House of Representatives

Income Tax Assessment Amendment Bill (No. 6) 1979

Income Tax Laws Amendment Act 1980

Income Tax (Rates) Amendment Bill (No. 2) 1979

Income Tax (Rates) Amendment Act 1980

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

Notes on Clauses

INCOME TAX ASSESSMENT AMENDMENT BILL (NO. 6) 1979

Clause 1: Short title etc.

By this clause the amending Act is to be cited as the Income Tax Assessment Amendment Act (No. 6) 1979 and the Income Tax Assessment Act 1936, as previously amended, as the "Principal Act".

Clause 2: Commencement

Under this clause the amending Act will come into operation on the day on which it receives the Royal Assent. But for this clause the amending Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Determination of value of employees' housing

Introductory note

This clause proposes to insert a new section - section 26AAAA - in the Principal Act to specifically require the Commissioner of Taxation, in determining for the purposes of section 26(e) of the Principal Act the value to an employee of housing accommodation provided in respect of his or her employment, to take all relevant matters into account.

In particular, a number of matters specified in the new section are specifically required to be taken into account as matters tending to reduce the amount that would otherwise be the value to the employee of the housing benefit. Under the present law, the factors taken into account by the Commissioner in assessing for income tax purposes the value of housing accommodation provided to an employee include matters now to be specifically listed in section 26AAAA.

Section 26(e) of the Principal Act provides for the inclusion in assessable income of the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums in respect of or in relation directly or indirectly to any employment or services rendered whether in money, goods, land, meals, sustenance, the use of premises or quarters, or otherwise. Where an employee is provided with residential accommodation in respect of his employment at either no cost to him or at a cost less than the value of the accommodation, the value to the employee of the benefit so derived forms part of his assessable income in terms of section 26(e).

Sub-clause (1) of clause 3 is the operative provision and inserts the new section 26AAAA. The section will in specific terms require the Commissioner in making a determination of the value to a taxpayer of a benefit granted in respect of his employment, being a benefit by way of a lease or licence in respect of residential accommodation that is occupied by the taxpayer or by the taxpayer and his family, to have regard to all relevant matters and in particular to certain matters specified in paragraphs (a), (b), (c), (d) and (e) of the new section. The matters specified in those paragraphs are out-lined below, and in each case where one or more of the particular factors specified is present the section will require that the Commissioner make such reduction in what would otherwise be the assessable benefit as is appropriate in the circumstances.

Paragraph (a) of section 26AAAA will require that regard be had to whether the residential accommodation is situated in a place that is remote from a major centre of population.

Paragraph (b) will require that regard also be had to whether it is customary in the industry in which the taxpayer is employed for employers to provide residential accommodation for employees without charge or for a rent or other consideration less than the market value of the accommodation right concerned.

Paragraph (c) is addressed to the possibility that the employee may be faced with a lack of suitable alternative residential accommodation, on reasonable terms, within a reasonable distance from his place of employment when accepting accommodation offered by his employer. By paragraph (c) such a lack of choice is also to be taken into account as a discounting factor in determining the value to the taxpayer of the accommodation provided.

Paragraph (d) will require the Commissioner to reduce what would otherwise be the assessable value where the standard of the residential accommodation provided to the taxpayer is higher than could reasonably be expected to be provided for the taxpayer or is of a larger size than is necessary to accommodate the taxpayer or the taxpayer and his family.

Paragraph (e) will similarly require account to be taken of any onerous conditions that are attached to the use of the accommodation.

By sub-clause (2) of clause 3 the provisions of the new section 26AAAA proposed to be inserted by sub-clause (1) are to apply in assessments in respect of income of the 1977-78 income year and subsequent income years.

The effect of sub-clause (3) will be to authorise amendments to assessments in respect of the 1977-78 and 1978-79 income years that have been made before the Bill comes into force on receiving Royal Assent, as provided for by clause 2, where the amendments are amendments that give effect to the new section 26AAAA. As section 26AAAA can only operate to require a reduction in the value of housing benefits assessable under section 26(e), it follows that the effect of sub-clause (3) will be limited to the making of amendments that reduce an employee's liability to tax. The Commissioner's ability to make the amendments authorised by sub-clause (3) will be available whether or not the taxpayer has formally exercised his ordinary rights of objection and appeal under the existing law.

Clause 4: Gifts, calls on afforestation shares, pensions, etc.

The purpose of this clause is to provide an income tax deduction for gifts made to the I.D.E.C. (International Disaster Emergencies Committee) Kampuchean Relief Appeal and to the Australian Red Cross East Timor Appeal.

Section 78 of the Principal Act authorises an income tax deduction for gifts of the value of $2 and upwards of money, or of property other than money that was purchased by the taxpayer within the twelve months preceding the making of the gift, to a fund, authority or institution specified in paragraph (a) of sub-section 78(1). The deduction in respect of gifts of property other than money is limited to the lesser of the value of the property at the time the gift was made and the amount paid by the donor for the property.

Paragraph (a) of sub-clause (1) will insert two new sub-paragraphs - sub-paragraphs (1) and (1i) - in paragraph (a) of sub-section 78(1) to specify the I.D.E.C. Kampuchean Relief Appeal and the Australian Red Cross East Timor Appeal as funds to which the income tax deduction authorised by paragraph (1)(a) of section 78 applies.

Paragraph (b) of sub-clause (1) will insert a new sub-section - sub-section (6AA) - in sub-section 78(1) to limit the income tax deduction being provided by these amendments to gifts made during the twelve months period from 1 July 1979 to 30 June 1980.

Claims in respect of gifts to these appeals can be expected to be made mainly in income tax returns lodged in respect of the 1979-80 income year. However, the 1978- 79 returns of late balancing taxpayers, that is, taxpayers whose 1978-79 income year ends after 30 June 1979, could include claims for deduction in respect of donations made to these appeals. Sub-clause (2) will ensure that the Commissioner of Taxation has authority to re-open an income tax assessment made before the enabling legislation becomes law if this should be necessary to allow a deduction for a gift made to either of the appeals before that time.

Clauses 5 to 7: Bad debts schemes of tax avoidance

Introductory note

Clauses 5 to 7 propose amendments to counter further tax avoidance arrangements of the "expenditure recoupment" type that have been employed to exploit the availability of income tax deductions for bad debts. Section 82KL and related provisions of the Principal Act (being inserted in the Act by the Income Tax Assessment Amendment Bill (No. 4) 1979) contain measures to counter such schemes and these are, by these clauses, to be extended.

Broadly, an expenditure recoupment scheme affected by these provisions is one in which a loss or outgoing is incurred as part of a tax avoidance arrangement under which the taxpayer (or an associate) receives a compensatory benefit, the value of which, together with the expected tax saving, effectively recoups the loss or outgoing to the taxpayer so that in the final analysis no real loss or outgoing is suffered.

The latest variants of the recoupment schemes seek to obtain a deduction under section 51 or section 63 of the Principal Act for a debt which becomes a bad debt but which, as part of the arrangement, is largely recouped in a non-taxable form.

Under section 63, a deduction is allowable for debts written off as bad during the year of income, provided the debts have been brought to account as assessable income or relate to money lent in the ordinary course of a money lending business. Bad debts may alternatively be deducted under section 51 - the general deduction provision of the law - if they satisfy the tests of the section, i.e., put broadly, if they represent losses incurred in gaining or producing assessable income or in the course of carrying on a business for that purpose and are not losses of a capital nature. Amounts subsequently recovered in respect of a debt claimed as a deduction are brought to account as assessable income, by virtue of sub-section 63(3), in the year of receipt.

One example of the complicated schemes developed to exploit the availability of deductions under these provisions (while avoiding the operation of sub-section 63(3)) involves a promoter setting up a partnership of clients who wish to "buy" tax deductions from the promoter, each partner contributing a small sum of capital to the partnership. The partnership engages in several money lending transactions with a view to establishing formally that it is engaged in a business of money lending.

The partnership then borrows $500,000 from company A controlled by the promoter. The partnership in the course of its "money-lending business" lends the money to company B which, in turn, lends the money back to company A. At this point a "round-robin" of cheques has put company A back in funds.

In purported repayment of its formal debt to company B, company A accepts a bill of exchange for $500,000, payable to company C, but delivered to company B. Company B in turn makes a loan of $500,000 to company C by delivering to that company the bill of exchange payable by company A.

Company C is then stripped of its assets so as to become unable to meet its debts. As company C cannot now repay company B, that company is thereby also made insolvent and unable to repay its loan from the partnership. The stripping of company C is achieved by a series of highly artificial transactions involving company D, yet another company controlled by the promoter, which gains possession of the bill of exchange.

Finally, company D makes a loan to company A by further endorsement and delivery to that company of the bill of exchange, which is thus discharged.

The partnership writes off as a bad debt the loan of $500,000 to company B and, as a money lender, claims a deduction for that amount. Company A is not out of pocket and the debt formally owing to it by the partnership is matched by the amount it owes to associated company D. The reality is that the partnership will not have to repay its debt of $500,000 to company A and, in practical terms, that amount lent to it recoups the partnership for the amount it has written off as a bad debt. The partners, of course, pay a fee to the promoter for entry to the scheme, expressed as a percentage of the tax sought to be saved.

Subdivision D of Division 3 of Part III of the Principal Act contains anti-avoidance provisions designed to counter expenditure recoupment schemes. As noted above, section 82KL is the operative measure. Those provisions operate to deny a deduction for expenditure incurred in borrowing money, in discharging a mortgage, in the acquisition of trading stock or by way of interest or rent where that expenditure is incurred after 24 September 1978 under a tax avoidance agreement of the recoupment type that is entered into after that date.

The amendments proposed by clause 7 will extend the operation of those provisions so that they operate also with respect to deductions sought under bad debts schemes. The effect of the amendments will be that a deduction will not be available for a bad debt relating to money lent in the course of a business where the debt is incurred under a loan 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 together with the amount of the tax saving sought in respect of the bad debt, is equal to or greater than the amount of the bad debt.

As a further counter to these schemes, clauses 5 and 6 will ensure that any losses generated by the use of bad debts schemes of this type entered into prior to 25 September 1978 will not be available to be carried forward for deduction in the 1978-79 income year or any subsequent income year.

The following notes explain the proposed measures in more detail.

Clause 5: Losses of previous years

Clause 5 proposes an amendment to paragraph (m) of sub-section 80(5) (which is being inserted by the Income Tax Assessment Amendment Bill (No. 5) 1979) so as to deny deductions for carry-forward losses generated by bad debts schemes of tax avoidance entered into prior to the general operative date of the amendments proposed by this Bill.

Under section 80 of the Principal Act, a taxpayer who incurs a loss in a year of income may, subject to certain stipulations, carry that loss forward as an allowable deduction against income of any of the next seven succeeding years of income. A loss incurred in engaging in primary production may, by virtue of section 80AA, be carried forward indefinitely. A loss is deemed to be incurred by a taxpayer in a year of income when the allowable deductions for that year exceed the sum of any assessable income and net exempt income derived in that year. In calculating a loss from engaging in primary production, only primary production income and related allowable deductions are taken into account.

By virtue of new sub-section 80(5), the amount of any deduction allowable in respect of a loss incurred in a previous year, other than from engaging in primary production, is to be determined for the 1978-79 and subsequent years of income as if certain anti-avoidance measures specified therein were taken to be applicable throughout the year of income in which the loss was incurred. Paragraphs (j) and (m) of that sub-section ensure that the amount of any deduction allowable in respect of a carry-forward loss is to be calculated as if 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 had been so applicable, i.e., as if those provisions were applicable irrespective of the date on which the relevant arrangement was entered into. Clause 5 will amend paragraph (m) to ensure that the restriction placed on the deductibility of carry-forward losses by virtue of paragraphs (j) and (m) is determined by reference to the operation of the "expenditure recoupment" provisions of that Subdivision as proposed to be amended by this Bill.

The effect of the amendment to be made by clause 5 will be that losses created under bad debts schemes of the kind at which the amendments proposed by clause 7 of this Bill are directed, but which were implemented before the general operative date, 25 September 1978, will be disregarded in determining for 1978-79 and subsequent income years the amount of any deduction allowable under section 80. The clause 5 amendment will also ensure that deductions under section 80AA for losses incurred in engaging in primary production are similarly restricted. This is because, by virtue of new sub-section 80AA(9) (also being inserted in the Principal Act by the Income Tax Assessment Amendment Bill (No. 5) 1979), deductions in respect of primary production losses are to be determined on the same basis as that provided by sub-section 80(5) in respect of non-primary production losses.

Clause 6: Arrangements to avoid the operation of certain loss provisions.

Clause 6, which will not amend the Principal Act, contains safeguarding provisions designed to ensure that the proposed "no carry-forward loss" provisions of sub-sections 80(5) and 80AA(9) referred to in the notes on clause 5 are not frustrated by arrangements designed to convert proscribed tax avoidance losses into other losses that, formally have a different character.

Clause 5 of the Income Tax Assessment Amendment Bill (No. 5) 1979 contains safeguarding provisions designed to protect against these kinds of arrangements, when employed in relation to the no carry-forward loss measures proposed by that Bill (i.e., losses generated by "Curran"-type schemes, trading stock schemes, pre-payment schemes and expenditure recoupment schemes other than bad debts schemes). Similarly, clause 14 of the Income Tax Laws Amendment Bill 1979 proposes safeguarding provisions against the employment of such arrangements to frustrate the "no carry-forward loss" amendments proposed by clause 13 of that Bill with respect to depreciation schemes of tax avoidance.

The additional safeguarding provisions now proposed by clause 6 are designed both to consolidate the operation of the measures contained in the other 2 Bills and to extend their application to any arrangements entered into in an attempt to frustrate the amendments proposed by clause 5 of this Bill to prevent the deduction of losses generated under bad debts schemes. Those amendments were specifically foreshadowed by a ministerial statement on 12 June 1979.

Arrangements that could be adopted for these purposes and against which the provisions proposed by clause 6 are directed fall into two broad categories. The first of these would involve, for example, an amount of income equal to the particular tax avoidance loss being paid by an associate, before the end of the 1978-79 income year, to the individual or partnership that had created the tax avoidance loss. At that point, the individual or partnership would, in 1978-79, have matched the loss against the diverted or manufactured income, the object also having been to give the income payment the character of a deductible expense in the hands of the associated entity. That expense, not being formally a loss from a proscribed tax avoidance scheme could then be sought to be applied against income of the associate. In other words, the arrangement would be designed so as to transfer to the associated entity the tax benefit that would otherwise have been denied by the operation of the "no carry-forward loss" amendments proposed by clause 3 or 4 of the Income Tax Assessment Amendment Bill (No. 5) 1979, clause 13 of the Income Tax Laws Amendment Bill 1979 or clause 5 of this Bill. (By virtue of sub-clause (5), and for ease of reference, these clauses are referred to in clause 6 as the "relevant loss provisions".)

Sub-clause (1) of clause 6 is directed against the possible use of this kind of method of circumventing the proposed "no carry-forward loss" amendments and will ensure that amounts incurred under arrangements of this type do not qualify for deduction under any provision of the income tax law.

For sub-clause (1) to apply, an amount must be included in the assessable income of a recipient taxpayer of the 1978-79 income year (paragraph (a)), and must in whole or in part represent an otherwise allowable deduction to another taxpayer - referred to as an "associated taxpayer" (paragraphs (b) and (c)). A key test (contained in paragraph (f)) is that the amount, or a part of it, was incurred by the associated taxpayer to the recipient taxpayer for a purpose of wholly or partly preventing the operation of the "relevant loss provisions" in relation to the taxpayer or, where the recipient taxpayer is a partnership, a partner in the partnership, i.e., of frustrating the intention to deny deductions for the carry-forward of the particular tax avoidance losses to which the relevant loss provisions apply.

