 12 January 1983, or those that apply to investments contracted for on or before that date, to benefit from the concessions under the latter arrangements in certain circumstances;
- recognise certain underwriting arrangements used in the financing of a film's budget;
- generally reduce the income tax deduction allowable for an eligible investment from 150% to 133% where the investment expenditure was incurred under a contract entered into after 23 August 1983; and
- similarly reduce the income tax exemption available in respect of net revenue from a film from 50% to 33% of the eligible investment.
As announced on 21 June 1983, it is proposed to modify a requirement of the film concession scheme, as it applies to investments contracted for after 12 January 1983, to facilitate the use of underwriting arrangements. That requirement is that an investor must be a party to a contract for the production of the film, being a contract entered into by the end of the financial year in which amounts are first expended in, or contributed to, the production of the film and one under which the budgeted cost of the film's production is secured.
This Bill will give effect to that proposal. It will remain necessary for the cost of the film to be fully secured by the end of the relevant financial year. However, this requirement will be able to be met by the use of underwriting arrangements and the particular investor claiming the concessions will not need to have been a party to the production contract.
With this modification, a producer seeking to fully secure a proposed film's budget by the end of a financial year will be able to do so through arrangements with underwriters who agree to meet the production cost to the extent that further investors cannot be found to do so. Provided all other eligibility requirements are satisfied, subsequent investors who take the place of the underwriters will be entitled to the concessions in respect of their investments in the film.
The Bill will also give effect to the Budget proposal to reduce the income tax concession presently available in respect of investments in the production of qualifying Australian films. Under the existing law, an income tax deduction of 150% of eligible investment expenditure is allowable and the investor's net earnings from the film are exempt from tax to the extent of up to 50% of his or her eligible investment. The amendments proposed will generally reduce those concessions to 133% and 33% respectively where the expenditure was incurred under a contract entered into after 23 August 1983.
However, the reduced concessions will not apply if the post-23 August 1983 eligible investment is in a qualifying film that had its production budget guaranteed by an underwriter on or before 23 August and the underwriter's obligation is reduced by that investment - that is, where the investor has effectively taken up an interest in the film in place of the underwriter.
Another modification to the film concession scheme proposed by this Bill relates to certain films that were partly completed as at 13 January 1983. With effect from that date, amendments were introduced under which the special income tax deduction is allowable in the year in which an eligible film investment is made. Under the earlier arrangements the deduction was not available until after the qualifying film was completed and used to produce assessable income.
The new arrangements apply in respect of eligible investments contracted for on or after 13 January 1983 and it is a condition of their application that a production agreement securing the film's budgeted cost must be entered into by the close of the financial year in which amounts are first expended in, or contributed towards, the production of the film. This condition, together with the fact that the earlier arrangements do not apply to investments contracted for after 12 January 1983, has meant that isolated cases can arise where films in production before the start of the 1982-83 financial year but unfinished as at 12 January 1983 cannot attract concessions under the new or the earlier arrangements. For new investment in such films, the 12 January 1983 effective termination date would bar eligibility under the earlier arrangements, while the requirement to fully secure a film's production by the end of the first investment year bars eligibility under the new arrangements. It is therefore proposed that an investor who would not be entitled to the special deduction under the earlier arrangements only because the film investment expenditure was contracted for after 12 January 1983 may qualify under those arrangements if the film production commenced before that date and the film was still in production on that date, amounts having been expended on, or contributed towards, the film's production during the 1981-82 or an earlier financial year. This extension applies in cases where the investment expenditure does not qualify under the new arrangements.
In accordance with the proposed general reduction in the film concession levels, investment expenditure qualifying under the earlier arrangements on the foregoing basis would attract the reduced concession if contracted for after 23 August 1983.
This clause amends the section of the Income Tax Assessment Act that governs the taxing of pensions, allowances and benefits under the Social Security and Repatriation Acts. It gives effect to the proposal, announced following the February bushfires in Victoria and bushfires and floods in South Australia, to exempt from tax the first 2 weeks of payment of special benefit under Part VII of the Social Security Act 1947 to victims of major disasters.
Under the existing income tax law, all benefits and allowances paid under Part VII are assessable income, although from 1 March 1984 payments under the Part of additional benefits for children and supplementary allowances to assist with rent costs will be exempt from tax. The Bill proposes that payments of special benefit on or after 17 February 1983 will not be subject to tax if they are made in relation to a disaster that the Director-General of Social Security considers to be a major disaster affecting a substantial number of people and if the payments are in respect of the first 2 weeks of eligibility for special benefit.
This measure concerns benefits distributed on or after 1 July 1977 from employer-sponsored employee superannuation funds - commonly called "section 23F funds" - where such distributions are made otherwise than in accordance with the requirements of the rules which apply to the fund or where the amount or value of the benefit is excessive, having regard to criteria already specified in the law for the purposes of determining whether concessional tax treatment should be given to the fund.
The arrangements against which the proposed amendments are directed involve an exploitation both of the provisions which allow deductions for contributions to superannuation funds for the benefit of employees and the provision of the Principal Act - section 23F - which exempts the income of superannuation funds of this kind.
Typically, these arrangements ensure that benefits, ostensibly provided for the ordinary employee members of a fund, are forgone in favour of employees who are in effect the proprietors of the employing entity. This is able to be done because unassociated employees are either not informed of their rights under the superannuation fund or have their employment terminated in circumstances where they become disentitled to benefits from the fund.
A more detailed explanation of the clauses of the Bill is contained in the following notes.