Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)
The first Bill, the Income Tax Assessment Amendment Bill (No. 6) 1979 will amend the Income Tax Assessment Act 1936. The main amendments are as follows:
The income tax law is to be amended so as to specifically require the Commissioner of Taxation to take into account all relevant matters when determining for income tax assessment purposes the value to an employee of any taxable benefit by way of free or subsidised accommodation provided by the employer. The amendment further specifies that the Commissioner is to take into account remoteness of location; lack of choice of accommodation; any onerous terms of occupancy; any excess in the standard or size of the accommodation over the employee's needs and, where it is customary in the particular industry for employers to provide housing for employees free or at a low rent, that factor. The amendment is to have effect in assessments in respect of the 1977-78 income year and subsequent years. There will also be authority for the Commissioner to amend assessments made before the Bill comes into operation so as to effect any reduction in the value of assessable housing benefits that is attributable to any of these specified matters.
Gifts to the value of $2 or more made during the twelve months ending 30 June 1980 to the International Disaster Emergencies Committee Kampuchean Relief Appeal and to the Australian Red Cross East Timor Appeal are to be made tax deductible.
The provisions of Subdivision D of Division 3 of Part III of the Principal Act as they relate to "expenditure recoupment" schemes of tax avoidance are to be extended to counter a variant of those schemes which relies on the effective recoupment of amounts claimed as deductions for bad debts.
The amendments will mean that a deduction will not be allowable for a bad debt relating to money lent in the course of carrying on a business where the debt is incurred in respect of loans made after 24 September 1978 as part of a tax avoidance agreement entered into after that date that involves the receipt by the taxpayer (or an associate) of a compensatory benefit the value of which, when added to the tax benefit sought in respect of the bad debt, effectively recoups the taxpayer for the loss incurred in respect of the loan so that no real loss is suffered.
In addition, losses generated under such schemes entered into in the 1977-78 or a prior year of income will not be available to reduce income derived in the 1978-79 income year or any subsequent income year. Where bad debts scheme losses of this kind have been generated in the 1978-79 income year, those losses will not be deductible against income of the 1979-80 income year or subsequent years.
These clauses, together with the amendments proposed by the Income Tax (Rates) Amendment Bill (No. 2) 1979, will give effect to two announced decisions of the Government. The first is, broadly, that subject to important exceptions, income derived, directly or through trusts, by minors - persons under 18 years of age at the end of the year of income - is to be taxed, for 1979-80 and subsequent income years, at a minimum rate of tax equal to the middle rate of personal income tax - 47.07 per cent for 1979-80. The second is that, again with important exceptions, accumulating trust income, that is, income to which no beneficiary is presently entitled, is to be taxed, for 1979-80 and subsequent years, at a rate equal to the maximum rate of personal income tax - 61.07 per cent for 1979-80.
Features of the new system for taxing income of minors are outlined below under three headings - the persons to whom it will apply; the income to which it will apply; and the rates of tax that will apply. A further section outlines the new system as it affects trustees who are liable to pay tax on behalf of minors and there is also, under the heading "relieving provisions", an outline of special measures for arrangements entered into on or before 26 July 1979 and for cases of serious hardship.
The new system will apply, basically, to persons who are unmarried and under 18 on the last day of the year of income, but excluding:
- any person engaged in a full-time occupation at the end of the year of income, and any person who was so engaged for at least 3 months during the year and was not later in the same income year engaged in full-time education, if in either case the person intends to be engaged in a full-time occupation during the whole or a substantial part of the next year (102AC(2)(b), (6), (7) and (8));
- any minor incapacitated to the extent that he or she is unlikely to enter the work force and in respect of whom, on the last day of the income year, a handicapped child's allowance or an invalid pension is paid or would, but for relevant income and other tests, be paid (102AC(2)(c), (2)(d));
- any minor,
- in respect of whom a double orphan's pension was, or but for entitlement to a repatriation pension would have been, payable for a period that included the last day of the income year (102AC(2)(e), (2)(f)); or
- who on the basis of a certificate by a legally qualified medical practitioner appears at the end of the income year unlikely, by reason of a permanent disability, to be able to engage in a full-time occupation (102AC(2)(g)),
- and who was not wholly or substantially dependent for support, for the whole of the relevant period, on a relative or relatives (102AC(3), (4) and (5)).
A person excluded from the new system for any reason will be subject to tax in the normal way.