Paragraphs (d) and (e) of sub-clause (1) contain tests that further define the scope of the sub-clause. Under paragraph (d) it must be the case that, if the amount had not been included in assessable income of the recipient taxpayer, that taxpayer would be deemed to have incurred a loss for the year. Paragraph (e) imposes the contrasting test that if the amount were not so included and if the relevant anti-avoidance provisions had been in effect prior to their generally effective operative date, this loss would not have been deemed to be incurred, or would have been smaller in amount. In other words, the paragraphs together make it necessary that the case be one where but for the arrangement a proscribed tax avoidance loss would have occurred.

By reason of sub-clause (4) the loss referred to in paragraphs (d) and (e) is, if the recipient taxpayer is a partnership, a partnership loss for the year, and in other cases, a carry-forward loss under section 80 or section 80AA.

Where all the tests of paragraphs (a) to (f) of sub-clause (1) are satisfied, the sub-clause will operate so that a deduction is not allowable to the associated taxpayer for so much of the relevant expenditure paid under the arrangement designed to prevent the operation of the relevant loss provisions as is paid with that purpose in mind.

Sub-clause (2) is directed at an alternative method of circumventing the operation of the proposed "no carry-forward loss" amendments that is made possible by the ability of a taxpayer to value his trading stock at either cost price, replacement cost or market value.

But for sub-clause (2), a taxpayer who would otherwise have a loss that would be subject to the operation of those amendments could value his closing trading stock at the highest value possible under the income tax law, with the object of increasing his trading profit in 1978- 79 by an amount sufficient to absorb the carry-forward loss. The effect of this arrangement would be to substitute a corresponding reduction in the taxpayer's 1979-80 trading profit for the 1978-79 loss that would otherwise have been subject to the operation of the "no carry-forward loss" amendments. This reduction would occur by reason of the resultant increased value of trading stock at the beginning of the 1979-80 income year.

By virtue of sub-clause (2), the tests for which match those of sub-clause (1), where a taxpayer values his trading stock under arrangements of this type with a purpose of preventing the operation of the relevant loss provisions, the value of this trading stock will at base be taken to be the lowest value at which the trading stock could be taken into account for income tax purposes (paragraph (e)). A higher value will, however, be adopted where the taxpayer satisfies the Commissioner of Taxation that the higher value might reasonably be expected to have been adopted if his trading stock had not been valued with a purpose of preventing the operation of those provisions.

By paragraph (a) of sub-clause (3), the operation of the safeguarding provisions proposed by sub-clause (2) is restricted to valuations of trading stock other than livestock. In the case of livestock, section 33 of the Principal Act contains controls on variations in the basis of valuation of such stock.

Paragraph (b) of sub-clause (3) is a drafting measure under which a reference to the valuation of trading stock by a taxpayer is a reference to the making of an election under section 31 of the Principal Act as to which of the previously-mentioned bases of valuation is to be applied in relation to that trading stock. An election as to the basis of valuation of trading stock on hand at the end of a year of income is available under section 31 in respect of trading stock other than livestock.

Sub-clause (4) is a measure that will ensure that the safeguarding provisions operate in circumstances where arrangements of the kind described in sub-clauses (1) and (2) are entered into by a partnership. It reflects the fact that tax avoidance losses of the kind to which proposed sub-sections 80(5) and 80AA(9) are to apply are commonly sought to be created through a partnership of taxpayers.

By virtue of section 90 of the Principal Act a partnership loss is calculated as if the partnership were a taxpayer. A partnership loss is not itself treated as a loss for the purposes of section 80 or 80AA of the Principal Act. Rather, each partner in the partnership is entitled to a deduction under section 92 of the Act in respect of his or her share of the loss incurred by the partnership. That deduction may form the basis for a carry-forward loss for the partner.

Against this background, sub-clause (4) enables the object of sub-clauses (1) and (2) to be achieved by specifying that a reference in sub-clauses (1) or (2) to a loss incurred is both a reference to a loss for the purposes of section 80 or 80AA of the Principal Act and to a partnership loss for the purposes of section 92.

As mentioned previously, sub-clause (5) is a drafting measure by which the expression "relevant loss provisions" is used in clause 6 to refer to the measures contained in clauses 3 and 4 of the Income Tax Assessment Amendment Bill (No. 5) 1979, clause 13 of the Income Tax Laws Amendment Bill 1979 and clause 5 of this Bill to prevent the carry forward of tax avoidance losses.

Sub-clause (6), which is consequential on the consolidation of the operation of the safeguarding measures, ensures that the provisions now proposed by clause 6 have effect notwithstanding the provisions contained in clause 5 of the Income Tax Assessment Amendment Bill (No. 5) 1979 and clause 14 of the Income Tax Laws Amendment Bill 1979.

Sub-clause (7) will make clear the power of the Commissioner to amend assessments for the purposes of giving effect to the safeguarding provisions of sub-clauses (1) and (2). By virtue of sub-clause (7), the Commissioner will be authorised to amend an assessment to give effect to those provisions within 3 years after the date on which the tax became due and payable under that assessment, should facts emerge to justify such a course.

Clause 7: Interpretation

Clause 7 proposes amendments to section 82KH of the Principal Act which will extend the operation of the "expenditure recoupment" provisions of Subdivision D of Division 3 of Part III (as proposed to be inserted in that Subdivision by the Income Tax Assessment Amendment Bill (No. 4) 1979) so that they will apply to schemes of tax avoidance based on deductions for bad debts.

Broadly, the expenditure recoupment provisions deny a deduction for specified types of losses or outgoings where the loss or outgoing is incurred as part of a tax avoidance arrangement under which the taxpayer (or an associate) receives a compensatory benefit, the value of which together with the tax saving sought, effectively recoups the taxpayer for the loss or outgoing.

In meeting this objective the provisions proposed by the Income Tax Assessment Amendment Bill (No. 4) 1979 require firstly that the particular loss or outgoing fits the description of "relevant expenditure". That term is defined in sub-section 82KH(1) and prescribes those types of losses or outgoings to which the "expenditure recoupment" provisions may apply. As proposed in that Bill, relevant expenditure includes losses or outgoings incurred in borrowing money, in discharging a mortgage, in the acquisition of trading stock or by way of interest or rent.

As a second step it is required that the relevant expenditure be "eligible relevant expenditure" as defined in proposed sub-section 82KH(1F). Relevant expenditure will fit that description if it is incurred under an agreement that has a purpose, other than a merely incidental purpose, of tax avoidance and under the tax avoidance agreement the taxpayer or an associate is to obtain a benefit in addition to the benefits that flow in the ordinary course of events from the incurrence of the loss or outgoing sought to be deducted.

If the additional benefit relating to the particular eligible relevant expenditure, when taken together with the "expected tax saving" in respect of that expenditure, is equal to or greater than the expenditure itself then, by proposed sub-section 82KL(1), a deduction is not allowable for the expenditure. The "expected tax saving" is defined in sub-section 82KH(1) and is to be determined primarily under sub-section 82KH(1B). Broadly, the expected tax saving in respect of an amount of eligible relevant expenditure is the amount by which a person's liability to tax in any year of income would be decreased if deductions were allowable in respect of the eligible relevant expenditure. Where eligible relevant expenditure is incurred by a partnership, sub-section 82KL(1) looks to whether the sum of the additional benefits to the partnership, the partners or their associates and the total expected tax savings of the partners equals or exceeds the partnership expenditure.

The amendments proposed by clause 7 to extend the operation of those provisions to bad debts schemes will ensure that the fact of a debt owing to a taxpayer becoming a bad debt can be taken as "relevant expenditure" to which the expenditure recoupment provisions can apply. Because the "losses" suffered under bad debts schemes relate to money lent by the taxpayer, the amendments proposed by clause 7 will also ensure that the notion of compensatory benefits embraces benefits obtained either in relation to the debt becoming a bad debt or in relation to the making of the relevant loan.

Paragraphs (a) and (b) of sub-clause 7(1) will insert new paragraph (f) in the definition of relevant expenditure in section 82KH. By virtue of paragraph (f) the amount of a bad debt incurred by a taxpayer in respect of money lent in the course of carrying on a business is, to the extent to which a deduction would otherwise be allowable under section 51 or section 63 of the Principal Act, to be taken to be an amount of relevant expenditure. By proposed new sub-section (1AA), to be inserted in section 82KH by paragraph (c), the incurring of a bad debt by a taxpayer is to be taken as a reference to a debt owed to the taxpayer becoming a bad debt.

Proposed new sub-section (1AB), which is also to be inserted in section 82KH by paragraph (c) of sub-clause 7(1), similarly characterises references in sub-section 82KL(2) and section 80 of the Principal Act to a loss or outgoing incurred by a taxpayer as including a reference to the incurring of a bad debt by the taxpayer, i.e., to the loss incurred as a result of a debt owed to the taxpayer becoming a bad debt.

Sub-section 82KL(2) enables the Commissioner of Taxation to deny a deduction in a year of income for expenditure or a loss or outgoing incurred by a taxpayer where the Commissioner concludes that sub-section 82KL(1) might reasonably be expected to operate at a later time with respect to that expenditure or loss or outgoing. Sub-section 82KL(2) would operate, for example, where it is reasonable to expect that an additional benefit will be received by the taxpayer or an associate in a future year and the effect of taking the amount or value of the additional benefit into account would be that sub-section 82KL(1) would apply, at that future time, to deny a deduction in respect of that expenditure or loss or outgoing. Proposed new sub-section (1AB) ensures the intended operation of sub-section 82KL(2) with respect to bad debts.

As to the operation of proposed new sub-section (1AB) with respect to section 80, it has been explained in the notes on clause 5 that the amount of any deduction allowable in respect of a loss incurred in a previous year is, by virtue of paragraphs (j) and (m) of sub-section 80(5), to be determined for the 1978-79 and subsequent years of income as if the expenditure recoupment provisions of Subdivision D were taken to be applicable throughout the year of income in which the loss was incurred. For this purpose, paragraph (m) ensures that any such deduction is to be determined as if those provisions were applicable in relation to "losses, outgoings or expenditures" incurred at any time. So that paragraph (m) as amended by clause 5, has the intended effect of denying deductions for losses generated under bad debts schemes entered into prior to 25 September 1978, proposed new sub-section (1AB) ensures that the reference in paragraph (m) to losses being incurred is taken to include a reference to bad debts being incurred.

Paragraph (d) will insert a new sub-section - sub-section (1FA) - in section 82KH to extend the operation of proposed sub-section 82KH(1F) as it applies to relevant expenditure in the form of bad debts.

By virtue of sub-section (1F) an amount of relevant expenditure incurred by a taxpayer is to be taken to be an amount of "eligible relevant expenditure" for the purposes of section 82KL if -

(a)
the expenditure was incurred after 24 September 1978 as part of a tax avoidance agreement entered into after that date; and
(b)
by reason of the operation of the tax avoidance agreement the taxpayer obtains, in relation to that relevant expenditure being incurred, a benefit or benefits additional to that in respect of which the relevant expenditure was incurred and any other benefit that might reasonably be expected to result if the benefit in respect of which the relevant expenditure was incurred were obtained otherwise than by reason of a tax avoidance agreement.

Further, it is the value of these additional benefits added to the tax saving from the eligible relevant expenditure that determines whether section 82KL will apply to deny a deduction in respect of the expenditure.

Proposed new sub-section (1FA) will ensure that for the purposes of determining under sub-section (1F) whether an amount of relevant expenditure, being a bad debt, is an amount of eligible relevant expenditure, any benefit obtained by a taxpayer or an associate (see proposed new sub-section 82KH(1P)) in relation to the making of the loan in respect of which the bad debt was incurred is to be taken as a benefit obtained in relation to the bad debt being incurred.

A further effect of new sub-section (1FA) will be that (subject to the operation of sub-section (1G) explained below) any benefit obtained by the taxpayer or an associate in relation to the making of the loan will be taken to be an "additional benefit" for the purposes of the application of section 82KL where that benefit is obtained as part of the tax avoidance agreement under which the bad debt was incurred.

Paragraphs (e) and (f) of sub-clause 7(1) will insert new paragraph (f) in sub-section 82KH(1G) which identifies, for the purposes of sub-section 82KH(1F), the direct benefit in respect of which relevant expenditure is taken to have been incurred. New paragraph (f) of sub-section (1G) identifies any interest received or receivable by the taxpayer in respect of that loan as the benefit in respect of which the relevant expenditure was incurred.

By virtue of new paragraph (f), any interest so received will be excluded for the purposes of determining under sub-section 82KH(1F) whether an amount of relevant expenditure, being a bad debt, is an amount of eligible relevant expenditure. Paragraph (f) also ensures that the interest or any benefit ordinarily flowing from the receipt of that interest will not constitute an additional benefit for the purposes of section 82KL.

Paragraph (g) of sub-clause 7(1) will insert 2 new sub-sections in section 82KH - sub-sections (1JA) and (1JB) - which will modify the operation of sub-sections 82KH(1H) and (1J) respectively. Those sub-sections deal specifically with additional benefits in the forms respectively of acquisition of a creditor's rights under a loan for a consideration less than the amount of the loan and the forgiveness of a debt.

Sub-section 82KH(1H) applies where, as part of a tax avoidance agreement, a taxpayer has incurred an amount of relevant expenditure and in relation to the incurrence the taxpayer or an associate acquires from another person the right to recover the amount of a debt owed to that other person. In those circumstances the taxpayer is to be deemed, for the purposes of sub-section (1F), to have obtained a benefit under the tax avoidance agreement in relation to that expenditure if, because of the tax avoidance agreement, the consideration (if any) paid or given by the taxpayer or an associate to acquire that right is less than the amount of the debt. The amount or value of the benefit thus deemed to be obtained is the amount by which the debt exceeds any consideration given or paid.

Proposed new sub-section (1JA) will ensure that, where the relevant expenditure is a bad debt, sub-section (1H) applies equally to any acquisition of a creditor's rights in relation to the making of the related loan.

Proposed new sub-section (1JB) will similarly modify the operation of sub-section 82KH(1J) which applies where, as a result of a tax avoidance agreement, an amount of relevant expenditure was incurred by a taxpayer and in relation to the incurrence a debt becomes or became owing by the taxpayer or an associate to another person, and where it is reasonable to expect that the taxpayer or associate will not be called upon to repay that debt. In those circumstances, for the purposes of applying paragraph (b) of sub-section (1F), sub-section (1J) means that the taxpayer is to be deemed to have obtained a benefit equal to the amount of the debt that will not be repaid.

By virtue of proposed new sub-section (1JB), sub-section (1J) will also apply, in the case of relevant expenditure being a bad debt, to debts which became owing in relation to the making of the loan giving rise to the bad debt.

Paragraphs (h) and (j) of sub-clause 7(1) will insert new paragraph (f) in sub-section 82KH(1L) which operates in conjunction with sub-section 82KH(1K) within the framework of the expenditure recoupment provisions.

Sub-section (1K) operates to ensure that, where two or more amounts of the same class of relevant expenditure are incurred by a taxpayer under the same tax avoidance agreement, and in respect of the same benefit, those amounts are to be treated as one amount of relevant expenditure. Sub-section (1L) specifies, for the purposes of sub-section (1K), circumstances in which two or more amounts of relevant expenditure are to be treated as being incurred in respect of the same benefit. Consistent with those provisions, new paragraph (f) of sub-section (1L) will treat two or more bad debts incurred in respect of the one loan as being incurred in respect of the same benefit.

Paragraph (k) proposes the omission of sub-section 82KH(1P) and the insertion of a new sub-section (1P). Sub-section (1P), as proposed to be inserted in the Principal Act by the Income Tax Assessment Amendment Bill (No. 4) 1979, is designed to ensure that any benefit obtained by an associate of a taxpayer under a tax avoidance agreement in relation to relevant expenditure being incurred by the taxpayer under the agreement is treated as a benefit obtained by the taxpayer under the agreement in relation to that expenditure being incurred. "Associate" is defined in sub-section 82KH(1) of the Principal Act and refers, broadly, to those persons who by reason of family or business connections might appropriately be regarded as one with the taxpayer. It specifies who is an associate in relation to a natural person, a company, a trustee of a trust estate and a partnership.

The re-drafted sub-section (1P) will ensure that in the case of relevant expenditure being a bad debt, any benefit obtained by an associate under a tax avoidance agreement in relation to the making of the loan in respect of which the bad debt was incurred will also be treated as a benefit obtained by the taxpayer under that tax avoidance agreement in relation to that relevant expenditure being incurred under that agreement.

By sub-clause (2) of clause 7, the extension of the expenditure recoupment provisions proposed by sub-clause (1) to counter bad debts schemes of tax avoidance is to apply with respect to bad debts incurred in respect of loans made after 24 September 1978. By virtue of sub-clause (2) and sub-section 82KH(1F), those provisions will apply to bad debts incurred by a taxpayer under a tax avoidance agreement entered into after 24 September 1978 in respect of loans made after that date.

Clause 8: Partner not having control and disposal of share in partnership income

This clause proposes amendments to section 94 of the Principal Act, to exclude from its field of application partnership income of minors - children under 18 years of age - which as from the commencement of the 1979-80 income year is to be subject to new rules for taxing income of minors generally, proposed to be inserted in the Principal Act by other provisions of this Bill, particularly new Division 6AA (clause 16).

Section 94, when read with the Income Tax (Rates) Act 1976, provides for a special further tax on partnership income over which a partner lacks real and effective control, sufficient to bring the rate of tax on the income to 50 per cent. A partner who is under 16 years of age on the last day of the partnership's income year is in effect deemed to lack real and effective control of his or her share of partnership income, whether received as a partner or as a beneficiary in a trust estate (other than a deceased estate) the trustee of which is a partner. Where a child renders services to the partnership, the further tax does not apply to so much of the child's income from the partnership as would constitute reasonable salary or wages for the services if performed by an employee. Nor does it apply to partnership income of a partner under 16 years of age where the partnership does not carry on a business and its only income is interest, dividends, rent or royalties from property owned jointly or in common by all the partners.

Paragraph (a) of sub-clause 8(1) will amend sub-paragraph (1)(a)(iii) of section 94 of the Principal Act, which excludes children under 16 years of age at the end of the partnership's year of income from the categories of persons to whom, if they in fact lack real and effective control over their share of partnership income, section 94 applies. The reason for this exclusion is that sub-section 94(3) deals with the partnership income of a child under 16.

The amendment proposed by paragraph (a) will exclude from the abovementioned categories, children under the age of 18 years at the end of the child's year of income. Since sub-section 94(3) is to be omitted by paragraph (e) of sub-clause 8(1), the overall effect will be that section 94 will no longer apply to such partners. However, new Division 6AA will be applicable in relation to them.

Existing sub-section (2) of section 94 covers cases in which a trustee of a trust estate in fact lacks real and effective control of the whole or part of the trust estate's share of partnership income. Its broad purpose is to make the section applicable where uncontrolled partnership income is included in the assessable income of a trust estate.

Paragraph (b) of sub-clause 8(1) proposes a technical amendment to sub-section 94(2) to make it clear that the reference in paragraph (a) to the net income of a partnership is a reference to the net income of the partnership of a year of income.

Paragraphs (c) and (d) of sub-clause 8(1) have a similar purpose to paragraph (a) of the sub-clause. They relate to provisions of section 94 under which the share of partnership income that a child under 16 years of age derives through a trust estate is subject to further tax under the section. As partnership income derived through a trust estate by a person under 18 years of age is to come within the scope of new Division 6AA, that income is being taken outside the operation of section 94. Paragraphs (c) and (d) will make the section inapplicable to such income where the trustee/partner in fact lacks real and effective control of the share of partnership income, while the omission by paragraph (e) of sub-section 94(4) (which applies generally to beneficiaries under the age of 16 years deriving partnership income through a trust estate) will complete the process.

Paragraph (e) of sub-clause 8(1) will omit sub-sections 94(3) and (4) from the Principal Act. As explained in the notes on paragraphs (a), (c) and (d), this amendment, together with the amendments effected by those paragraphs, will mean that section 94 will no longer apply to partnership income derived directly or through a trust by children under the age of 18 years.

Paragraph (f) of sub-clause 8(1) will amend sub-section (6) of section 94 to take account of the proposed removal (by paragraph (e)) of section 94(4) from the Principal Act.

Paragraph (g) of sub-clause 8(1) is also consequential upon the proposed omission of sub-sections 94(3) and 94(4) by paragraph (e). Existing sub-section 94(7) applies only to cases in which sub-section 94(3) or 94(4) apply. With their omission, sub-section (7) would no longer have any relevance.

Paragraph (h) of sub-clause 8(1) proposes to omit from sub-section (13) of section 94 the definition of "prescribed trust". The expression is used only in sub-section (4), which is being omitted by paragraph (e).

Sub-clause (2) of clause 7 applies the proposed amendments contained in sub-clause 8(1) to assessments in respect of income of the 1979-80 and subsequent years of income.

Clause 9: Special provisions relating to present entitlement

This clause proposes to amend section 95A of the Principal Act to deem a beneficiary who has an indefeasible vested interest in, but otherwise no present entitlement to, income of a trust estate, to be presently entitled to that income.

The broad principle behind the provisions relating to the taxation of the net income of trust estates is to tax the beneficiary on any part of the net income in respect of which he or she is presently entitled. That is done either directly under section 97 if the beneficiary is not under a legal disability, such as infancy, or through the trustee under sections 98 and 100 if the beneficiary is under a legal disability. Accumulating trust income, that is, any part of the net income of the trust estate in respect of which no beneficiary has a present entitlement, is taxed in the trustee's hands under section 99 or 99A.

Sub-clause (1) of clause 9 will add a new sub-section (2) to section 95A, under which any beneficiary who has a vested and indefeasible interest in income of a trust estate, but is not otherwise presently entitled to that income is to be deemed to be presently entitled to that income for all purposes of the Principal Act.

The effect of this amendment, together with those proposed by later clauses (clauses 10, 11 and 12), will be that the income in respect of which a beneficiary is so deemed to be presently entitled will in most cases be taxed in the trustee's hands under section 98, whether or not the beneficiary is under a legal disability - see notes on clauses 10 to 12. The income may also be taxed in the beneficiary's hands under section 100, subject to credit for the tax payable by the trustee - see notes on clause 14.

The amount of tax payable by the trustee will generally be calculated at normal individual tax rates, including the zero rate bracket (up to $3,893 for 1979-80), unless the beneficiary is a minor and the income is subject to the proposed new rules under Division 6AA. In the latter cases the tax payable by the trustee will be based on the rules that would apply if the income were derived directly by the beneficiary - see notes on clause 16.

By paragraph (a) of sub-clause 9(2), the amendment proposed by sub-clause (1) will apply to assessments in respect of income of the 1979-80 and subsequent income years.

Paragraph (b) of sub-clause 9(2) will correspondingly ensure that where a non-resident beneficiary with an indefeasible vested interest is deemed to be presently entitled to income of a trust estate by virtue of the amendment proposed by sub-clause 9(1), and the income is a dividend or interest subject to withholding tax under section 128B of the Principal Act, the amendment proposed by sub-clause (1) will have effect in relation to such income derived on or after 1 July 1979.

Clause 10: Beneficiary not under any legal disability

This clause is related to clauses 9, 11, 12 and 14. It represents one of the measures necessary to achieve the basic result that trust income in respect of which a beneficiary is to be deemed to be presently entitled by sub-section 95A(2) will be taxable in the trustee's hands under section 98 - and, as appropriate in the beneficiary's hands under section 100 - rather than being taxable in the beneficiary's hands by reason of section 97.

Sub-clause (1) of clause 10 proposes to amend section 97 of the Principal Act by adding a new sub-section (2). Section 97 ordinarily requires that where a beneficiary who is not under a legal disability is presently entitled to a share of trust income, the beneficiary is to be directly liable for tax in respect of that share of the trust's net income. If the beneficiary were made directly liable for tax on income in respect of which he or she is deemed by proposed new sub-section 95A(2) to be presently entitled - see notes on clause 9 - but which is currently retained by the trustee, the beneficiary may not be in a position to pay the tax.

Accordingly, proposed new sub-section 97(2) is being inserted so that, with one exception, section 97 is not to apply to income to which a beneficiary is deemed by sub-section 95A(2) to be presently entitled. (The exception relates to beneficiaries who have made or are deemed to have made an income equalisation deposit and is explained in the notes on clause 11.) The income which is thus excluded from the application of section 97 will instead be taxed in the hands of the trustee under section 98 of the Principal Act (see clause 12) and, where appropriate, after credit for tax payable by the trustee, in the hands of the beneficiary (see clause 14).

By sub-clause (2) of clause 10, the new sub-section 97(2) is to apply to assessments for the 1979-80 and later income years.

Clause 11: Beneficiaries who have made income equalisation deposits

Sub-clause (1) of clause 11 proposes to amend section 97A of the Principal Act by inserting new sub-section 97A(1A). The new sub-section will allow beneficiaries who are deemed by proposed section 95A(2) - see clause 9 - to be presently entitled to income of a trust estate in which they have an indefeasible vested interest, to obtain a deduction for income equalisation deposits made by them.

Sub-section 97A(1), when read with section 159GB of the Principal Act, has the effect that a beneficiary presently entitled to income of a trust estate of a deceased person that carries on a business of primary production, but who is under a legal disability, may obtain a deduction for an income equalisation deposit made on behalf of the beneficiary by the trustee. This result is, in part, achieved by sub-section 97A(1) deeming the beneficiary not to be under a legal disability, the effect being that the assessment of that beneficiary's share of the net income of the trust estate is made upon the beneficiary under section 97 of the Principal Act rather than upon the trustee under section 98 of that Act. Sub-section 159GB(2) deems the deposit to have been made by the beneficiary.

This facility will be extended in a similar way to a beneficiary deemed to be presently entitled to income of a trust estate by proposed section 95A(2), provided that the conditions in paragraphs (a), (b) and (c) of proposed sub-section 97A(1A) are met. That is, the beneficiary is not under a legal disability; he is deemed by sub-section 159GB(1) to have carried on a business of primary production in Australia because he was presently entitled to income from such a business carried on in Australia by the trustee during the year; and he has made an income equalisation deposit in the relevant period. If such a beneficiary had no income other than the share of trust income to which he or she is deemed to be presently entitled and which would otherwise be taxed in the trustee's hands under section 98 (see clause 12), the beneficiary would not be able to take a deduction for the deposit. Accordingly new sub-section (1A) means that in these circumstances the beneficiary, and not the trustee, will be taxed under section 97 on the trust income in respect of which he or she is deemed to be presently entitled.

By sub-clause (2) of clause 11, the new sub-section 97(1A) is to apply to assessments for the 1979-80 and later income years.

Clause 12: Beneficiary under legal disability or having indefeasible vested interest

Sub-clause (1) of clause 12 will insert three new sub-sections - sub-sections (2), (3) and (4) - in section 98 of the Principal Act.

New sub-section 98(2) will give effect to the proposal that income of a trust estate to which beneficiaries who are not under a legal disability are deemed by sub-section 95A(2) to be presently entitled is to be taxed in the hands of the trustee under section 98, and, if within the terms of section 100, in the hands of the beneficiary under that section (clauses 9 to 11 and 14).

Existing section 98 operates to tax in the trustee's hands trust income to which a beneficiary who is under a legal disability is or is deemed to be presently entitled. New sub-section 98(2) will extend the section to include a beneficiary who is deemed to be presently entitled under new sub-section 95A(2), yet is not under a legal disability. However, paragraph (b) of sub-section 98(2) will exclude from assessment under section 98, the income of a beneficiary that, by reason of sub-section (1) or (1A) of section 97A, is to be assessed under section 97 (see notes on clause 11).

In the absence of anything to the contrary, new sub-section 98(2) would, despite the exempt status of the beneficiary, require accumulating trust income in which an exempt body, association etc. has an indefeasible vested interest to be taxed in the hands of the trustee, as income to which the body etc. is deemed to be presently entitled. At present, this income falls to be dealt with under section 99A, sub-section (5) of which is to the effect that the trustee is not to be assessed under that section on the part of accumulating trust income in respect of which, in the opinion of the Commissioner, a specified exempt body has an indefeasible vested interest.

New sub-sections 98(3) and 98(4), to be inserted by clause 12, will ensure that such trust income will continue to be exempt from tax. Sub-section (3) (which incidentally brings up to date the list of exempt bodies in sub-section 99A(5)) specifies that the income is not to be taxed under section 98. If nothing else were done this could leave the income exposed to tax under section 99A, as it would represent a category of trust income not liable to be assessed under either section 97 or 98. To avoid this result new sub-section 98(4) requires that a trustee is to be regarded, in the application of other sections of the Act (e.g., section 99A), as liable to be assessed and to pay tax under section 98 on net income of the trust estate that is under sub-section 98(3) excluded from assessment under section 98. The amendments being made by clause 15 to section 100A of the Act are also relevant.

By sub-clause (2) of clause 12, the amendments made by sub-clause (1) will apply in assessments for the 1979-80 and subsequent income years.

Clause 13: Certain trust income to be taxed at special rate

Sub-clause (1) of clause 13 will amend section 99A of the Principal Act by substituting a new sub-section (2); by inserting a new sub-section (3A); and by omitting sub-section (5). The basic purpose of the amendments is to achieve the result that, in a greater range of cases than at present, trust income to which no beneficiary is presently entitled or deemed to be presently entitled (broadly income accumulating in the trust) will be taxed at the maximum individual rate of tax.

As the law stands, all such income falls initially within the ambit of section 99A, the applicable tax rate for which in 1979-80 is set out in sub-section 6H(7) of the Income Tax (Rates) Act 1976, and is to be 61.07 per cent. However, sub-section (2) of section 99A makes the section inapplicable if the Commissioner of Taxation, on the basis of guidelines set out in sub-section 99A(3), is of the opinion that in any of the cases to which section 99A is initially applicable it would be unreasonable that the section should apply. If that opinion is formed - and in the majority of cases it is - the income in respect of which there is no present entitlement is taxed in the trustee's hands under section 99 of the Principal Act. With the qualification that the zero rate of tax is ordinarily not available, the income is taxed under that section at the rates of tax applicable to individuals generally (sub-section 6H(4) of the Income Tax (Rates) Act 1976).

Clause 13 will give effect to a policy that it will only be in a limited range of cases that accumulating trust income may be taxed under section 99 instead of section 99A. To achieve this, section 99A will retain its present initial all-embracing ambit, and it will only be in the cases to be specifically listed in new sub-section 99A(2) that the Commissioner may form an opinion that it would be unreasonable for section 99A to apply. Those are cases of deceased estates, bankrupt estates and, broadly, trusts arising as a consequence of a person's death or to cover payment of certain compensation moneys.