Persons who are not entirely excluded from the new system for any of the reasons set out above will be subject to tax under the new system on all taxable income other than the following specifically excluded categories, which will remain subject to normal tax:
- reasonable amounts of salary and wages and other income from services rendered, including profits from a business conducted in a real sense by a minor either alone or in partnership with others who were under 18 at the start of the year of income (102AE(2)(a), (5) and 102AF);
- income received directly or through a trust from investment of compensation moneys, comprising court-awarded damages, or amounts paid in settlement of damages claims, for personal injury, disease suffered or physical or mental impairment, or loss of parental support (102AE(2)(b), (9));
- income from deceased estates to which the minor is presently entitled or in which he or she has an indefeasible vested interest (102AE(2)(e), (4));
- income arising from property that came directly to a minor on the death of another person: such as a legacy, the proceeds of a life insurance policy, from a superannuation fund, or an ex-gratia grant by an employer of the deceased person (102AE(2)(b)(iv), (v) and (vi), (2)(c)(i));
- income from property transferred to the minor by another person from property that devolved upon the latter from the estate of a deceased person, provided that the property was transferred within 3 years after the death of that person and that the total income excluded as a result of the death does not exceed that which would have flowed if the child had received the benefit of the rules of intestacy (102AE(2)(c)(ii), (10));
- income, including trust income, from property transferred to the minor or to a trustee from a public fund established and maintained exclusively for the relief of persons in necessitous circumstances (102AE(2)(b)(vii));
- income from property transferred to a minor pursuant to court-ordered settlements arising as a result of divorce of judicial separation (102AE(2)(b)(viii));
- income derived by a minor from the investment of verifiable winnings by the child from legally authorised and conducted lotteries (102AE(2)(c)(iii));
- income arising from the investment and re-investment of any of the abovementioned categories of excluded income (102AE(2)(f)).
The various exclusions are to be subject to safe-guards designed to prevent their exploitation in artificial or unintended ways. For example, the exclusions for income resulting from death are to be subject to safeguards against arrangements to channel income or property into a deceased estate to give them the formal character of estate income or property. There are also to be safeguards against arrangements to inflate the profits of a minor's business by diversion of income to it by relatives or other persons not at arm's length. (102AE(5), (6), (7) and (8) and corresponding provisions 102AG(3), (4) and (5)).
The basic rule is to be that a minor to whom the new system applies will be taxed on income to which the new system applies, at the middle personal rate of tax (47.07 per cent for 1979-80), except where the ordinary rate payable on the income is higher. That is, if the total taxable income exceeds $33,216, the part in excess of $33,216 will be taxed at the ordinary maximum rate of 61.07 per cent applicable to taxable income above that level. If the minor also has income to which the new system does not apply it will be taxed in the ordinary way on the basis that it is the first part of his or her income. In this way the minor will enjoy the benefit of the zero rate of tax applicable to the first $3,893 of such taxable income, and the standard rate of 33.07 per cent on such taxable income from $3,894 to $16,608.
Where the income to which the new system applies is $1,040 or less, it will be taxed in the ordinary way. If, for example, the total taxable income (including income to which Division 6AA applies of $1,040 or less) does not exceed the amount to which the normal zero rate of tax applies ($3,893 for 1979-80), no tax will be payable.
A shading-in provision is included so that where the minor's income to which the new system applies exceeds $1,040, the tax on it is limited to 66 per cent of the excess over $1,040. This means that, on the basis of 1979-80 tax rates, the 47.07 per cent minimum rate will not be fully applicable until the relevant income exceeds $3,625. Below this level the average rate on that income will be below 47.07 per cent.
These rules (to be set out principally in section 6HA of the Income Tax (Rates) Act 1976) as to the rate of tax to be applied, are subject, in the case of arrangements made on or before 26 July 1979, and in cases of serious hardship, to special rules outlined below under the heading "relieving provisions".
At present, where a minor is presently entitled to a share of the income of a trust estate, the trustee is taxed under section 98 of the Income Tax Assessment Act on the income at personal rates of tax but, if the trust did not result from a will or intestacy and the beneficiary is under 16 years of age, without the zero rate of tax that otherwise applies to taxable income up to $3,893. If the minor is presently entitled to income from more than one trust, or also has income from another source, the trust income is also included in his or her assessment with credit being allowed for the tax paid by the trustee.
Under the new system, trust income to which a beneficiary under 18 years of age is or is deemed to be presently entitled will be taxed in the hands of the trustee under section 98 on the same basis as that which would apply if the beneficiary received the income directly (proposed section 102AG). That is, if the beneficiary is an excluded person under the rules described above, e.g., is in full-time employment, the share of trust income to which he or she is presently entitled will be taxed at ordinary personal rates of tax, including the zero rate of tax on income up to $3,893. If the trust resulted from a will or intestacy ordinary personal rates of tax, including the zero rate step, will apply whatever the age of the beneficiary or whether or not the beneficiary is an excluded person.