The criteria that the Commissioner is to use in considering whether it would be unreasonable that section 99A should apply in these cases will remain essentially the same as at present (sub-section 99A(3)). This will enable the result that, unless there are tax avoidance connotations, accumulating income in these cases will continue to be taxed under section 99, on the same basis as at present. (Because there had been tax avoidance exploitation of an earlier exclusion of deceased estates from the ambit of section 99A, those estates were, by section 6 of the Income Tax Assessment Amendment Act (No. 2) 1977, in that year brought within its scope.)

Paragraph (a) of sub-clause 13(1) omits sub-section 99A(2) and inserts a new sub-section 99A(2) which limits to the situations specified in its four paragraphs the cases in which the Commissioner may conclude that it would be unreasonable for section 99A to apply. Where that opinion is formed, the relevant income will, as explained above, fall for assessment under section 99. The Commissioner's opinion is to be formed on the basis of the guidelines set out in sub-section 99A(3), supplemented by new sub-section 99A(3A).

Any trustee dissatisfied with a decision by the Commissioner that it would not be unreasonable for section 99A to apply will, of course, have usual rights of objection and reference to a Taxation Board of Review.

Paragraphs (a), (b), (c) and (d) of new sub-section 99A(2) specify that, provided that the Commissioner forms the opinion mentioned, section 99A will not apply to a trust estate resulting from the will or intestacy of a deceased person, or that consists of property of a bankrupt vested in The Official Receiver in Bankruptcy. Property that is being administered under Part XI of the Bankruptcy Act 1966 and property of a kind referred to in paragraph (b) of sub-section 102AG(2) (which is being inserted in the Principal Act by clause 16) is similarly covered. The latter group comprises, broadly, trusts for property transferred to the trustee for the benefit of the beneficiary by way of compensation for damages or injury; as the direct result of the death of a person such as proceeds of a life insurance policy; out of a public fund established and maintained for the relief of persons in necessitous circumstances; or pursuant to a court order on divorce or judicial separation.

Paragraph (b) of sub-clause 13(1) proposes the insertion of a new sub-section 99A(3A) which relates to trusts resulting from wills or intestacies. As noted above these are in the categories of trusts, specified in new sub-section (2), that may be excluded from the application of section 99A. In order to counter possible tax avoidance practices under which a person's assets might be "padded out" prior to death so as to take advantage of this exclusion, new sub-section (3A) will in effect extend existing paragraph (a) of sub-section 99A(3). Under that paragraph, the Commissioner is to have regard to the circumstances in which property and other rights are conferred on the trust estate itself. By sub-section (3A) the circumstances in which property and other rights were conferred on the deceased person are also to be taken into account.

Paragraph (c) of sub-clause (1) will omit sub-section 99A(5) from the Principal Act. The sub-section frees from tax under section 99A income of a trust estate in respect of which no beneficiary has a present entitlement, but which is income in which an exempt body has an indefeasible vested interest. The function of exempting that income from tax is being taken over by proposed sub-section 98(3) - see notes on clause 12.

By sub-clause (2) of clause 13, the amendments proposed by sub-clause (1) will apply to assessments for the 1979- 80 and subsequent income years.

Clause 14: Beneficiary assessable in respect of certain trust income

Sub-clause (1) of clause 14 proposes to amend section 100 of the Principal Act by omitting sub-section (1) and substituting a revised sub-section that extends the section's field of application.

The purpose is to ensure that a beneficiary who is deemed to be presently entitled to income of a trust estate through having an indefeasible vested interest in that income (by virtue of new sub-section 95A(2) (clause 9)), and who is a beneficiary in more than one trust estate or who also has income from any other source, will have the income from the various trusts in respect of which he is, or is deemed to be, presently entitled, and income from any other source amalgamated in one assessment.

Existing section 100 does this. It includes in the assessable income of a resident beneficiary under a legal disability who is presently entitled to income from more than one trust estate, or from a trust estate and from another source, his interest in the net income of each trust estate, or if the beneficiary is a non-resident, that part thereof that is attributable to sources in Australia.

Proposed sub-section 100(1) does not alter this basic approach. It retains the scope of the present sub-section (1) and simply extends it by also including a beneficiary, including a beneficiary who is not under a legal disability, who is deemed to be presently entitled to any of the income of a trust estate by virtue of the new sub-section 95A(2).

Because the trustee may also have been taxed under section 98 of the Principal Act on this trust income, provision is made by existing sub-section 100(2) for any tax paid or payable by the trustee in respect of the beneficiary's interest to be deducted from the tax payable by the beneficiary.

By sub-clause (2) of clause 14, the amendment will apply to assessments for the 1979-80 and later years of income.

Clause 15: Present entitlement arising from reimbursement agreement

Clause 15 will amend section 100A of the Principal Act by omitting paragraph (a) of sub-section 100A(4) and substituting a revised paragraph.

Section 100A is designed to counter tax avoidance arrangements which are based on the introduction into a trust estate of a beneficiary who would be exempt from tax on any income from the trust estate, for example, an exempt institution. Under such arrangements, a "reimbursement agreement" would involve this introduced beneficiary passing all, or the major part, of the income to which it is presently entitled, but altered into a tax-free form, to the person or group of persons intended to enjoy the benefit of the trust income.

In these circumstances sub-sections 100A(1) and (2) deem the exempt beneficiary never to have been presently entitled to income of the trust estate, so that the income in respect of which it is presently entitled may be taxed under section 99A. Sub-section 100A(4) ensures that the discretion not to apply section 99A (sub-sections 99A(2) and (3)) and the exclusion (by sub-section 99A(5)) from the application of that section of trust income in which specified exempt bodies have an indefeasible vested interest, will not operate to negate this intended result. Because sub-section 99A(5) is (by clause 13) being omitted, the intended result will be maintained without reference in sub-section 100A(4) to sub-section 99A(5). The revised paragraph (a) of sub-section 100A(4), in part, reflects this.

A related effect of the revised paragraph (a) of sub-section 100A(4) concerns cases in which an exempt body is party to an arrangement of the "reimbursement" type and has an indefeasible vested interest in income in circumstances where new sub-section 95A(2) (clause 9) applies. It is intended that, by reason of sub-section 95A(2), that income will be within the scope of section 100A, and thus subject to tax under section 99A. As, by proposed sub-section 98(4) (clause 12), the income will generally be viewed in the application of the Principal Act as being liable to assessment under section 98 (when in fact it is not), and as this would take it outside the scope of section 99A (see sub-section 99A(2)), it is necessary that sub-section 100A(4) should disregard the operation of sub-section 98(4). The revised paragraph (a) of sub-section 100A(4) also does this.

By sub-clause (2) of clause 15 the amendment of section 100A is to apply to assessments for the 1979-80 and subsequent income years.

Clause 16: Division 6AA - Income of certain children

Introductory note

The amendments proposed by clause 16 will insert a new Division - Division 6AA - in Part III of the Principal Act, to implement the new system for taxing certain income of persons under 18 years of age at the end of the year of income, whether it is derived directly or through trusts.

The system is described in broad outline at the beginning of this memorandum under the heading "Tax on income of trusts and income of dependent children". Examples of the way the system applies are given later in the notes on the Income Tax (Rates) Amendment Bill (No. 2) 1979.

A broad outline of the structure of the proposed new Division 6AA is given below in order to assist understanding of the detailed explanation of each section that is given subsequently.

·
Section 102AA contains definitions of terms and other drafting aids.
·
Section 102AB applies the Division to 1979-80 and later years.
·
Section 102AC prescribes the persons to whom the Division applies - broadly, all persons under 18 on the last day of the year of income apart from "excepted persons", who are listed in detail.
·
Sections 102AD, 102AE and 102AF, contain rules to determine what types of assessable income are to be subject to the Division (other than income as beneficiary of a trust estate). This "eligible assessable income" is so much of normal assessable income as is not "excepted assessable income" - the latter being described in detail in section 102AE. To arrive at the 'eligible taxable income' that is subject to tax under the new system, deductions are to be made from the 'eligible assessable income' in accordance with rules set out in section 102AD. Section 102AF elaborates on the meaning to be given to the terms "employment income" and "business income" for the purposes of the exclusion of such income from the system.
·
Section 102AG describes the trust income of minors to which the Division applies. It is along similar lines to the provisions covering minors who derive income other than through a trust.
·
Sections 102AH and 102AJ contain relieving provisions under which the Commissioner of Taxation may grant a rebate of tax where he considers, by reference to parental income and income of other minor children in the family, that it would be unreasonable for extra tax to be paid by virtue of the new system on income derived under arrangements entered into prior to 26 July 1979, or where it is established to his satisfaction that exaction of the extra tax would entail serious hardship.

Notes on proposed provisions of new Division 6AA follow.

Section 102AA: Interpretation

Sub-section (1) defines various terms used in the Division. Each term is to have the given meaning, unless the contrary intention appears:

"agreement" is being defined to mean any agreement, arrangement, understanding or scheme whether that agreement, arrangement, understanding or scheme is formal or informal, express or implied and whether or not enforceable by legal proceedings, irrespective of whether it was intended to be so enforceable;
"occupation" is to include any office, employment, trade, business, profession, vocation or calling, but will specifically exclude a course of education at a school, college, university of similar institution;
"property" means both real and personal property, and includes money.

Paragraph (a) of sub-section (2) is a drafting measure to make it clear that a reference in the Division to the derivation by a person of assessable income is to be taken to include a reference to the inclusion of an amount in the person's assessable income in accordance with any provision of the Principal Act.

Paragraph (b) of sub-section (2) corresponds with paragraph (a), but it relates to income derived from particular property. It is designed to ensure that, in Division 6AA, a reference to the derivation by a person of assessable income from particular property is taken to include a reference to the inclusion of an amount in respect of that particular property in the assessable income of the person.

By sub-section (3), a reference in Division 6AA to the share of a beneficiary of the net income of a trust estate (e.g., in sub-section 102AG(1)) is to mean a reference to a share of the net income of a trust estate that is included in the assessable income of a beneficiary under section 97 or 100 of the Principal Act or in respect of which the trustee is assessed under section 98 of that Act, that is, to the share of the net income of a trust estate in respect of which the beneficiary is, or is deemed to be, presently entitled.

In practice, few beneficiaries affected by the Division will have amounts included in assessable income under section 97 - there would be some with income equalisation deposits, as mentioned above in the notes on clauses 10 and 11. Where a minor's only income is from a trust estate, the trustee will normally be assessable in respect of that income under section 98 because the beneficiary, being under 18, is under a legal disability. If the beneficiary has income from more than one trust estate, or income from some other source, such as interest from a building society deposit, the income from the various sources will be included in assessable income under section 100, credit being allowed for any tax paid by the trustee under section 98.

Under sub-section (4), references in Division 6AA to income that is derived from particular property are to be read as including a reference to income that is derived from property that, in the opinion of the Commissioner of Taxation, represents that property. For example, income from the investment of property that is transferred to a trustee for the benefit of a minor in satisfaction of a claim for damages for personal injury to the minor, is to be classified as "excepted trust income" by new section 102AG(2)(b)(i)(B), and hence excluded from the new system. If that property, say cash, is invested in some other property, such as shares, sub-section (4) will ensure that the dividends may be excluded, on the basis that those dividends are derived from property that represents the cash settlement received by the trustee.

Section 102AB: Application of Division

This section specifies that Division 6AA applies in relation to the 1979-80 and subsequent income years.

Section 102AC: Persons to whom Division applies

Section 102AC is the operative provision to determine whether a person comes within the scope of Division 6AA. If so, this "prescribed person" becomes liable for tax under the new system in respect of any assessable income derived by the person which is not excluded from the system by section 102AE. Where income is derived by a trustee for a prescribed person, the trustee may, by reason of section 102AG, become liable for tax under the new system.

Sub-section (1) of proposed section 102AC specifies that a person is a "prescribed person" for the purposes of the Division in relation to a year of income if -

(a)
the person is under the age of 18 years on the last day of the year of income; and
(b)
is not an "excepted person" (as defined in sub-section (2)), in relation to the year of income.

Sub-section (2) specifies that a minor will be an "excepted person", and so a person to whom the Division does not apply, if and only if, at the end of the year of income, he or she falls within one or other of the classes listed in paragraphs (a) to (g) of sub-section (2). Those paragraphs are to be read subject to the qualifications contained in sub-sections (3) to (8) of section 102AC.

A minor is to be an excepted person if -

·
the person was a married person on the last day of the year of income (paragraph (a));
·
the person was engaged in a full-time occupation (see sub-section 102AA(1)) on the last day of the year of income, within the sense of sub-sections (6) to (8) (paragraph (b));
·
a handicapped child's allowance or an invalid pension was payable in respect of the minor under the Social Services Act 1947 in respect of a period that included the last day of the income year (paragraph (c));
·
where an allowance or pension referred to in paragraph (c) is not payable, e.g., because of an income test, if the Commissioner of Taxation has received a medical certificate that the minor is a handicapped child or a severely handicapped child, within the meaning of Part VIB of the Social Services Act 1947, or is permanently incapacitated for work within the meaning of Division 3 of Part III of that Act - and the Commissioner is satisfied this was the position on the last day of the income year (paragraph (d));
·
a double orphan's pension was payable in respect of the minor under the Social Services Act 1947 for a period including the last day of the income year, (paragraph (e)) or would have been payable in respect of that period but for sub-section 105B(2) of that Act, that is, where a repatriation pension is payable (paragraph (f)). (A double orphan otherwise covered by paragraph (e) or (f) will not be taken to be an excepted person, however, if during the whole of the period during which the pension was or would have been payable, he or she was wholly or substantially dependent for support on a person who, within the meaning in section 6 of the Principal Act, is a relative, or on relatives - sub-section 102AC(3).);
·
the Commissioner has received a medical certificate that the minor is unlikely to be able to engage in a full-time occupation because of a permanent disability, and he is satisfied that on the last day of the income year this is the situation (paragraph (g)). However, under sub-section 102AC(4) a minor is not to be taken to be an excepted person by reason of this paragraph where the Commissioner is of the opinion that, during the whole of the relevant period during which the minor was, by reason of a permanent disability, unlikely to be able to engage in a full-time occupation, he or she was wholly or substantially dependent for support on a relative or relatives.

Sub-section (5) means that for the purposes of sub-sections (3) and (4), a minor is to be taken to have been wholly or substantially dependent for support on a relative during any period during which the minor resided with the relative, unless the contrary is established to the satisfaction of the Commissioner. In effect, the minor concerned will remain an excepted person under paragraph (e), (f) or (g) of sub-section (2) if it is demonstrated that for any part of the relevant period, the support by the relative was insubstantial.

"Relative" is, as noted earlier, a term defined in section 6(1) of the Principal Act. It means the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the person concerned, or of his or her spouse, as well as the spouse of any of those specified persons.

Sub-sections (6), (7) and (8) set out a number of tests to determine whether a minor is to be regarded as having been engaged in a full-time occupation at the end of the year of income for the purposes of paragraph (b) of sub-section 102AC(2). As noted earlier, "occupation" is being defined in section 102AA to include any office, employment, trade, business, profession, vocation or calling.

A person who was on the last day of the income year engaged in a full-time occupation will be within the category being discussed, but sub-section (6) adds that a minor not actually in full-time employment at the end of the year, may still qualify if he or she was in a full-time occupation for at least 3 months, or for periods aggregating 3 months or more, during the income year.

Sub-section (7) qualifies sub-section (6) by excluding from consideration any such period of employment in a year if the minor was in the year subsequently engaged in a course of full-time education at a school, college, university or similar institution. This means, for example, that employment during normal school or university vacations will not be treated as full-time employment.

Sub-section (8) is an overriding provision to the effect that a minor will not be taken to have been in a full-time occupation on the last day of the year unless the Commissioner is satisfied that on that day the minor both intended to be engaged in a full-time occupation (or occupations) during the whole or a substantial part of the next year (paragraph (a)), and did not intend to engage in a course of full-time education at any time during that next year (paragraph (b)).

Section 102AD: Taxable income to which Division applies

The purpose of this section is to provide rules for allocating deductions to which a prescribed person is entitled between income which is subject to the new system - "eligible assessable income" - see the notes on section 102AE below - and other assessable income in order to arrive at "eligible taxable income". Eligible taxable income is the eligible assessable income after reduction by its share of allowable deductions.

The eligible taxable income will, without more, if it exceeds $1,040 be subject to tax at the rates applicable under the new system, as declared by the Income Tax (Rates) Act 1976 as proposed to be amended by the second Bill. New section 6HA of the Rates Act is the principal relevant section in that Act.

By reason of section 102AD the "eligible taxable income" of a "prescribed person" (defined in section 102AC) is to be the amount (if any) remaining after deducting from that person's eligible assessable income (defined in section 102AE) -

·
under paragraph (a), any allowable deductions that relate exclusively to that eligible assessable income;
·
under paragraph (b), so much of any other deductions (other than apportionable deductions) as may appropriately be related to that eligible assessable income; and
·
under paragraph (c), a proportionate share of any apportionable deductions (defined in section 6(1) of the Principal Act).

The formula under paragraph (c) is -

((eligible taxable income (before apportionable deductions))/(taxable income as increased by apportionable deductions)) * ((apportionable deductions)/(1))

Section 102AE: Eligible assessable income

This section specifies exhaustively the types of income which comprise the "eligible assessable income" that, after making the deductions allocated to that income in accordance with section 102AD, will result in eligible taxable income on which a minor who is a prescribed person may pay tax under the new system for which Division 6AA makes provision.

Sub-section (1) of section 102AE means that the eligible assessable income of a person of a year of income will comprise all assessable income of the person, other than income that is made "excepted assessable income" by sub-section (2).

Sub-section (2) specifies the categories of assessable income that are to be excepted assessable income. To the extent to which assessable income of a minor who is a prescribed person consists of the types of income listed, that amount or those amounts will be taxed in the normal way and will not be liable for tax under new Division 6AA. The exceptions listed in sub-section (2) are, however, subject to the qualifications contained in sub-sections (3) to (10) of section 102AE, and section 102AF.

The excepted categories of income are set out in a number of paragraphs. Those sub-paragraphs cover situations where a minor derives income without the intervention of a trustee. If income is derived by a trustee for a minor, arising out of circumstances of the kind covered by sub-section 102AE(2), the income will be excepted income by reason of sub-section 102AG(2), read with paragraph (e) of sub-section 102AE(2) and sub-section 102AE(4).

Paragraph (a) of sub-section 102AE(2) excludes from the new system income that is employment income or business income. "Employment income" is defined in new section 102AF, and "business income" in sub-section (5) of section 102AE and in sub-section 102AF(3).

Paragraph (b) excludes income derived by a minor from property transferred to the minor under circumstances described in sub-paragraphs (i) to (viii). As noted earlier, proposed sub-section 102AA(4) will enable income from property that represents the re-investment of property transferred in such circumstances to qualify under paragraph (b).

·
Sub-paragraph (i) refers to property transferred to the minor in respect of a damages claim for loss of parental support, or for personal injury, disease, or physical or mental impairment. Where the property was transferred otherwise than in pursuance of a court order, sub-section (9) of section 102AE guards against any exploitation by limiting the amount of income excepted under this sub-paragraph to so much as the Commissioner considers fair and reasonable.
·
Sub-paragraphs (ii) to (viii) cover property transferred to a minor -

· .
pursuant to any law relating to workers' compensation or to the payment of compensation in respect of criminal injuries;
· .
directly as the result of the death of another person and either under a life assurance policy, or out of a provident, benefit, superannuation or retirement fund, or by an employer of the deceased person, e.g., where no entitlement to superannuation benefits exist;
· .
out of a public fund established and maintained exclusively for the relief of persons in necessitous circumstances, e.g., where, on the death of a person, a public appeal is made for the members of the deceased's family who are in real need; or
· .
pursuant to a decree or order of dissolution or annulment of marriage having effect in Australia by reason of the Family Law Act 1975, or recognised as valid in Australia, or a decree or order of judicial separation or a similar decree or order.

Paragraph (c) of sub-section 102AE(2) treats as excepted income, income that is derived by a minor from the investment of property which came to the minor in one of three distinct circumstances.

By sub-paragraph (i), income derived by a minor from property that devolved upon the minor from the estate of a deceased person will be excepted assessable income, and outside the new system. By this sub-paragraph, income from the investment of a cash legacy, or dividends from shares bequeathed to a minor, will be excepted income and will thus continue to be taxed at normal rates. Income derived as a beneficiary in a deceased estate is to be excepted by paragraph (a) of new sub-section 102AG(2).

Sub-paragraph (ii) of paragraph (c) covers certain cases where property comes indirectly to a child as a result of a person's death, e.g., where a husband dies leaving all of his estate to his widow, who shortly afterwards makes provision for the children by transferring property acquired from the estate to them. By this sub-paragraph, income from property transferred to a minor by another person out of property that devolved upon the latter from a deceased estate will be excepted assessable income, provided that the property was transferred within 3 years after the date of death. The amount of income so excluded is, by sub-section (10) of the section, to be limited, broadly, to the amount of income that would have flowed to the child from the estate of the deceased person if the child had received the benefit of the rules of intestacy.

By sub-paragraph (iii) of paragraph (c) income from the investment of property acquired by a minor as the beneficial owner of a verifiable prize in a legally authorised and conducted lottery, will be excepted assessable income.

Paragraph (d) of sub-section 102AE(2) relates to income, other than business income, that is derived by a minor as a share of partnership income.

A person's share of partnership income is included in his or her assessable income under section 92 of the Principal Act. If the partnership is in business, a minor partner's share of the partnership business income will qualify as excepted income only to the extent to which paragraph (a) of sub-section 102AE(2) (and related provisions) allows. Paragraph (d) will, however, apply where the partnership does not carry on a business - persons in receipt of income jointly, e.g., from property, are treated as partners for income tax purposes.

The amount of this income that will be treated as excepted income is governed by sub-section (3), which is framed so as to provide a safeguard against "padding out" the property or property income of a partnership in order to inflate the amount of property income that would otherwise qualify as excepted income. Sub-section (3) limits the excepted amount to the minor's share of so much of the partnership income as, in the opinion of the Commissioner of Taxation, would have been excepted income if the income concerned had been derived by the child. Accordingly, where property is transferred into the joint ownership of a minor and one or more other persons, the minor's share of the resulting income will be excepted income to the extent that it would have been excepted income if the minor's share of the property had been transferred to him or her direct.

Paragraph (e) of sub-section 102AE(2), which covers a minor's share of trust income, is to be read together with the provisions of sub-section 102AE(4) and section 102AG.

Although paragraph (e) on its face indicates that income included in the assessable income of a minor under section 97 or 100 of the Principal Act, that is, income of a trust estate in respect of which the minor is, or is deemed to be, presently entitled, is to be excepted assessable income, sub-section (4) means that the amount of assessable income to be excepted is not to include any part of the minor's share of the trust income to which Division 6AA applies.

A minor beneficiary's share of trust income will, if it is included in his or her assessable income, ordinarily be so included under section 100 of the Principal Act. (The exceptional circumstances in which it may be included under section 97 are outlined in the notes on clause 11.) Section 100 applies where a beneficiary under a legal disability has income from more than one trust estate, or also derives income from some other source. Each share of trust income will have been exposed to tax in the trustee's hands under section 98, and section 100 applies so as to include in the minor's assessable income the shares of net income of the trust estate or estates, with credit then being allowed in his or her assessment for any tax paid by the trustee.

The measures contained in the Bill are structured so that where a minor has a present entitlement to trust income, the extent to which that income is within the new system is initially to be determined under section 102AG. The principles of that section are closely in line with those of section 102AE, the section now being discussed. Section 102AG determines how much of a minor beneficiary's share is income to which Division 6AA applies, and that result is used for purposes of an assessment on the trustee under section 98. The same amount of income is then, in a case where the beneficiary is liable to be assessed in respect of the share of trust income, to be treated in any assessment of the beneficiary as income to which the Division applies.

The minor's total share of trust net income will be included in assessable income of the minor and will, by sub-section 102AE(1), at base be eligible income to which the new system applies. However, paragraph (e) of sub-section 102AE(2), read with sub-section 102AE(4), will exclude so much of the beneficiary's share as, by relevant provisions of section 102AG, is treated as excepted income in the trustee's hands.

Paragraph (f) of sub-section 102AE(2) will treat as excepted assessable income, income arising from the reinvestment of amounts saved out of excepted assessable income. Income from reinvestment of amounts saved out of income of earlier years will also be excepted if the income saved would have been excepted had the new system applied in those years. On a corresponding basis, income from reinvestment of savings of exempt income will be treated as excepted income.

Sub-paragraph (i) of paragraph (f) relates to accumulations of excepted assessable income derived during the 1979-80 and later income years, that is, years in relation to which Division 6AA applies. So much of a minor's income from property as, in the opinion of the Commissioner, represents those accumulations will be excepted income, outside the new system. Income from investment of wages is an example.

Sub-paragraph (ii) has a similar effect in relation to income from investment of savings of income derived prior to 1979-80. It will mean that income will be excepted income to the extent to which it represents income from the investment of accumulations of income that would have been excepted assessable income if Division 6AA had applied at the time the earlier income was derived.

Sub-paragraph (iii) treats as excepted income, income from property representing accumulations of exempt income to the extent to which sub-paragraphs (i) or (ii) would, in the opinion of the Commissioner apply, if that exempt income had been assessable income. For example, if a minor received rent from an overseas property that had been left to him under a will that rent would, if it were taxed abroad, be exempt from tax under section 23(q) of the Principal Act. If the minor saved and invested those earnings so as to produce assessable income, paragraph (iii) would operate to treat the income from the reinvestment as excepted income. Income that is exempt from tax is, of course, not covered by the new system which applies only to income that is liable to Australian tax.

As mentioned earlier, sub-section (3) operates in conjunction with paragraph (d) of sub-section 102AE(2) to limit the amount of non-business partnership income that will be treated as excepted assessable income to the amount that would have been excepted if the minor had derived directly the share of income concerned.

Sub-section (4) qualifies paragraph (e) of sub-section 102AE(2). As explained more fully in the notes on that paragraph, the effect is to limit the amount of trust income included in a minor's assessable income that is treated as excepted income to the amount of that trust income that is treated as "excepted trust income" (see section 102AG).

Sub-section (5) of section 102AE qualifies the exception for business income provided by paragraph (a) of sub-section 102AE(2). (Sub-sections (6) and (7) are also relevant.) As specified in sub-section 102AF(3), business income for the general purposes of Division 6AA, is to mean income, not being employment income as defined in sub-section 102AF(2), that is derived by a person from carrying on a business either alone or together with other persons. However, by sub-section 102AE(5), the expression will, for purposes of paragraph (a) of sub-section 102AE(2) have a more restricted meaning.

The broad intended effect of sub-section 102AE(5) will be that income of a business that is carried on by a minor either alone or in partnership with other minors, will be treated as excepted income if the minor (or minors) in reality owns and conducts the business. If the minor derives income from any other business, for example, in partnership with his or her parents, the only amounts which will be treated as excepted assessable income will be the amount that would be reasonable salary or wages for services rendered and such amount (if any) as represents a reasonable return for use of the child's "excepted" capital. It will be recalled that under section 94 of the Principal Act, partnership income of a child under 16 years of age attracts further tax, except to the extent that the child's share represents what would be reasonable remuneration by way of salary or wages for services rendered (see notes on clause 8 of the Bill).

Paragraph (a) of sub-section (5) refers to the case where, during the year, the business was carried on by the minor either alone or in partnership with another person who was or other persons each of whom were under 18 on the first day of the year of income. In this case, the amount of business income to be treated as excepted assessable income under paragraph (a) or sub-section 102AE(2) is so much of that income as the Commissioner of Taxation considers fair and reasonable having regard to specified matters aimed at establishing the extent to which the business and the business income are really those of the minor (or minors). The matters are -

·
the extent to which, during the year of income, the minor had the real and effective conduct and control of the business and participated in the operations and activities of the business (sub-paragraph (i));
·
the extent to which the minor had the real and effective control over the disposal of income derived by the minor from the business during the year (sub-paragraph (ii));
·
the extent to which the capital of the business consisted of property contributed by the minor, being property the income from which would, in the opinion of the Commissioner, be excepted assessable income in relation to the minor (e.g., property left to the minor by a deceased person or property representing savings of past earnings) (sub-paragraph (iii)); and
·
such other matters (if any) as the Commissioner thinks fit (sub-paragraph (iv)).

Paragraph (b) applies in cases other than those to which paragraph (a) applies, e.g., where a minor carries on business in partnership with persons who were over the age of 18 at the beginning of the year of income. In these cases the amount of business income to be excluded - that is, to be treated as excepted assessable income - will be limited on two bases. First, income from the business will be excepted income to the extent of an amount equal to the amount that, in the opinion of the Commissioner, would be reasonable salary or wages for any services rendered by the minor during the year in the production of assessable income of the business. Second, so much of the business income as, in the Commissioner's opinion, represents a reasonable return on what is, broadly, a minor's "excepted" capital employed in the business, such as savings by the minor from part-time employment, will be excepted income to which the new system does not apply. This part of paragraph (b) thus allows exclusion from the new system of the portion of business income that represents a return on capital which, if it were invested elsewhere than in a business, would be excepted assessable income under one or other of the relevant paragraphs of sub-section 102AE(2).

Sub-section (6) is a general safeguarding provision, using the concept of arm's length dealing, to guard against exploitation of the provisions of sub-section (2), which in effect exclude income from tax under the new system. It applies subject to sub-section (7), another general safeguarding provision.

The intended effect of sub-section (6) is that where assessable income is derived by a minor, directly or indirectly, under or as a result of an agreement (see sub-section 102AA(1) for the meaning of "agreement") any parties to which were not dealing with each other at arm's length, and the income so derived is greater than that which would have been derived if the parties to the agreement had dealt with each other at arm's length, sub-section 102AE(2) does not apply to so much as exceeds the arm's length amount. For example, if income is derived by a minor under an agreement with a relative, and it appears to the Commissioner of Taxation that the income so derived is greater than the income that the minor would have derived had he or she been dealing with an unrelated person, the amount by which the income under the agreement exceeds that which the Commissioner considers would have been derived in dealings with the unrelated person will not be treated as excepted income.

Any conclusion reached by the Commissioner in the application of sub-section (6) will, like conclusions that he reaches under other provisions in Division 6AA that confer specific powers on him, be subject to ordinary rights of objection and of reference to a Taxation Board of Review.