If a beneficiary under the age of 18 is not an excepted person but the trust income is of a type that would be excepted income if derived directly by the beneficiary, e.g., income from the investment of compensation for damages, it will also be taxed at ordinary personal rates of tax, including the zero rate step. If a beneficiary under the age of 18 is presently entitled to a share of the income of a trust, not being a trust resulting from a will or intestacy, and the income is not of an excepted type, that income will be taxed in the trustee's hands under section 98 at a minimum rate of 47.07 per cent, subject to a threshold of $1,040 and shading-in above that level, in the same way as it would be taxed under the new system if derived directly by the beneficiary.
The Bill contains a relieving discretionary power under which the Commissioner of Taxation may reduce, and in appropriate cases eliminate, any extra tax payable by virtue of the new system, to the extent that he considers it would be unreasonable for it to be paid.
This relief, in the form of a rebate of tax, is to be available only where the income arises under arrangements entered into on or before 26 July 1979. The relieving power will not ordinarily be exercised unless it is established to the satisfaction of the Commissioner that the tax payable on the relevant income under the new system is greater than the tax that would have been payable on that income if it had been added to the income of the child's parent. If one of the parents has a higher taxable income than the other, the reference will be to the taxable income of the parent with the higher income.
If the child has minor brothers and sisters also in receipt of income to which the new system applies, that income of all of them is to be added to that of the relevant parent for this comparison.
As a safeguard, the Bill provides that in determining the amount of any rebate under this provision, the Commissioner may take into account any tax avoidance arrangements entered into by the parent concerned by reason of which the sum of the incomes is less than it otherwise would have been. For this purpose, agreements in the course of ordinary family or commercial dealing are not to be viewed as tax avoidance arrangements.
The Bill also provides for the Commissioner to be authorised to allow a rebate of all or part of the increase in tax payable as a result of the new system where it is established to his satisfaction that exaction of the full amount of the increase would entail serious hardship.
Under existing provisions, income to which no beneficiary is presently entitled - broadly, income that is accumulating within the trust estate - is taxed under section 99A of the Income Tax Assessment Act 1936 at the maximum rate of personal tax (61.07 per cent for 1979-80) unless the Commissioner is satisfied that it would be unreasonable for that section to apply, and exercises the discretionary power provided in the section.
If the discretion is exercised, the assessment is made under section 99 of the Assessment Act. Where the trust estate is that of a person who died less than 3 years before the end of the year of income, the trustee is liable to tax at normal individual tax rates, including the zero rate bracket ($3,893 for 1979-80).
In other section 99 cases, normal individual tax rates apply but there is no entitlement to the zero rate bracket, a minimum taxable income of $417 applying instead, with shading-in arrangements when the income is marginally above $416.
Under the provisions contained in the two Bills, the general rule will be that, subject to specified exceptions, all income of a trust estate to which there is no present entitlement will be assessed under section 99A at the maximum personal tax rate (61.07 per cent for 1979-80).
Accumulating income in which a beneficiary has an indefeasible vested interest will be taxed under section 98 in the same way as the share of trust income to which a minor beneficiary is presently entitled.
Existing rules relating to the assessment of income of a deceased estate to which no beneficiary is presently entitled will continue. That is, the trustee will be liable to be assessed at ordinary rates, including the zero rate bracket, where the income to which no beneficiary is presently entitled is that of a deceased estate of a person who died less than 3 years before the end of the income year, and at ordinary rates but without the zero rate bracket for other deceased estates. The latter will retain the minimum taxable income of $417 and a shading-in rate of 50 per cent for income in excess of $416.
Certain other types of trust estate are to be excluded from section 99A and their accumulating income taxed to the trustee under section 99 at ordinary tax rates but without the benefit of the zero rate bracket, and subject to a minimum taxable income of $417 and a 50 per cent shading-in rate. These are bankrupt estates, trusts for property awarded as compensation to minors or arising from public funds established and maintained for the relief of persons in necessitous circumstances, and other trusts for property the income from which would, if derived by the minor directly, be excluded from the new system of taxing minors.
As a safeguard against use of accumulation trusts for tax avoidance purposes assessment of these classes of accumulating trust income under section 99 rather than under section 99A will continue to be subject to the exercise by the Commissioner of the discretionary power contained in section 99A.
The second Bill - the Income Tax (Rates) Amendment Bill (No. 2) 1979 - will amend the Income Tax (Rates) Act 1976, which declares the rates of income tax payable by individuals and trustees, to incorporate the rates of tax to be imposed for the 1979-80 financial year and subsequent years, on income to which the new system for taxing income of minors applies.
More detailed explanations of the clauses of each of the Bills are contained in the following notes.