Sub-section (7) is designed as a safeguard against arrangements of any kind that might be entered into with the purpose of exploiting the exclusions of particular income from the new system. It will, subject to sub-section (8), exclude from the application of sub-section 102AE(2), any assessable income derived by a minor directly or indirectly under or as a result of an agreement entered into or carried out by any person for a purpose of securing that the assessable income would not be income to which Division 6AA applies - that is, that it would not be eligible assessable income.

Sub-section (8) qualifies sub-section (7) by directing that in determining whether sub-section (7) applies, a purpose that is a merely incidental purpose is to be disregarded.

Sub-section (9) specifically limits the application of sub-paragraph (b)(i) of sub-section 102AE(2) in a situation where property was, otherwise than in pursuance of a court order, transferred to a minor in settlement for damages referred to in that provision.

To guard against possible abuse of the particular exception, for example by a settlement out of court for a very large sum of a claim by a minor against a relative for damages for relatively minor injuries, sub-section (9) will limit the amount of the income derived from investment of the settlement that is to be treated as excepted income to so much (if any) of the income as the Commissioner considers fair and reasonable.

Sub-section (10) relates to sub-paragraph (c)(ii) of sub-section 102AE(2). It will operate where property is transferred to a minor by another person, out of property that devolved upon the latter from a deceased estate, within 3 years after the death of the deceased. It will in such a case limit the amount that may be treated as excepted assessable income. The limitation contained in sub-section (10) is measured against the amount of income that would have flowed to the minor if property of the deceased had been distributed to the minor under laws of intestacy.

Paragraph (a) of sub-section (10) distinguishes two situations. First, sub-paragraph (i) refers to cases in which the minor does not receive any property or income directly from the estate of the deceased person. That is, the minor has not received any property from the estate, and is not presently entitled to any of the income of the estate so as to be assessable under section 97 or 100 of the Principal Act.

In these cases, the amount of income otherwise to be treated as excepted assessable income under sub-paragraph (c)(ii) of sub-section 102AE(2) is to be reduced by the amount by which the income that the minor has derived from property referred to in that sub-paragraph exceeds the amount of income that, in the opinion of the Commissioner, would have been included in the assessable income of the minor from property that, in the Commissioner's opinion, would have devolved upon or for the benefit of the minor from the estate of the deceased person if he or she had died intestate.

Sub-paragraph (ii) of paragraph (a) refers to the second situation, that is, to cases in which the minor does also receive property, or income assessable under section 97 or 100, directly from the estate.

In these cases, the amount of income to be treated as excepted assessable income under sub-paragraph (c)(ii) of sub-section 102AE(2) is to be reduced by the amount by which the income that did come to the minor from the estate, plus the income that came from property transferred to the beneficiary out of property left to someone else, exceeds the amount that would have been included in the assessable income of the minor from property that, in the Commissioner's opinion, would have devolved upon or for the benefit of the minor from the estate of the deceased person if he or she had died intestate.

It is to be noted that this limitation only refers to amounts covered by sub-paragraph (c)(ii) of sub-section 102AE(2). In no circumstances will the limitation affect an amount of assessable income derived by the minor directly from the estate of the deceased person, which is specifically excluded from Division 6AA.

Section 102AF: Employment income and business income

This section, in effect, defines the meaning of the term "employment income", and the basic meaning of the term "business income", for the purposes of Division 6AA.

By sub-section (1), "employment income" is to include income that is salary or wages for purposes of the pay-as-you-earn provisions of the Principal Act (paragraph (a)), and, by paragraph (b), other payments made for services rendered or to be rendered are also to be treated as employment income.

"Salary or wages" is defined in section 221A for PAYE purposes as meaning taxable salary, wages, commission, bonuses or allowances paid (whether at piece-work rates or otherwise) to an employee as such. It also includes taxable social security payments, e.g., unemployment benefits (section 23AD) and fully-taxable lump sum retirement amounts paid in respect of unused annual leave and long service leave (sections 26AC and 26AD). There are also specific inclusions as listed in paragraphs (a) to (k) of the definition.

Sub-section (2) of section 102AF will adapt the definition of "salary or wages" for the purpose of references to "employment income" in Division 6AA, so as to treat as employment income periodical payments under an insurance policy owned by a minor that are made by way of compensation or of sickness or accident pay in respect of incapacity for work.

Sub-section (3) provides a general meaning in Division 6AA for the term "business income". It is to mean income, not being employment income, derived by a person from carrying on a business either alone or together with another person or persons - for example, in partnership with others.

While the term "business income" is throughout the Division, e.g., in paragraph (d) of sub-section 102AE(2), to have this basic meaning, the term will have a more restricted meaning for purposes of paragraph (a) of that sub-section. That is because sub-section 102AE(5) sets out in more restricted terms how the reference in paragraph (a) to business income is to be read.

Section 102AG: Trust income to which Division applies

As noted earlier, the new system is to apply to the income of minors, whether derived directly or through a trust estate. Where a trust estate is involved, the income is treated as income of a beneficiary if the beneficiary is, or is deemed by new sub-section 95A(2) or by section 101 to be, "presently entitled" to it.

If a minor beneficiary is, or is deemed to be, presently entitled to income of a trust estate, tax is generally collected in the first instance from the trustee through an assessment under section 98 of the Principal Act. Where the minor beneficiary also has income from another source, or from more than one trust estate, the income from the trust estate or estates is included in the child's assessable income under section 100, tax paid by the trustee being deducted from tax of the beneficiary.

To facilitate the application of the new system to income of minors that is from a trust, special rules are being provided to determine, for the purposes of assessing both trustees and, in appropriate cases, minor beneficiaries, what part of a minor's share of the net income of a trust estate is to be income to which the new system is to apply. Proposed section 102AG which, in large part, mirrors the provisions of new section 102AE relating to eligible assessable income derived directly by a minor, is designed for this purpose.

Sub-section (1) sets out the circumstances in which and the extent to which trust income is to be subject to tax under the new system. It will have application for the purposes of taxing both the trustee and, if appropriate, the beneficiary only in those cases in which the beneficiary is a prescribed person (under new section 102AC) who is, or is deemed to be, presently entitled to a share of the income of a trust estate.

Where this is established, the Division will apply only to so much of that share of the net income of the trust estate as, in the opinion of the Commissioner, is attributable to assessable income of the trust estate that is not, by virtue of sub-section (2), excepted trust income in relation to the beneficiary. The latter is broadly equivalent to excepted assessable income under new sub-section 102AE(2). In other words, the Commissioner will be required to look at each element of the assessable income of a trust estate to determine its status under the new Division in relation to the beneficiary and from that, to determine the part of the beneficiary's share of the whole of the net income of the trust estate that relates to non-excepted trust income. The amount so ascertained will, in broad terms, be subject to tax in accordance with Division 6AA in the hands of the trustee and, if the minor has other income as well, in his or her hands also, on the basis outlined above.

An amount included in the assessable income of a trust estate may only constitute excepted trust income (income to which the new system is inapplicable) where it satisfies the requirements of a particular category of excepted trust income in relation to the beneficiary whose share of the net income of the trust estate is attributable to that amount. In other words, a share of the net income of the trust estate is to be excepted from liability to Division 6AA tax only to the extent that assessable trust income to which it is attributable would, if derived directly by the minor beneficiary, be excepted assessable income.

An amount of income that, by the application of sub-section 102AG(1), is trust income to which the Division applies will, by a combination of sub-section 102AE(1), paragraph (e) of sub-section 102AE(2) and sub-section 102AE(4), in the beneficiary's hands be income to which the Division applies. Where the trustee is assessable on behalf of the beneficiary under section 98 of the Principal Act, the amount fixed by sub-section 102AG(1) will be taxed under the new system according to section 6HA of the Income Tax (Rates) Act 1976 (see clause 5 of the second Bill).

Sub-section (2) specifies the various categories of assessable income which, subject to the other provisions of the section, may be treated as excepted trust income. Subject to the deletion of employment and business income, but with the addition of income of deceased trust estates, each of the categories of income specified corresponds with a category of income derived directly by minors that is excepted from the operation of Division 6AA by section 102AE.

Paragraph (a) excludes from the operation of Division 6AA the assessable income of a deceased estate, whether resulting from a will, a codicil, or an intestacy, or an order of a court that varied or modified the terms of a will, or codicil, or application of the rules of intestacy. Generally, a share of a minor beneficiary in the net income of a deceased estate will be taxed at ordinary personal rates of tax, including the benefit of the zero rate of tax on taxable income up to $3,893 in 1979-80. However, the exception under this paragraph is subject to the other provisions of this section so that if, for example, income is diverted into a trust estate with the purpose of obtaining the benefit of this exception, that income will not, by virtue of sub-section (4), be entitled to the benefit of this exception.

Paragraphs (b), (c) and (d) correspond with the exceptions specified in paragraphs (b), (c) and (f) of sub-section 102AE(2) in respect of comparable income derived directly by a minor. The explanations given in relation to sub-section 102AE(2) are equally appropriate to these provisions, subject to their being read in the context of the income in question being derived by a trustee rather than directly by the minor.

Sub-sections (3), (4), (5), (6) and (7) correspond in their practical effect with sub-sections (6), (7), (8), (9) and (10) respectively of section 102AE, the earlier comments on which, again subject to the altered context, are also relevant here.

Sub-section (8) sets down a rule for determining the amount of excepted trust income of a particular beneficiary in a discretionary trust. It is that where property is transferred to the trustee of a discretionary trust for the benefit of specified beneficiaries or beneficiaries included in a specified class of beneficiaries, that property is to be taken as having been transferred for the benefit of each of the specified beneficiaries or for each of the beneficiaries in that specified class of beneficiaries.

For example assume that $10,000 of property was transferred to a discretionary trust, comprising $6,000 being a cash legacy from a deceased estate transferred within 3 years of the date of death of the deceased person and $4,000 being a gift from a parent, for the benefit of two children A and B, that the net income of the trust estate for 1979-80 was $1,200, and that the trustee in the exercise of his discretion, applied $1,100 to A and $100 to B.

Under the provisions of Division 6AA, income from the legacy transferred to the trust estate satisfies the tests of sub-section 102AG(7) and is excepted assessable income, whereas income from the gift is liable to tax under the new system in the hands of a minor who is a prescribed person.

By the application of sub-section (8) the net income received by each beneficiary will be dissected into income subject to tax under the new system, and income liable to ordinary tax, on the basis that each beneficiary is regarded as receiving the same proportion of each type of income as the ratio of the amount of property yielding that type of income bears to the total amount of property. That is, on the above facts, A would be regarded as having derived -

(($6,000)/($10,000)) * (($1,100 attributable to income from the legacy and not subject to tax under the new system))

, i.e.,
$660

(($4,000)/($10,000)) * (($1,100 attributable to income from the gift and subject to tax under the new system))

, i.e.,
$440
And B would be regarded as having derived

(($6,000)/($10,000)) * (($100 attributable to income from the legacy and not subject to tax under the new system))

, i.e.,
$60

(($4,000)/($10,000)) * (($100 attributable to income from the gift and subject to tax under the new system))

, i.e.,
$40

Section 102AH: Commissioner may allow rebate

By this section, relief from part or all of the extra tax payable in consequence of the application of the new system to income arising under arrangements entered into before 26 July 1979 may be available where it is established to the satisfaction of the Commissioner of Taxation - ordinarily by reference to income of a parent and other minor children - that it would be unreasonable that the whole of that extra tax should be payable. The relief under this section is to be in the form of a rebate of tax to be allowed in the assessment of the minor, or trustee for the minor, concerned.

Sub-section (1) of section 102AH will authorise the granting of a rebate in the circumstances described in the sub-section, but subject to the other provisions of the section. The circumstances are, broadly, that the rebate may only be allowed -

-
in relation to income (referred to in these notes for purposes of explanation as "pre 26 July income") derived under arrangements entered into on or before 26 July 1979, which is the date on which it was announced that the new system for taxing income of minors would be introduced; and
-
where it is established to the satisfaction of the Commissioner that it would be unreasonable that the whole of the additional amount of tax payable in respect of pre 26 July income by virtue of the application of Division 6AA (referred to in these notes as "the additional tax") should be payable.

The nature of the unreasonableness to which section 102AH is directed is indicated in proposed sub-section 102AH(2), read with sub-section (3). The section is not limited in scope to the precise situations covered in those sub-sections but, for other situations, the sub-sections are intended to provide a basic guideline.

Under the sub-section, the Commissioner's discretion is to be exercised in relation to each year of income. If the Commissioner decides that it would be unreasonable for the additional tax under the new system to be payable on income of a particular year, he will not be precluded from changing this view in relation to another year, e.g., where he considers that a change in circumstances warrants that course. Conversely, if the Commissioner decides that the relief is not called for in relation to a particular year he may, having reviewed the relevant circumstances as they exist in relation to a later year, form an opinion that results in its allowance for that later year.

Where the Commissioner is satisfied that it would be unreasonable for the whole of the additional tax payable by a minor, or by a trustee on behalf of a minor, by virtue of the application of the new system to that minor's pre 26 July income to be paid, the Commissioner may grant a rebate of such amount, if any, as he considers fair and reasonable, but not exceeding the additional tax payable by virtue of the application of the new system. That is, the tax payable by the minor, or trustee, in respect of the pre 26 July income is not to be reduced by the rebate below the amount that would have been payable by the minor or trustee on the income if the new system had not been introduced.

Sub-section (2) provides, as noted earlier, the basic guideline for the operation of section 102AH. By it, in a case where a parent or parents of the minor had a taxable income or taxable incomes in the particular year concerned, there will be no entitlement to rebate unless it is established to the Commissioner's satisfaction that the total tax that, but for any rebate under this section or under section 102AJ, would be payable on the pre 26 July income of the minor is greater than a further amount calculated in accordance with the sub-section, and which can conveniently be termed the "notional tax". The notional tax is to be an amount equal to the additional tax that the relevant parent of the minor would have had to pay if the pre 26 July income of the minor, or of a trustee for the minor, to which the new system applies, had been added to the taxable income of the parent.

If both of the parents of the minor have taxable incomes the notional tax is calculated by reference to the income of the parent who has the higher taxable income or, if the parents have equal taxable incomes, by reference to the income of the father.

If there are other minor children, or trustees for other minor children, of that parent, the pre 26 July income of those children, or of their trustees, to which the new system applies, is also to be added to the taxable income of the relevant parent for the purpose of calculating the notional tax. If more than one minor is involved, the amount of the notional tax would be apportioned between them, for the purpose of calculating whether the tax payable on their pre 26 July incomes is greater than the notional tax on those incomes, in the proportion that the pre 26 July income of each minor bears to the total of the pre 26 July incomes of all of them. The practical application of this sub-section is illustrated by the following examples:

Example 1 - One minor child all of whose income is derived under pre 26 July 1979 arrangements and is taxed under the new system.
  $ $  
Taxable income of the parent with the higher income 15,000
Income of the child 5,000
Tax on the child's income under the new system -
$5,000 @ 47.07% = 2,353.50 (a)
Parent's taxable income $15,000
Tax at ordinary rates 3,673.08 (b)
Calculation of notional tax
Parent's taxable income 15,000
Child's taxable income 5,000
Notional taxable income 20,000
Tax at ordinary rates on notional income 5,801.46 (c)
Notional tax ((c) - (b)) 2,128.38 (d)
Excess of tax under new system over notional tax ((a) - (d)) $225.12

On this calculation sub-section (2) would not operate to deny a rebate under the section. However, the question of whether or not a rebate would be allowable and, if so, the amount of the rebate, also depends on the other matters to which the Commissioner is to have regard, e.g., the matters specified in sub-section (3) and the limitation of the amount of the rebate by sub-section (1) to the additional tax payable on the pre 26 July income by virtue of the application of Division 6AA. In this example the additional tax (tax under new system $2,353.50 less ordinary tax $366.08 on $5,000=$1,987.42) would not prevent the allowance of a rebate of an amount up to the amount of the excess calculated in the example.

Example 2 - Three children all of whose incomes are derived under pre 26 July 1979 arrangements and are taxed under the new system.
  Income Tax payable under new system     $ $  
Child A 5,000 2,353.50 (a)
Child B 4,000 1,882.80 (b)
Child C 1,000 Nil
Total 10,000 4,236.30 (c)
Parent's income 12,000 (d)
Tax at ordinary rates = 2,680.98 (e)
Notional taxable income

((c) + (d)) = $22,000

Tax at ordinary rates 6,742.86 (f)
Notional tax ((f) - (e)) 4,061.88 (g)
Children's shares of notional tax
A 5/10 of $4,061.88 = 2,030.94 (h)
B 4/10 of $4,061.88 = 1,624.75 (i)
C 1/10 of $4,061.88 = 406.18 (j)
Excess of tax under new system over notional tax
Child A ((a) - (h)) = $322.56
Child B ((b) - (i)) = $258.05
Child C (no tax under new system) Nil
Example 3 - Child having pre 26 July 1979 income subject to Division 6AA and other income excluded from the Division.
  Income   Tax     $   $  
Child's pre 26 July 1979 income 4,000 (a) 1,882.80 (b)
Other income 4,000 35.38
$8,000 $1,918.18 (c)
Tax on child's taxable income at normal rates 1,358.18 (d)
Parent's taxable income 1,000.00
Tax at ordinary rates Nil (e)
Notional taxable income ((a) + (e)) 5,000.00
Tax at ordinary rates 366.08 (f)
Notional tax ((f) - (e)) 366.08 (g)
Excess of tax under new system over notional tax ((b) - (g)) $1,516.72

In this case, the additional tax payable in respect of the pre 26 July income by virtue of the application of the new system, ((c) - (d)), is $560 and sub-section 102AH(1) limits any rebate under the section to that amount.

Sub-section (3) refers to additional matters to which the Commissioner may have regard in determining the amount of any rebate that may be granted in accordance with sub-section (1).

Paragraph (a) specifically authorises the Commissioner to take into account, as a factor operating against the granting of a rebate, any tax avoidance agreement, as defined in sub-section (6), by reason of which the aggregated taxable income referred to in sub-section (2) was lower than it would have been but for that agreement. In effect, this paragraph authorises the Commissioner to take into account the effect of any tax avoidance agreement (as defined) on the taxable income of both parents, since this could result in a different parent having the higher taxable income for the purposes of sub-section (2).

Paragraph (b) of sub-section (3) authorises the Commissioner, in determining the amount of any rebate under the section, to have regard to such other matters as he thinks fit.

Sub-sections (4) and (5) provide authority for the amendment of an assessment, at any time, for the purpose of granting a rebate or for the purpose of disallowing or varying the amount of any rebate previously granted, where the circumstances warrant that course, e.g., where the amount of the taxable income of the parent taken into account in accordance with sub-section (2), is subsequently varied.

Sub-section (6) inserts a definition, for the purposes of the section, of the term "tax avoidance agreement", the existence of which, as explained earlier, may be taken into account by the Commissioner as a factor operating against the granting of a rebate under this section. The term is defined, broadly, to mean any agreement entered into or carried out by any person for a purpose of securing a reduction in the tax that, apart from the agreement, would have been payable by a person in respect of a year of income.

However, specifically excluded from the definition is an agreement entered into or carried out in the course of ordinary family or commercial dealing, e.g., a transfer of income producing property by a husband to his wife, in the course of ordinary family dealing, would not be a factor to be taken into account, for the purposes of sub-section (3), against the granting of a rebate.

Because any relief granted under this section will be allowed in the form of a rebate in a person's assessment (including an amended assessment) all decisions of the Commissioner in relation to the allowance of rebates will be subject to the taxpayer's usual rights of objection and reference to a Taxation Board of Review.

Section 102AJ: Rebate in case of serious hardship

This section authorises the granting of a rebate, of part or all of the additional tax payable by virtue of the application of the new system, where it is established to the satisfaction of the Commissioner of Taxation that exaction of the full amount of the additional tax would give rise to serious hardship.

The section is cast in somewhat similar terms to section 265 of the Principal Act which provides for the release of taxpayers from tax liability where it is shown to the satisfaction of a Board of Relief that, because of the circumstances referred to in that section, exaction of the full amount of tax would entail serious hardship. By contrast, however, the relief under section 102AJ is to be provided by decision of the Commissioner, so that it will enable a more ready form of relief in appropriate cases. The relief to be available under section 102AJ is more limited, in that it cannot exceed the amount of additional tax payable as a result of the application of the new system.

Sub-section (1) sets out the circumstances in which a rebate may be allowable under the section.

These are, broadly, that it be established to the satisfaction of the Commissioner that:

·
the tax payable in respect of a year of income by a minor, or by a trustee for the minor, by virtue of the application of the new system, exceeds the tax that would have been payable in respect of that year if the new system had not been introduced (paragraph (a)); and
·
for any reason, the exaction of the full amount of tax payable by the minor or trustee by virtue of the application of the new system would cause serious hardship (paragraph (b)).

Where these circumstances exist, the minor, or trustee, is entitled in the relevant assessment to a rebate of tax of such amount, not exceeding the excess referred to in paragraph (a), as the Commissioner considers reasonable.

Sub-section (2) is a drafting measure to make it clear that the relief provided by sub-section (1) is available in an assessment of a trustee on behalf of a minor child in pursuance of section 98, i.e., in relation to income of a trust estate in respect of which a person under a legal disability is, or is deemed to be, presently entitled.

Sub-section (3) provides authority for the amendment of an assessment, at any time, for the purposes of granting a rebate or of increasing the amount of any rebate already granted under this section.

Because any relief granted under this section will be allowed in the form of a rebate in a person's assessment all decisions of the Commissioner in relation to the allowance of rebates will be subject to the taxpayer's usual rights of objection and reference to a Taxation Board of Review.

Sub-clauses (2) to (4) of clause 16, which will not amend the Principal Act, are machinery provisions which will provide a facility for those not otherwise liable to pay provisional tax for 1979-80, to pay provisional tax on the basis of the new system, e.g., a minor having eligible taxable income above $1,040 but total taxable income below $3,893 in 1978-79 and who was not subject to any tax in that year, but who will be subject to tax under Division 6AA in 1979-80. Taxpayers affected by the new system in cases such as that just described could face an apparent "doubling-up" effect when assessments on income of the year ending 30 June 1980 are made after the end of the year, i.e., such assessments will show both tax for 1979-80 and provisional tax for 1980-81. To provide such taxpayers with an opportunity to avoid this result, sub-clause (2) makes provision for them to furnish, at their option, a return in a form provided by the Commissioner.

The contemplated form would request particulars that would enable provisional tax for the 1979-80 income year, including tax payable pursuant to Division 6AA, to be calculated by the Commissioner, as provided in sub-clause (3). The effect will be that where a return in this form is furnished, provisional tax will be calculated on the person's estimated taxable income (other than salary or wages) for the 1979-80 income year, at 1979-80 rates of tax, including those applicable under Division 6AA.

Sub-clause (4) extends the above provisional tax payment facility to a trustee who will become liable, under the new system, to tax under section 98 on behalf of a minor.

Clause 17: Rebate of tax for certain primary producers

This clause proposes the amendment of section 156 of the Principal Act as a consequence of the new rules for the taxation of minors and trusts. It relates to the averaging rebate allowed to primary producers.

Paragraph (a) of sub-clause (1) proposes to amend sub-section 156(4) of the Principal Act. Under that sub-section, where the ordinary tax payable on a primary producer's taxable income exceeds the tax that would be payable if the notional rate of tax for purposes of that section (that is, the rate applicable to the primary producer's average income) were the rate of tax payable on the taxable income, the primary producer is entitled to an averaging rebate based on the amount of that excess.

In determining the amount of the excess any rebates or credits to which the taxpayer may be entitled, and any further tax that may be payable by him or her under section 94 of the Principal Act in respect of uncontrolled partnership income, are not taken into account in calculating either the tax at general rates of tax or the tax at the notional "average" rate of tax, so that the excess reflects only the difference in tax resulting from the application of general and average rates of tax.

The amendment proposed by paragraph (a) is to the same effect. It will mean that, for the purposes of calculating the excess, neither the tax at general rates nor the tax at the average rate is to be increased by the application of Division 6AA. This will ensure that the application of Division 6AA will not affect any averaging rebate to which a minor may be entitled.

Paragraph (b) proposes a similar amendment to sub-section 156(5) of the Principal Act. So far as now relevant, this sub-section sets out the rules for determining the averaging rebate of a trustee who is liable to be assessed under section 98 on behalf of a minor beneficiary. These rules correspond with those set out in sub-section 156(4) for individuals and accordingly, the amendments being made by paragraph (b) to sub-section 156(5) correspond with those that are being made by paragraph (a) to sub-section 156(4).

By sub-clause (2), the amendments made by sub-clause (1) are to apply to assessments in respect of the 1979-80 income year and subsequent years of income.

Clause 18: Amendment of assessments

This clause proposes to amend sub-section 170(10A) of the Principal Act which enables the Commissioner, in certain circumstances, to amend an assessment for the purpose of giving effect to specified provisions of the Act relating to partners and trustees, including sub-sections (3) and (4) of section 94.

The references in section 170(10A) to sub-sections (3) and (4) of section 94 are being omitted consequent upon the deletion of those provisions as proposed by clause 8, with effect for the 1979-80 and subsequent years of income.

Clause 19: Provisional tax on estimated income

By this clause it is proposed to amend sub-section 221YDA(1) of the Principal Act to ensure that when a taxpayer to whom Division 6AA will apply seeks to vary provisional tax, he or she will supply sufficient information to allow any tax that may be payable by virtue of Division 6AA to be taken into account.

Section 221YDA enables a taxpayer to apply to have varied the amount of provisional tax that has been notified as payable - normally on a notice of assessment - and for this purpose he or she is to supply the Commissioner of Taxation with an estimate of his or her taxable income for the year for which the provisional tax has been notified. The taxpayer is required to specify in the application a number of things relevant in the re-calculation of the provisional tax.

By this amendment, provision is made that will allow information relevant in the re-calculation of provisional tax reflecting tax under Division 6AA to be shown on the form of application. Thus, in re-calculating provisional tax for 1979-80 (or a later year), the rates of tax applicable for the 1979-80 income year (or the later year), including those to be applicable to income to which Division 6AA will apply, will be able to be applied.

INCOME TAX (RATES) AMENDMENT BILL (NO. 2) 1979

This Bill will amend the Income Tax (Rates) Act 1976 (in this section of these notes referred to as "the Principal Act"), which declares the rates of tax in respect of the income of individuals and trust.

The Bill complements provisions being inserted in the Income Tax Assessment Act 1936 (the Assessment Act) by the Income Tax Assessment Amendment Act (No. 6) 1979 to give effect to the new system for the taxation of certain income of trusts and of dependent children in accordance with ministerial announcements on 26 July 1979 and 14 November 1979. The rates of tax to be applied under the new system to "eligible" taxable income of dependent children and of trustees for them are, where the income exceeds $1,040, being declared by the Bill. Basically, where the eligible income is $1,040 or less, the new system will not apply.

Notes on the clauses of the Bill are set out below.

Clause 1: Short title, etc.

This clause provides for the amending Act to be cited as the Income Tax (Rates) Amendment Act (No. 2) 1979 and for the Income Tax (Rates) Act 1976 as previously amended to be referred to in the amending Act as the Principal Act.

Clause 2: Commencement

Under sub-section 5(1A) of the Acts Interpretation Act 1901 every Act is to come into operation on the 28th day after the day on which the Act receives the Royal Assent, unless the contrary intention appears. By this clause, it is proposed that, like the related amendments to the Assessment Act, the amending Act will come into operation on the day on which it receives the Royal Assent.

Clause 3: Interpretation

This clause will omit sub-section 3(2) from the Principal Act and replace it by two new sub-sections - sub-sections (2) and (3) - that will supplement the interpretational measure contained in the sub-section by two further interpretational provisions. Under the existing sub-section 3(2) of the Principal Act, references to taxable income (or net income) in the Principal Act are to be taken to mean taxable income (or net income) of the year of income.

Paragraph (a) of new sub-section 3(2) restates existing sub-section 3(2). Paragraph (b) will have a corresponding effect to paragraph (a). By it, references to the eligible taxable income to which the new system tax rates are to apply are to be taken to mean the eligible taxable income of the year of income.

In circumstances where part only of the share of a beneficiary of the net income of a trust estate may be income to which new Division 6AA of Part III of the Assessment Act applies, it is convenient to refer in the proposed new provisions to the part of the share of the net income of a trust estate to which that Division applies. Proposed new sub-section 3(3) will make it clear that if the whole of a beneficiary's share of the net income of a trust estate is income to which the Division applies then, in relation to that share, references to the part of the share in the new provisions are to be taken to refer to the whole of the share.

Clause 4: Rates of tax and notional rates

This clause will effect formal drafting amendments of section 6H of the Principal Act consequential on the insertion by clause 5 of new section 6HA into that Act.

Clause 5: Rates of tax where Division 6AA of Part III of the Assessment Act applies

This clause will insert a new section - section 6HA - in Part IVA of the Principal Act. This new section will declare the rates of tax that are to be payable for the 1979-80 financial year by a minor whose taxable income includes income that is eligible taxable income for the purposes of Division 6AA of Part III of the Assessment Act of more than $1,040. Section 6HA will not apply if the eligible income is $1,040 or less, and the general rates of tax will in that case apply to the whole of the taxable income.

New section 6HA will also declare the rates of tax that are to be payable for the 1979-80 financial year by a trustee of a trust estate who is liable to be assessed and to pay tax under section 98 of the Assessment Act on a share of the net income of a trust estate to which a minor is presently entitled, where the new system under Division 6AA is applicable to a part of that share or to parts of two or more such shares, if the part, or sum of the parts, is greater than $1,040.

Sub-section (1) of new section 6HA declares the rates of tax that are to be paid for 1979-80 by a minor whose income includes eligible taxable income of more than $1,040. The rates declared by that sub-section are set out in new schedule 16A which is to be inserted in the Principal Act by clause 14 of this Bill.

Paragraph (a) of Schedule 16A sets out the rates of tax that are to be payable on that part of the minor's taxable income that is not eligible taxable income, that is, the income which is not to be taxed under the new system. This income is referred to in the Schedule as the "relevant part" of the taxable income.

The rates of tax that, by paragraph (a), are to apply to the relevant part of a minor's taxable income are the same as the normal rates that would have applied to that income if it had been the minor's only income. In this way the minor will enjoy, on this part of his or her income, the benefit of the zero rate of tax applicable to the first $3,893 of taxable income and the standard rate of 33.07 per cent on income in excess of that amount up to $16,608.

Paragraph (b) of Schedule 16A sets out the rates of tax that are to be paid on the eligible taxable income. The rate is 47.07 per cent, except where the ordinary rate payable on the income is higher. In the latter circumstances the excess over $33,216 of the person's taxable income will be taxed at the ordinary maximum rate of 61.07 per cent applicable to taxable income above that level.

Calculation of tax payable under these rules may be illustrated by the following example -

  $ $
Taxable income:
Wages from part-time work 1,500
Income from deceased estate 3,500
Income from family trust subject to tax under new rules 5,000
$10,000
Tax payable on wages and income from deceased estate (paragraph (a) of Schedule 16A)
. On first $3,893 Nil
. On remainder ($5,000 - $3,893) at 33.07% 366.08
Total tax on this income 366.08 366.08
Tax payable on income from family trust (paragraph (b) of Schedule 16A)
. $5,000 at 47.07% 2,353.50 2,353.50
Total tax payable $2,719.58
N.B. If the total taxable income were to exceed $33,216, the excess will be taxed at the maximum rate - 61.07% - that ordinarily applies.

Sub-section (2) of new section 6HA is set against the background that $1,041 is the minimum amount of eligible taxable income that is to be taxed at the rates applicable to eligible income of minors under the new system - eligible income up to $1,040 is to be taxed in the ordinary way and, if total taxable income does not exceed $3,893, no tax will be payable on eligible income of up to $1,040. If the 47.07 per cent rate were to apply to eligible income of $1,041 the result could therefore be that the derivation of one additional dollar of eligible income would produce tax of almost $500.

To avoid this result, sub-section (2) provides for "shading-in" arrangements to apply where the eligible taxable income is between $1,041 - the point where the income becomes liable to be taxed under the new rules - and $3,625 - the point where the tax under the shading-in arrangements reaches the tax at the 47.07 per cent rate. The sub-section is to the effect that where the eligible taxable income is in this range, the tax that would otherwise be payable on that income under sub-section (1), that is, at 47.07 per cent, is to be limited to the greater of 66 per cent of the amount by which the eligible taxable income exceeds $1,040 (paragraph (a) of sub-section (2)) or the marginal tax that would be payable on the eligible taxable income if it were taxed in the ordinary way (paragraph (b) of the sub-section).

For example, under these arrangements, tax on eligible taxable income of $1,100, if it were the only income, would be $39.60 (66 per cent of $1,100 less $1,040). However, if the taxable income also included $4,000 of income that is outside the new system, the marginal normal tax on the eligible income would be $363.77 (tax on total taxable income of $5,100 - $399.15 - less tax on $4,000 other income only - $35.38). In this case the tax payable would be the higher amount, that is, $363.77.

Sub-section (3) of proposed section 6HA declares the rates of tax payable by a trustee, who is taxable under section 98 of the Assessment Act in respect of a beneficiary's share of the net income, if Division 6AA of Part III of the Assessment Act applies to more than $1,040 of the share.

The rates payable in those circumstances are set out in Schedule 16B. That Schedule is to the same broad effect as Schedule 16A which applies to eligible income derived directly by a minor. Paragraph (a) sets out the rates of tax that are to be payable on that part of the beneficiary's share of the income of the trust estate that is not income to which the new rules apply - called the "relevant part" in the Schedule. This relevant part will be taxed at the normal rates that would apply if it were the only income. Under paragraph (a) the trustee will be entitled, in respect of this relevant part, to the benefit of the zero rate of tax applicable to the first $3,893 of taxable income and to be taxed on the remainder of that income up to $16,608 at the standard rate for 1979-80 of 33.07 per cent.

Paragraph (b) of Schedule 16B sets out the rates of tax that are to apply to the part of the share of the net income of a trust estate that is to be subject to tax under the new system - called the "eligible part" in the Schedule. The rate applicable to this eligible income is to be 47.07 per cent except where the ordinary rate payable on the income would be higher. That is, if the share of the net income of the beneficiary exceeds $33,216, the part of that share in excess of $33,216 will be taxed at 61.07 per cent in the ordinary way.

Sub-section (4) of proposed section 6HA specifies that the rates of tax set out in Schedule 16B may in defined circumstances also apply where the eligible part of the share of the net income of a trust estate in respect of which a minor is presently entitled does not exceed $1,040. This will be the case where Division 6AA also applies to a part of the beneficiary's share of the net income of another trust estate or other trust estates and the total of all of the eligible parts exceeds $1,040. The next sub-section, sub-section (5), is also relevant.

Sub-section (5) of proposed section 6HA is set against the background that "shading-in" arrangements, to the same effect as those described in the notes on sub-section (2) in relation to the eligible income of a minor, are to apply under sub-section (6), when read with sub-section (7), where a beneficiary is entitled to a share of the net income of only one trust estate and Division 6AA applies to an amount of that share of between $1,041 and $3,625. These arrangements cannot apply in a case where sub-section (4) applies since the eligible part in this case is $1,040 or less. However, sub-section (5) will empower the Commissioner of Taxation to reduce the tax that would otherwise be payable in accordance with sub-section (4) where the sum of the eligible parts of the shares of net income of trust estates in respect of which the beneficiary is presently entitled does not exceed $3,625. Sub-section (9) sets out matters to which the Commissioner is to have regard in deciding on the amount of the reduction in the tax payable that is to be made in accordance with sub-section (5). The broad aim is to arrive at an amount of tax on the notionally aggregated trust incomes that is equivalent to the amount that would result under the "shading-in" provisions of sub-section (6) if the income were that of only one trust estate.

Sub-section (6) provides, subject to sub-section (7), "shading-in" arrangements that are to apply where the eligible part of the share of a minor beneficiary of the net income of a trust estate exceeds $1,040 but does not exceed $3,625. The "shading-in" arrangements correspond in effect with those applicable to eligible income of between $1,041 and $3,625 derived directly by a minor - see notes on sub-section (2).

Sub-section (7) specifies that sub-section (6) is not to apply to limit the tax payable by a trustee on the eligible part of a share of the net income of a trust estate in respect of which a minor is presently entitled that is between $1,041 and $3,625 if the beneficiary is also entitled to a share of income of another trust estate or other trust estates, to a part of which or of each of which Division 6AA applies. However in circumstances where sub-section (6) is not applied because of the operation of sub-section (7), sub-section (8) empowers the Commissioner of Taxation to reduce the tax that would otherwise be payable by the trustee in accordance with sub-section (3) if the sum of the eligible parts does not exceed $3,625. Sub-section (8) will have a corresponding effect in relation to a trustee who would otherwise be liable to pay tax under sub-section (3), as sub-section (5) is to have in relation to a trustee who would otherwise be liable to pay tax under sub-section (4).

Sub-section (9) sets out the matters to which the Commissioner is to have regard in forming an opinion, for the purposes of sub-section (5) or (8), as to the amount, if any, by which the tax that would otherwise be payable by a trustee on a share of the net income of a trust estate should be reduced. The sub-section, in effect, requires the Commissioner to notionally aggregate all of the shares of trust net income in respect of which a beneficiary is presently entitled, and all of the parts of those shares to which Division 6AA of Part III of the Assessment Act applies. Having done that the Commissioner then has to determine the amount to which the tax payable by a trustee on a share of the net income of a trust estate would have been limited under sub-section (6) if that share were equal in amount to the sum of those shares and included an eligible part equal in amount to the sum of those eligible parts. As a final step the Commissioner has to have regard to the amount by which he has, by the application of sub-section (5) or (8), reduced the tax payable on the share or shares of the beneficiary of the net income of any other trust estates.

A trustee who is dissatisfied with the amount of any reduction determined by the Commissioner in his application of sub-section (5) or (8) will have the usual rights of objection and reference to a Taxation Board of Review. A Board may, of course, substitute its conclusion for that of the Commissioner.

Clause 6: Limitation on tax payable by certain trustees

This clause amends section 6J of the Principal Act by omitting sub-sections (1) and (2). Those sub-sections provided for a minimum taxable amount of net income, and for shading-in arrangements above that income level, as part of special arrangements providing for the taxation of the share of the net income of a trust estate (other than a deceased estate) to which a beneficiary under 16 years of age was presently entitled. Those special arrangements are being replaced by the proposed new arrangements for taxing trust income to which persons under the age of 18 years are presently entitled, and corresponding shading-in arrangements are to be provided by sub-sections (5) to (9) of section 6HA - see notes on clause 5. Accordingly, sub-sections 6J(1) and (2) are redundant and are being repealed.

Clause 7: Rates of tax and notional rates

This clause will effect formal drafting amendments of section 6L of the Principal Act consequential on the insertion, by clause 8, of new section 6LA into the Act.

Clause 8: Rates of tax where Division 6AA of Part III of the Assessment Act applies

This clause will insert a new section - section 6LA - in part IVB of the Principal Act. This new section will formally declare the rates of tax payable for the 1980-81 and subsequent financial years by those minors who are to be liable to tax under the new system, and by trustees of trust estates who are liable to tax on behalf of a minor beneficiary under section 98 of the Assessment Act where part of that income is income to which the new system applies.

Section 6LA corresponds with section 6HA (which is being inserted in the Principal Act by clause 5), varying from it only so as to reflect the consequential change in the rates of tax and "shading-in" ranges that flow from the reduction, from 33.07 per cent to 32 per cent, in the standard rate of tax for 1980-81 and subsequent years.

Clause 9: Limitation on tax payable by certain trustees

This clause will amend section 6M of the Principal Act, which will apply in relation to the 1980-81 and subsequent financial years, by omitting sub-sections (1) and (2). This amendment corresponds with the amendment that is being made to section 6J, in relation to the 1979-80 year, by clause 6. For the reasons explained in the notes on that clause, sub-sections (1) and (2) of section 6M will be redundant following the introduction of the new system.

Clause 10: Operation of sections 6C and 6F

The amendment being made by this clause is consequential upon the omission, by clause 6 and clause 9, of sub-sections 6J(1) and (2) and sub-sections 6M(1) and (2) from the Principal Act. This clause will delete the reference in section 7A of the Principal Act to those sub-sections.

Clause 11: Indexation

This clause amends the definition of "relevant amount" in sub-section 9(1) of the Principal Act, which operates to fix the amounts in the Principal Act that are subject to indexation. The existing definition covers any of the amounts that constitute the income steps in the general scale of rates set out in Schedule 17 and the amount of $3,893 specified in paragraph 3(a) and in paragraph 3(b) of Part II of Schedule 18.

This clause will expand the definition to include, in addition to those amounts, the amounts of $3,893 and $16,608 specified in sub-paragraph 2(b)(ii) of Part III of Schedule 18 and in paragraph 2(b) of Schedule 20 to the Principal Act, and the amount of $33,216 specified in paragraph (b) of Schedule 21 and in paragraph (b) of Schedule 22.

The amounts of $3,893 and $16,608, where they are specified in Schedules 18 and 20, are part of the definition in those Schedules of the range of income in the general scale of rates in Schedule 17 to which the standard rate of tax applies. Accordingly, those amounts would be changed following indexation of the general scale of rates and the amendment proposed by clause 11 will make it clear that these amounts are to be indexed too.

The amount of $33,216 is specified in several places in Schedules 21 and 22 as a convenient way of defining the level of income above which the rate of tax payable on income to which Division 6AA of Part III of the Assessment Act applies is to change from the middle rate of personal income tax to the maximum rate of personal income tax. That level corresponds to the level in the general scale of rates above which the maximum rate applies. Accordingly, it is necessary to provide for the references to the amounts of $33,216 in Schedules 21 and 22 to be indexed in line with indexation of the ranges of income in the general scale of rates in Schedule 17, and clause 11 proposes that that be done.

Clause 12: Schedule 14

This clause will amend Schedule 14 to the Principal Act, which sets out the 1979-80 notional rates for purposes of the primary producer averaging provisions of the Assessment Act. Notional rates are used to determine the averaging benefit of a primary producer whose taxable income exceeds his or her average income.

Basically, averaging benefit is the difference between tax payable on the taxable income at general rates and tax payable on that income at the notional rate, that is, the rate of tax applicable to the average income.

Schedule 16 to the Principal Act is to be amended by clause 13 to allow the zero rate of tax to those trustees assessed under section 98 of the Assessment Act who will be required to pay tax at the rates referred to in that Schedule rather than at the rates that are payable under the new system applicable to income of dependent children and trustees for them. That amendment will reduce the amount of tax payable at general rates by the trustees in question, which is one part of the equation for determining the average benefit. Accordingly, it is necessary to similarly amend Schedule 14 so that the zero rate of tax is also taken into account in the calculation of the tax payable at notional rates, which is the other part of the equation for determining averaging benefit. But for this the reduction in tax payable at general rates would reduce the averaging benefit by a corresponding amount.

Clause 13: Schedule 16

This clause will amend Schedule 16 to the Principal Act which sets out the rates of tax applicable to the 1979-80 income of a trust estate on which a trustee is liable to be assessed under section 98 or 99 of the Assessment Act.

So far as a trustee who is liable to be assessed under section 98 of the Assessment Act is concerned the present effect of Schedule 16 is that, unless the trust is an inter vivos trust and the beneficiary presently entitled to the income is under 16 years of age at the end of the year of income, the trustee is taxed at the ordinary rates of tax that apply to individuals, including the zero rate of tax on income up to $3,893. Where a beneficiary presently entitled to the income of an inter vivos trust is under 16 years of age at the end of the year of income, Schedule 16 requires that the income be taxed in the trustee's hands at personal rates of tax, but without the benefit of the zero rate.

Trust income in respect of which beneficiaries under 16 years of age are presently entitled will in future be taxed under the new system for taxing children under 18 years of age that are to be introduced by other provisions of this Bill and the related Income Tax Assessment Amendment Bill (No. 6) 1979, and the special provisions in Schedule 16 relating to beneficiaries under 16 years of age are no longer necessary and are being omitted. In future the share of the net income of a trust estate in respect of which a beneficiary under the age of 18 year is presently entitled will be taxed at the rates set out in Schedule 16 unless the new Division 6AA of Part III of the Assessment Act applies to part of the share, in which event the share will be taxed at the rates set out in Schedule 16B.

The amendment being made to Schedule 16 will not affect the tax payable for 1979-80 by trustees liable to be assessed under section 99 of the Assessment Act.

Clause 14: Insertion of Schedules 16A and 16B

This clause will insert new Schedules 16A and 16B in the Principal Act. Schedule 16A specifies the rates of tax that are to be payable for 1979-80 by a minor who has more than $1,040 of eligible income to which Division 6AA of Part III of the Assessment Act applies. Schedule 16B specifies the rates that are to be payable for 1979-80 by a trustee of a trust estate who is liable to be taxed under section 98 of the Assessment Act in respect of the share of a beneficiary where Division 6AA of Part III of the Assessment Act applies to a part of that share. The effect of these Schedules has been explained earlier in the notes on clause 5.

Clause 15: Schedule 18

Clause 16: Schedule 20

These clauses will amend Part III of Schedule 18 and clauses 1 and 2 of Schedule 20 to the Principal Act. Part III of Schedule 18 formally sets out the notional rates for the purposes of the primary producer averaging provisions for the 1980-81 and subsequent financial years in cases where a trustee of a trust estate is liable to be assessed under section 98 or 99 of the Assessment Act. Schedule 20 sets out the rates of tax that are payable for those years by a trustee who is liable to be assessed under section 98 or 99 of the Assessment Act.

The amendments that are being made to Schedules 18 and 20 correspond with those that are being made to Schedules 14 and 16 by clauses 12 and 13 respectively - see notes on those clauses.

Clause 17: Addition of Schedules 21 and 22

This clause will insert new Schedules 21 and 22 in the Principal Act. These Schedules specify the rates of tax formally declared by new section 6LA for the 1980-81 financial year and all subsequent financial years. The effect of these Schedules has been referred to earlier in the notes on clause 8.


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